I try to find a relationship between the after tax cost of a mortgage and house prices, and can't.

Some years ago, I wrote a paper with Pat Hendershott and Dennis Capozza looking at the impact of tax policy on house prices.  We ran the following regressions using a panel of cities across three census years:

Rent/Price = alpha + Beta1*ATCC + Beta2*NPT + Beta3*E[g] + e

where Rent/Price was the average rent to average housing price for an MSA, ATCC was the after tax cost of capital, NPT is the net average property tax rate after deductions, E[g] is expected house price growth net of depreciation, and e is an error term.  This is just the user cost model: Beta1 and Beta2 should equal one (and they did) and Beta3 should equal -1 (and it didn't, but we never got a decent measure of expected house price growth, and so it is not surprising that it didn't work).  Our results implied that removing tax advantages for housing would push rents up or drive prices down, or, most likely, both.

I have been redoing this exercise using American Community Survey Data from 2006-2010.  I get the following scatter plot, where each dot is an MSA at a different time:

The x -axis, the after tax cost of capital, is a function of two things: the mortgage rate for each period, and the effective rate at which mortgage interest is deducted (which is taken from the NBER TAXSIM model, Table 2).  Do you see a relationship between the after tax cost of capital and house price to income ratios? I don't.  Here is a regression with MSA and year fixed effects:

Fixed-effects (within) regression               Number of obs      =      1275

Group variable: msa                             Number of groups   =       255

R-sq:  within  = 0.4535                         Obs per group: min =         5

       between = 0.1258                                        avg =       5.0

       overall = 0.1387                                        max =         5

                                                F(6,1014)          =    140.25

corr(u_i, Xb)  = -0.6549                        Prob > F           =    0.0000

   rvratio1 |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]

-------------+----------------------------------------------------------------

       atcc1 |   .1972777   .1165485     1.69   0.091    -.0314262    .4259817

     ptrate1 |   3.075967   .1451177    21.20   0.000     2.791202    3.360733

The coefficient on the after tax cost of capital is much smaller than one, and is not different from zero at the 95 percent confidence level.  But even if we take this coefficient at face value, it suggests that capitalization effects now are about 1/5 of what they were when Pat, Dennis and I wrote our paper.  I am curious about feedback (I should also note that the coefficient floats around depending on specification, and sometimes has the wrong sign).

Sherman Maisel on how Fannie Mae "left" the government in 1968

Go to 3:55

Southwest CEO Gary Kelly understands price elasticity

I am at the ULI conference in Denver, and reading the local magazine, which features an interview with Gary Kelly. His quote on why Southwest doesn't charge for baggage: "it takes the loss of one customer to offset about ten bag fees."

I enjoy it when an executive talks about demand curves.

A gentle rebuke to Paul Krugman--she was referring to Oakland, not Los Angeles

Tomorrow I am teaching a book I admire--Paul Krugman's Development, Geography and Economic Theory.  The book contains three Olin Lectures that are beautifully written, accessible and insightful.  But on page 58, he quotes Gertrude Stein as having said that Los Angeles had "no there there."  

She actually was referring to her home town.  Specifically, she wrote:

What was the use of my having come from Oakland it was not natural to have come from there yes write about it if I like or anything if I like but not there, there is no there there.

I am not sure Oakland deserves the insult either, but still, LA gets enough abuse as it is.

Rub ́en Herna ́ndez-Murillo, Andra C. Ghent, and Michael T. Owyang show that the Community Reinvestment Act did not induce subprime lending.

They look at lending originations and loan performance on either side of the CRA thresholds.  If CRA encouraged subprime lending, one should see a discontinuity at the thresholds, but there is none.

These are originations for 2-28 subprime loans.  Under CRA, lenders received credit for originating and funding loans in census tracts whose median incomes were below 80 percent of area median income.  If the CRA was inducing lending, we should see a jump in lending to the left of the 80 percent cut-off--there isn't (either visually or econometrically).  They find the same result when looking at pricing and default.   

Was Paul Ryan a math major?

Ryan says it is too complicated to explain his budget numbers. Imaginary numbers are indeed complex.

The final installment of the Oswald-Green debate on home-owning in The Economist

It is here.

The Oswald-Green Debate in the Economist: Rebuttals

Andrew says:

If high levels of home-ownership impair the efficiency of the labour market, then the costs are potentially huge. It is the job of economists to point that out.

I say:

Does home-ownership gum up labour markets? A number of papers sought to test Mr Oswald's conjecture and my takeaway is that the impact of tenure on labour markets is marginal.

[Note: as an American, I never myself would write "labour," so The Economist changed spellings to conform to their style].

Ed Glaeser weighs in

He advocates neutrality:

The government should neither encourage nor discourage home-ownership. Significant public interventions require evidence of significant market failure, and confidence that the costs of state action will be less than the costs of those market failures. These conditions are not met in the housing sector, whether we are contemplating pro or anti home-ownership policies. 

The case for home-ownership often begins with the view that home-owners are better citizens, who create social benefits by investing more in their communities and their governments. My work with Denise DiPasquale does find that home-owners are more likely to work to solve local problems, to vote and to know the names of local leaders. These effects reflect both home-owners' stake in their community and their tendency to live in one place longer. 

If Apple is so cool...

...why doesn't their new map ap give public transit directions?

Andrew Oswald and I debate the merits of homeownership in The Economist

Ryan Avent moderates:

The view of home-ownership as a pillar of economic and social welfare is deeply ingrained across much of the rich world. It seems natural to think a household that owns its home is invested in society in a way a renting family never could be. It is bound to be richer, thanks to the ability to accumulate equity. Its members are sure to take a greater interest in the health of their neighbourhood and the quality of local institutions, if only to help protect the value of their property. And because of that interest in property value, home-owners may be more politically active, to help secure sound and stable governance....

Andrew Oswald defends discouraging ownership:

Home-ownership has reached inefficiently high levels; it has become a distorting totem; modern generations have been brainwashed to believe there is something wrong with them if they rent. We do not want developing countries to mimic the West's post-war obsession with owner-occupation.

There are five reasons to discourage home-ownership. Let's call them: look at the data; efficiency of the labour market; macroeconomic stabilisation; sensible lifetime budgeting; entrepreneurial supply; the common sense of diversity...

I argue against discouraging homeownership:

The motion "Should home-ownership be discouraged?" takes a novel formulation. Generally, the question policymakers ask is whether home-ownership should be encouraged, which suggests that there are social benefits to owning a home. In this case, the affirmative position is that home-ownership should be discouraged. This implies that having people own their homes is socially costly. Thus, my task is to show that home-owning is not socially costly.

I can think of three potentially legitimate arguments for why home-owning might be socially costly; I do not think that any of them are straw men, but I also think that none of them is convincing.

Are ballots more democratic than markets?

I really don't know.  But Parris Glendening made an interesting point at a conference I participated in at GW last week: that in Los Angeles, people decided to tax themselves (via Measure R) to build a light rail system.  So while such systems fail to pass the cost-benefit test, and often worsen the bus service that low income riders rely on, they do, in the case of LA, reflect the will of the people.

I am guessing most people don't read the works of John Kain before they vote; they also don't read IEEE journals before buying PCs.  Los Angeles is implementing measure R in the manner described when it was on the ballot, which makes it very different from the high-speed rail initiative.  I think I need to make my peace with light rail in LA (although I sure wish the Expo line worked better).

Why doesn't cheap RAM hurt SAS?

I don't use SAS anymore because I can now fit large datasets in RAM using Stata.  But SAS sales are doing well.  I wonder why?

How life really has gotten better for researchers

The first non-thesis project I worked on as an assistant professor used the 1 in 1000 Public Use Microdata Sample of the US Census.  My recollection is that the sample had about 63,000 observations; I had to spin a tape to read data into a big iron VMS machine using SAS, and it took about 10 hours to do so.  The year was 1990.

Yesterday, I read five year ACS household data into my Macbook Pro using Stata.  It is broken into four files with about 1.5 million observations each.  Each file took about 2 minutes to read. This is really, really nice.

  

Chris Leinberger reels off a nice line

I was on a panel with him at GW on Tuesday, and he said something like, "when people think of New York, they think people live like Woody Allen Jerry Seinfeld, when in fact most people live like Tony Soprano."

My favorite National League team is the Dodgers....

...and my favorite American League team is whatever team has Billy Beane as its general manager--which is still the Oakland As.

The As have the same won-lost record as the Yankees with 1/4 the payroll.  That is the kind of austerity I can get behind, because it is austerity based on statistics.  But what is remarkable is that after Michael Lewis' Moneyball ( a terrific book) and Bennett Miller's Moneyball ( the highly enjoyable movie version of the book), what Beane is doing is no secret, and yet most other teams have not been able to figure it out, showing that information inefficiencies can stick around for a long time.

The Red Sox were able to combine money with moneyball for awhile to banish to curse of Ruth, but, well, not reason to dwell on others' misery.

(BTW, even though I have only lived in LA for four years, I have been a Dodger fan for much longer, because my wife, a native Angelino, grew up in a Dodger household.  Giving up the Cubs was not a hard thing to do).

On Labor Day, it is worth revisiting Lipsey and Lancaster (1956)

From The General Theory of Second Best, by R. G. Lipsey and Kelvin Lancaster, The Review of Economic Studies, Vol. 24, No. 1 (1956 - 1957), pp. 11-32

It is well known that the attainment of a Paretian optimum requires the simultaneous fulfillment of all the optimum conditions. The general theorem for the second best optimum states that if there is introduced into a general equilibrium system a constraint which prevents the attainment of one of the Paretian conditions, the other Paretian conditions, although still attainable, are, in general, no longer desirable. In other words, given that one of the Paretian optimum conditions cannot be fulfilled, then an optimum situation can be achieved only by departing from all the other Paretian conditions. The optimum situation finally attained may be termed a second best optimum because it is achieved subject to a constraint which, by definition, prevents the attainment of a Paretian optimum.

Everyone who takes Econ 1 (or its equivalent) learns this; it doesn't seem to me that people remember it very well.

A question for Joel Kotkin: What happened to choice?

Joel Kotkin, who often correctly defends auto-oriented suburbs as reflections of many people's preferences, has written that he opposes a new zoning code for Hollywood that would allow for it to become denser.

The code does nothing to force developers to build 50 story apartment buildings, it simply allows developers to build 50 story apartment buildings.  Hollywood is, as he notes, a bit scruffy, but it is also adjacent to  some very expensive real estate, with the Hollywood Hills to the north, Hancock Park to the south and West Hollywood to the west.  It also features two subway stops on a subway line that has pretty decent ridership.  It is entirely possible that market forces would lead developers to increase its density, were they allowed to do so.  These market forces also reflect preferences.


 

The events of the past few days lead me to think about Herman Melville

From The Confidence Man, Chapter 7:

The stranger was a man of more than winsome aspect. There he stood apart and in repose, and yet, by his mere look, lured the man in gray from his story, much as, by its graciousness of bearing, some full-leaved elm, alone in a meadow, lures the noon sickleman to throw down his sheaves, and come and apply for the alms of its shade.

But, considering that goodness is no such rare thing among men--the world familiarly know the noun; a common one in every language--it was curious that what so signalized the stranger, and made him look like a kind of foreigner, among the crowd (as to some it make him appear more or less unreal in this portraiture), was but the expression of so prevalent a quality. Such goodness seemed his, allied with such fortune, that, so far as his own personal experience could have gone, scarcely could he have known ill, physical or moral; and as for knowing or suspecting the latter in any serious degree (supposing such degree of it to be), by observation or philosophy; for that, probably, his nature, by its opposition, imperfectly qualified, or from it wholly exempted. For the rest, he might have been five and fifty, perhaps sixty, but tall, rosy, between plump and portly, with a primy, palmy air, and for the time and place, not to hint of his years, dressed with a strangely festive finish and elegance. The inner-side of his coat-skirts was of white satin, which might have looked especially inappropriate, had it not seemed less a bit of mere tailoring than something of an emblem, as it were; an involuntary emblem, let us say, that what seemed so good about him was not all outside; no, the fine covering had a still finer lining. Upon one hand he wore a white kid glove, but the other hand, which was ungloved, looked hardly less white. Now, as the Fidèle, like most steamboats, was upon deck a little soot-streaked here and there, especially about the railings, it was marvel how, under such circumstances, these hands retained their spotlessness. But, if you watched them a while, you noticed that they avoided touching anything; you noticed, in short, that a certain negro body-servant, whose hands nature had dyed black, perhaps with the same purpose that millers wear white, this negro servant's hands did most of his master's handling for him; having to do with dirt on his account, but not to his prejudices. But if, with the same undefiledness of consequences to himself, a gentleman could also sin by deputy, how shocking would that be! But it is not permitted to be; and even if it were, no judicious moralist would make proclamation of it.

This gentleman, therefore, there is reason to affirm, was one who, like the Hebrew governor, knew how to keep his hands clean, and who never in his life happened to be run suddenly against by hurrying house-painter, or sweep; in a word, one whose very good luck it was to be a very good man.

I should note that my mother, a retired English Professor and Melville mavin, led me to read this, Melville's last, novel, many years ago.  My understanding is that it is not widely read, but it should be.


 

Chris Christie yearns to be run by the Medicis

Since love and fear can hardly exist together, if we must choose between them, it is far safer to be feared than loved.

Niccolo Machiavelli, The Prince