Garages

I am a big fan of Witold Rybczynski. He writes books (such as City Life and Home) that are insightful, whimsical, and blessedly short. Yesterday, he had a wonderful slideshow in Slate about the state of garage architecture:

http://www.slate.com/id/2179373/

It actually makes sense for parking garages to go upscale. In Washington, it costs around $200 per month to rent a space downtown. A typical parking space is about 170square feet. The costs of maintaining a garage are pretty minimal, so let's say that a parking garage owner nets $170 per month, or $1 per square foot per month, or $12 per year. At a cap rate of 8 percent, this means that parking spaces are worth $150 per square foot, or around $25,500 per space: this is not chump change for something that requires no interior walls, no heat, etc. [Update: of course this is value per space. Because garages have lots on non-leasible space, the value of the entire garage will be less]. Washington is not remotely the most expensive city for parking, either. New York (of course), Boston, San Francisco and Philadelphia (!!) are more expensive places to park.

Given the expense of parking spaces, one does begin to wonder why garages don't start charging by the square foot rather than by the space. Part of the garage could be configured for Honda Fits and Cooper Minis; another to Hummers and Escalades. I know this adds a layer of complexity, but all other types of real estate come in various configurations.

In my ideal world, Hummers and Excalades would pay higher tolls on East Coast Turnpikes too--they do, after all, take up more space, and therefore impose higher marginal costs of congested roads. I think people should be able to drive whatever they like, so long as they internalize the costs of doing so.

The capitalization rate for Priuses?

I am in Southern California for a few days, and when a Prius was available in the National Car Emerald Aisle, I took it. It is actually a lot of fun to drive--it makes no noise at stop lights, and is remarkably smooth on the freeway.

A limited number of Prius' get stickers that allow them into HOV lanes even if the driver has no passengers. A friend of mine pointed out that these stickers add substantial value in the secondary market. A story from last spring on NPR notes:

The California legislature approved 85,000 permits that will allow lone drivers of hybrid cars to drive in carpool lanes. The permits come along with big, yellow decals.

In February, the DMV mailed out the last of the 85,000 sets of stickers. Now the only way to get a new one is to buy a car that already has the stickers.

That difference is turning up in the cost of used cars, say the people at Kelley Blue Book. The re-sale analysts have figured out that a used Prius that already has the stickers is going for $4,000 more than one that lacks them.

There have been reports of stickers being stolen off cars — but the DMV doubts this is happening. The decals are tamper-proof. If you remove them they crumble and read "VOID."

Preliminary Syllabus for GW Finance 279 Part I, Spring 2008

Course: Finance 279 Semester: Spring 2008

Course
Description: This is a course on fixed income real estate securities. It will explore the peculiarities of mortgages and mortgage-backed securities. While there is a suggested text with good background, I do not “teach the text.” I hand out notes and expect you to learn largely by doing.

We will value these securities and analyze their risk using tools from finance theory and real estate valuation theory. Most of the work will be performed in spreadsheets. We will do spreadsheet work in class—if you have a laptop, please bring it to class. Data for class will be posted on the class web site.

Learning To apply fixed income pricing and option pricing techniques to mortgage pricing
Goals: problems.

To understand urban land markets sufficiently well to underwrite mortgage default risk.

Professor: Richard K. Green
507 Funger Hall
202-994-2377 (o)
301-467-3582 (m)
drgreen@gwu.edu
Office Hours: Thursdays and Fridays, 5-6 pm.



Requirements: Assignments 1-5 10% each
Exam I 25%
Exam II 25%


Texts (suggested reading)

Frank Fabozzi, Bond Markets, Analysis and Strategies, Sixth Edition, Prentice Hall.

January 24-25

The Primary Residential Mortgage Market
An Institutional Overview of Government Sponsored Enterprises
Richard K. Green and Susan M. Wachter, The US Mortgage in Historical and International Contexts, Journal of Economic Perspectives, Fall 2005.

Text, Ch. 10.

Assignment 1: Qualifying a primary borrower and Housing Affordability Indexes







January 31, Feb 1

Text, Chs. 4, 6, and 21.

Mortgage Backed Securities and Pass-through Certificates
Three kinds of risk:
-default risk
-prepayment risk
-bond-like interest rate risk

Exercise in Class: Measuring Duration
Assignment 2: Pricing a security with ruthless default

February 7-8

An Overview of Modeling Prepayment Risk for MBS
-Option pricing models
-PSA models
-Empirical survivor function models

Text, Chapter. 11.

Richard K. Green and Michael Lacour-Little, Some Truths about Ostriches, Journal of Housing Economics, 1999, vol. 8, issue 3, pages 233-248

Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.

Exercise in Class: Calculating an Empirical Survival Function
Assignment 3: Developing a PSA spreadsheet

February 14-15

Derivatives and Hedging
-Collateralized Mortgage Obligations
-Strips
-Secondary Market Institutions Funding Mechanisms
-Swaps

Text, Chs. 12, 26, 27 and 28.

EXAM 1


February 21-22

Asset Backed Securities, Sub-prime loans, CDOs, Adjustable Rate Mortgages
Assignment 4: To be determined

Readings TBA

February 28-29

The Primary Commercial Mortgage Market
-Underwriting Issues—the pro forma
-Structural Issues
-Roles of Institutions

In class exercise: Pro Forma Development
Assignment 5: Leverage, Risk and Returns
Reading: Handout


March 6-7

The Secondary Commercial Mortgage Market
Low Income Housing Tax Credits

Text, Chapter 13.



EXAM II

For FIn 397, A clearer description of Odds-Ratios and the Rare Disease Assumption

Odds
Gerard E. Dallal, Ph.D.

The odds o(E) of an event E is the ratio of the probability that the event will occur, P(E), to the probability that it won't, 1-P(E), that is,

For example, if the probability of an event is 0.20, the odds are 0.20/0.80 = 0.25.

In epidemiology, odds are usually expressed as a single number, such as the 0.25 of the last paragraph. Outside of epidemiology, odds are often expressed as the ratio of two integers--2:8 (read "2 to 8") or 1:4. If the event is less likely to occur than not, it is common to hear the odds stated with the larger number first and the word "against" appended, as in "4 to 1 against".

When the odds of an event are expressed as X:Y, an individual should be willing to lose X if the event does not occur in order to win Y if it does. When the odds are 1:4, an individual should be willing to lose $1 if the event does not occur in order to win $4 if it does.

The Fascination With Odds

A common research question is whether two groups have the same probability of contracting a diseaase. One way to summarize the information is the relative risk--the ratio of the two probabilities. For example, in 1999, He and his colleagues reported in the New England Journal of Medicine that the realative risk of coronary heart disease for those exposed to second hand smoke is 1.25--those exposed to second hand smoke are 25% more likely to develop CHD.

As we've already seen, when sampling is performed with the totals of the disease categories fixed, we can't estimate the probability that either exposure category gets the disease. Yet, the medical literature is filled with reports of case-sontrol studies where the investigators do just that--examine a specified number of subjects with the diesease and a number without it. In the case of rare diseases this is about all you can do. Otherwise, thousands of individuals would have to be studied to find that one rare case. The reason for the popularity of the case control study is that, thanks to a little bit of algbera, odds ratios give us something almost as good as the relative risk. allow us to obtain something almost as good as a relative risk.

There are two odds ratios. The disease odds ratio (or risk odds ratio) is the ratio of (the odds of disease for those with some exposure) to (the odds of disease for those without the exposure). The exposure odds ratio is ratio of (the odds of exposure for those with disease) to (the odds of exposure for those without disease).

When sampling is performed with the totals of the disease categories fixed, we can always estimate the exposure odds ratio. Simple algebra shows that the exposure odds ratio is equal to the disease odds ratio! Therefore, sampling with the totals of the disease categories fixed allows us to determine whether two groups have different probabilities of having a disease.

1. We sample with disease category totals fixed.
2. We estimate the exposure odds ratio.
3. The exposure odds ratio is equal to the disease odds ratio. Therefore, if the exposure odds ratio is different from 1, the disease odds ratio is different from 1.

A bit more simple algebra shows that if the disease is rare (<5%), then the odds of contracting the disease is almost equal to the probability of contracting it. For example, for p=0.05, , which is not much different from 0.05. Therefore, when a disease is rare, the exposure odds ratio is equal to the disease odds ratio, which, in turn, is approximately equal to the relative risk!

Cliver Crook of the FT channels Barney Frank

Normally it falls to conservatives to cry “moral hazard” when policies such as this, expressly designed to reward imprudent behaviour, are announced. This time, the indispensable Barney Frank, the Democratic chairman of the House financial services committee, is leading the chorus. As he points out, the plan bizarrely confines its promised assistance to borrowers with poor credit histories. More than a third of mortgages currently in foreclosure were granted to prime borrowers; and, of those, more than half were adjustable-rate loans. Under the Paulson scheme, prime borrowers who get into trouble when their teaser rates reset will have to refinance, if they can; otherwise, they are on their own. Borrowers who struggled to improve their credit scores before taking out their mortgages are going to feel aggrieved. In many cases, the reward for those efforts will be eviction.

When Odds make no Sense

Betting markets usually are good at prediction, but this morning I read that the betting action has made the Patriots odds-on favorites to have a perfect season.

Two things make me skeptical--Tom Brady's touchdown-to-interception ratio, and the number of games left on the Patriot's schedule.

Tom Brady has a 9-1 touchdown to interception ratio this year. This is astonishing, and surely reflects luck. Over his career before this season, his ratio has been an excellent 2-1 (stat comes from TMQ). A ratio that improved to 3-1 or 4-1 could reflect fundamentals (better line play, better play calling, Randy Moss, etc), but 9-1 must reflect a lucky draw.

If Brady returns to normal, it would be reasonable to expect New England's probability of winning to drop to .9 against most teams, and .6 against the Colts at home. They have five games remaining before they (presumably) play the Colts for the Super Bowl. So the chance of the Colts winning the last 6 is .9^5*.6, or .354.

This is still a ridiculously high probability for going undefeated, but it makes it a 2-1 fair bet, rather than less than 1-1.

I think I was just insulted

A reporter called to ask me if I would go on TV to put positive spin on economic news. I don't mind if people think I'm cheerful...but I don't want them to think I'm a cheerleader.

The Month's Supply Measure Keeps Rising

The NAR Existing Home Sales report came out yesterday, with one not-terrible number (pending sales seem to have flattened) and one bad one (the months of inventory available for sale continues to rise).

The official line of NAR is that New Home Sales will fall next year, while Existing Home Sales will turn around. I am doubtful on both the relative and absolute picture for existing home sales. Builders, who are usually high leveraged, need to get rid of houses, and are willing to slash prices to do so. As Genesove and Mayer showed in a terrific paper on nominal loss aversion, homeowners seem to have a strong distaste for selling at a loss. Second, while NAR asserts that the mortgage market is improving, I don't really see it. Spreads on jumbos had narrowed some, but the subprime market seems to be gone for the time being. The fact that inventories continue to rise relative to sales also makes it hard to foresee a turnaround. And in certain regions of the country (the inland empire of California), foreclosures will make things even worse.

If I were NAR, I would be advising their members to advise their sellers to expect to take a price cut; until that happens, inventory will continue to be a drag on the market. Then again, turning points are tough to call, and I could be all wet. But I don't think so.

Deepak Bhattasali on China

Deepak Bhattasali from the World Bank gave a nice talk here at GW tonight to officials from Wuhan and Shaoxing. Some takeaways I got:

(1) The unevenness of China's income distribution is approaching the US. Part of the reason for this is that internal migration is still stunted by government policy. The lack of labor mobility means that skilled labor that happens to already be in manufacturing cities commands a premium.

(2) With five levels of government, China may overdo federalism just a bit.

(3) Banks have to learn modern underwriting techniques. The ratio of GDP growth to investment in China is much lower than it is in India. In light of how poor India's infrastructure is, and how good China's is, this is remarkable. (My own view--China needs private sector banks).

(4) China has cut its poverty by 3/4 in less than 20 years. This is breathtaking.

Deepak is an engaging and informative speaker.

Keynes Quotes to Live By

Tim Riddiough reminded me of this one:

"When the facts change, I change my mind. What do you do, sir?"

Reply to a criticism during the Great Depression of having changed his position on monetary policy, as quoted in Lost Prophets: An Insider's History of the Modern Eonomists (1994) by Alfred L. Malabre, p. 220

And just as germane at the moment:

"If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has."

What I submitted to the House Financial Services Committee last Thursday

Feedback welcome

Testimony of Richard K. Green
Oliver T. Carr, Jr. Chair in Real Estate and Finance, The George Washington University
Before the House of Representatives Committee on Financial Services
December 6, 2007

Chairman Frank, Representative Bachus, and members of the committee, thank you for inviting me to testify today as part of this hearing on “Accelerating Loan Modifications, Improving Foreclosure Prevention and Enhancing Enforcement.” My name is Richard K. Green, and I am the Oliver T. Carr, Jr. Chair in Real Estate and Finance at the George Washington University. Before teaching at George Washington, I taught at the University of Wisconsin-Madison and the Wharton School of the University of Pennsylvania. In the interest of disclosure, let me note that I worked for Freddie Mac for about 16 months in 2002-03, and that I own a small amount of Freddie Mac stock (whose value is considerably lower than it was six months ago!)
Let me begin by saying that my thoughts on the subprime crisis have evolved considerably over the past year. Last March, I was quoted in Newsweek as saying that I thought the damage arising from the subprime mess would be limited. I was clearly wrong. And so as events have changed, my thoughts on appropriate policy responses to the crisis have changed as well.
Mass loan modification is one example of how my views have changed. Not so long ago, I worried about the moral hazard problems that could result from effectively allowing a large class of borrowers to change the rules of a loan after it was originated. When initial loan terms are not enforced, future investors will be less willing to invest in mortgages, which in turn can reduce the availability of mortgage credit. But this point seems moot at the moment.
Three things have led me to change my mind about modification. First, and most important, is the fact that it will be difficult to preserve macroeconomic stability if we ignore the fact that already dangerous loans will become even more so when their payments increase, sometimes dramatically. For reasons I will describe later in my testimony, I do not think that modification is by any means a panacea. But past experiences in the history of the US mortgage market give us reason to believe that mass modification can be an effective tool for restoring stability to financial markets.
Before the Great Depression, the typical mortgage in the United States had some features in common with many current subprime mortgages: floating interest rates, no amortization, and the possibility of “payment shock. ” The payment shock arose from the fact that mortgages had balloon payments: borrowers were forced to refinance regularly. If they could not refinance, they owed a balance roughly equal to half the purchase price of the house.

This housing finance system worked reasonably well until the Great Depression, when bank illiquidity made lenders call loans when they were due. Households rarely had enough cash to pay off their mortgages and so needed to sell their homes to meet their obligations. The lack of liquidity meant that buyers could not obtain financing, so sellers could not sell. This led to waves of foreclosures, followed by real estate owned by financial institutions, which in turn created more illiquidity; and soaring default rates. The market clearly needed a “servicing” solution.

In response, the Hoover Administration created the Federal Home Loan Bank System, and New Deal housing finance legislation created the FHA to insure long-term mortgages and the Home Owners Loan Corporation (HOLC) and its successor, the Federal National Mortgage Association, to tie mortgage markets to capital markets. HOLC, backed by the full faith and credit of the U.S. government, raised money in the bond market to purchase non-performing mortgages from depository institutions. HOLC reinstated the loans as 20-year fixed-payment mortgages (Green and Wachter 2005). This can be seen as the first example of mass loan modification. Borrowers were removed from an impossible position (where they had to raise a large amount of cash to pay off a mortgage balance) and placed in a manageable position. At the same time, by changing the terms, the federal government reduced the embedded risk of the loans and therefore increased their value to depositories, which ultimately bought them back from HOLC.

Second, I have come to appreciate that transactions between borrowers and lenders are hardly typical. Even the simplest fixed-rate mortgage, whose cost is a function of rate, term, points, fees, and expected time in the home, is not a straightforward product. Adjustable rate mortgages are more complicated than fixed-rate mortgages; exotic ARMS are even more so. At a conference sponsored by the Joint Center for Housing Studies last week, professors of law and economics from leading universities could not explain in detail all the characteristics of their adjustable rate mortgages. To expect consumers with far less financial acumen to understand the terms of exotic ARMS is unreasonable. It is particularly noteworthy that as we gather more evidence about the characteristics of subprime borrowers, we find that increasing numbers of subprime loans were going to borrowers with relatively high FICO scores. I have become increasingly convinced that large numbers of borrowers were pursuaded to take on products that they did not understand (I also leave open the possibility that some of the brokers who sold the loans did not really understand them either).
Third, structured finance has made loan modification on an individual loan level difficult. The interests of the different investors in various classes of securities can be in conflict: when a loan is in default, it is possible that investors holding a senior tranch will prefer foreclosure to workout, while those holding junior tranches might prefer workouts. At the end of the day, this conflict could prevent workouts in cases where both borrowers and the sum total of investors would be better off with a workout, indicating that workouts are economically efficient, at least in the short run. But let me raise a flag about problems that might arise: trusts that hold mortgages are supposed to be passive entities. Large numbers of workouts could turn them into active entities, which in turn could, under the terms of the trust, lead to dissolution. The legal implications of all this are well beyond my ken (I am not a lawyer), but they need to be considered as Congress moves forward with legislation such as HR 4178.
In my opinion, as we think about solving the current crisis and developing reforms for the mortgage market of the future, we must keep in mind how important it is to develop incentives that will allow us to get out of our current predicament and prevent future crises. To me, a combination of incentives and improved information will be more effective than detailed regulation (big picture regulation is another matter, and something I will get to in a minute).
For the time being, the key loan modifications would be: (1) to freeze ARM payments for particular types of ARMS and (2) to allow ARM borrowers whose mortgages have prepayment penalties to refinance without having to pay these penalties. But in determining the level at which to freeze ARM payments, we should not freeze rates below A and alt A rates, both for equity reasons and because we want to encourage borrowers who can refinance into A or alt A products do to so. We also should be sure only to modify loans for borrowers who occupy the house under mortgage.
As we look forward, new regulation should focus on aligning incentives to mitigate against the adverse selection and moral hazard issues that led to the current crisis. To be more specific, changes in policy should accomplish three things:
(1) It should make sure that all parties in the lending chain have “skin in the game.” While reputational risk mitigates against bad behavior, there is not a substitute for financial incentives.
(2) It should make sure that all parties in the lending chain are subject to federal supervision. This will reduce regulatory arbitrage.
(3) It should do what it can to improve disclosures throughout the lending chain. Borrowers must be better informed as to the consequences of their lending choices (although this will be difficult); bond ratings must be consistent, and securities must be more transparent.

All this said, it is important to recognize that no amount of modification can produce a panacea to the current crisis. First of all, we know that many defaults occurred before a rate reset, and so they were induced by something other than payment shock. It is actually an interesting and open question as to whether those borrowers with the greatest propensity to default have already done so. In the distant past (i.e., the 1970s and 1980s), default usually occurred in the third to seventh year of a loan’s life. We now have the unusual spectacle of books of mortgages that contain large numbers of loans that didn’t receive a single payment. This means history gives us little guidance about how these mortgages will perform going forward.
Second, the current outlook for the housing market is grim. Economic theory tells us that one of the key determinants of current house prices is expectations of future house prices. A very small change in expectations can actually lead to a very large change in house prices. One of the best ways to look at expectations for house prices is to look at the S&P/Case-Shiller futures market for houses ; in this market, people actually place money behind their opinions about future house price movement. And right now the market is telling us that people’s expectations are not positive. This by itself could push down house prices for awhile, which will eat away at home equity, which will make mortgages more vulnerable. Reducing the possibility of payment shocks and making loans easier to refinance will help, but for a person who loses his job, gets sick, or sees his marriage dissolve, the fact that his mortgage balance is higher than his house value may leave him with little alternative but to default.
Reducing impediments to modification will, however, reduce the probability of foreclosure somewhat, and will therefore reduce the inventory of homes available for sale going forward. This can do nothing but help expectations about future house prices, and therefore make the market less bad than it would otherwise be. I think for the time being, reducing the damage from the subprime crisis is the best we can expect to do.

I am going to a conference in honor of Chip Case tomorrow

After I do my testimony (written at last!), I am getting on an airplane to Boston, where I will be attending a conference in honor of Chip Case. Along with being a great Wellesley teacher, a terrific housing scholar, and a rare academic entrepreneur, Chip is responsible for generations of economics students at Harvard: he designed the iconic course know as Ec 10. Ec 10 was what turned me into an economist, and for that I am entirely grateful.

I am discussing a paper from John Quigley and Berkeley colleagues on land use regulation and house prices in San Francisco. I will post those comments here after I discuss them in person. John continues to amaze me with the depth of his work--he pulls together very difficult data and then analyzes them using the most rigorous tools going. Although John has never been my teacher per se,and even though I have had great mentors in my career--Kerry Vandell, Pat Hendershott, Buz Brock to some extent and of course Robert Baldwin--I don't know that I have ever learned as much from one man as I have from John Q.

John and Ed Glaeser are the hosts for the conference, which will fill with luminaries with which I don't hold a candle. But I'll have lots of fun anyway.

More random thought as I try to pull this together

I am trying Brahms with the hope that he helps. Anyway, I in my office have this relative cheap stereo (NAD L-40 with a pair of PSB mini speakers) that sounds amazing to me. I think I bought it seven or eight years ago. Talk about bargains...

Gotta finish the testimony

Do you ever know what you're going to say, but have a hard time writing the words to say it???? Arghhhhh!

I will be testifying on subprime before the House Committee on Financial Service on Thursday

So I have about 60 hours to determine what I am going to say in five minutes. It brings to mind the famous Mark Twain maxim: "I was going to write you a shorter letter, but I didn't have time."

Financial Innovation

I remember when I first heard about CDOs, I didn't understand them--or maybe I should say I did. They were explained to me as being tranched securities of tranched securities: that is, they took subordinated debt pieces, wrapped them together, and then tranched them again, so there were senior pieces of subordinated tranches.

But these really weren't senior pieces--they were "mezzanine " pieces--pieces that got paid after the original senior piece got paid, but before the sub of the sub got paid. In any event, it was pretty risk stuff, and it is now taking a beating.

Nevertheless, just because people invested stupidly in innovative securities, innovations in securities are not per se bad things, and on net (in my view) contribute benefits. The development of the mortgage backed security market in the 1970s was an important and welfare enhancing innovation that brought liquidity to the mortgage market everywhere in the United States, and perhaps preserved the 30-year fixed rate mortgage as an instrument for American consumers. Even now, the conventional conforming mortgage market continues to cook along just fine.

Perhaps the most important thing the Fannie/Freddie MBS market did was bring standardization to mortgages, so that they could be underwritten, packaged and sold as commodities. The mortgages creating the problems we are facing now are anything but standard.

Mark Thoma Channels St. Louis Fed President William Poole

This is important:

Some questions for William Poole, president of the FRB St. Louis. The answers are extracted from his speech Market Bailouts and the "Fed Put":

One of the arguments against the Fed taking action to reduce problems in financial markets is that this creates a moral hazard problem. Can you remind us what the concern is?

The concern over moral hazard is that monetary policy action to alleviate financial distress may complicate policy in the future, by encouraging risky investing in the securities markets.

Do we know much about financial turmoil of the type we are experiencing now?

There are so few instances of market turmoil similar to the current situation that I’ll broaden the analysis to include significant stock market declines. Doing so gives us a substantial sample to discuss.

What is the most important question to consider?

[W]hether Federal Reserve policy responses to financial market developments should be regarded as “bailing out” market participants and creating moral hazard by doing so.

Maybe an example of the types of questions we should ask would help.

The U.S. stock market, between its peak in 1929 and its trough in 1932, declined by 85 percent. Question 1: If the Fed had followed a more expansionary policy in 1930-32, sufficient to avoid the Great Depression, would the stock market have declined so much? Question 2: Assuming that a more expansionary monetary policy would have supported the stock market to some degree in 1930-32, would it be accurate to say that the Fed had “bailed out” equity investors and created moral hazard by doing so? I note that a more expansionary monetary policy in 1930-32 would, presumably, have supported not only the stock market but also the bond and mortgage markets and the banking system, by reducing the number of defaults created by business and household bankruptcies in subsequent years.

Now apply these questions to the current situation. Did the Fed “bail out” the markets with its policy adjustments starting in August of this year? Have we observed an example of what some observers have come to call the “Fed put,” typically named after the chairman in office, such as the “Greenspan put” or the “Bernanke put”? Why has no one, at least not recently to my knowledge, argued that a more expansionary Fed policy in 1930-32 would have “bailed out” the stock market at that time and, by implication, have been unwise?[1]

Some people aren't going to make it to the end of this discussion. Any chance you could give a summary of the bottom line?

I can state my conclusion compactly: There is a sense in which a Fed put does exist. However, those who believe that the Fed put reflects unwise monetary policy misunderstand the responsibilities of a central bank. The basic argument is very simple: A monetary policy that stabilizes the price level and the real economy cannot create moral hazard because there is no hazard, moral or otherwise. Nor does monetary policy action designed to prevent a financial upset from cascading into financial crisis create moral hazard. Finally, the notion that the Fed responds to stock market declines per se, independent of the relationship of such declines to achievement of the Fed’s dual mandate in the Federal Reserve Act, is not supported by evidence from decades of monetary history.

William Poole is a monetarist (he wrote a book called Money and the Economy: A Monetarist View, so I think I am characterizing him fairly), so these comments are quite significant. As I noted in my impressions of the conference on Understanding Consumer Credit at Harvard last week, we may have reached the point where the mortgage crisis is sufficiently contagious that actions to fight it (such as freezing the interest rates on ARMS) should not create serious moral hazard problems, or in any event, the moral hazard problems pale in comparison with the problems that would arise from passivity.

Paul Krugman takes down Ben Stein, but gets something a tiny bit wrong

The blog entry is great:

Maybe I don’t have what it takes to be a serious columnist. I mean, it would never have occurred to me to suggest that the only way to explain an economic forecast I don’t agree with is to say that it must be part of an evil plot to drive down the market, so that Goldman Sachs can make money off its short position — and to suggest that Goldman should be the subject of a federal investigation.

But he goes on to say

For what it’s worth, Goldman’s forecast of a 15 percent decline in home prices seems implausible to me, too — but on the low side. A 15 percent decline would bring prices back to their level in early 2005 — when the bubble was already well inflated. If prices fall back to their level in early 2003, that’s a 30 percent decline.

Implicit here is the assumption that prices in 2003 were roughly in equilibrium, and I think that is probably right. But if prices rose by 3 percent per year since then (that is, if real prices stayed constant), then prices would only need to fall around 21 percent to get us back to alignment with fundamentals.

OK--that is really, really picky, and truth be told, I have no idea how much prices will fall (or even if they will continue to fall) for reasons I have explained in other posts. It's just that Krugman is usually precisely correct, so I am surprised he benchmarked to a nominal, rather than real, price from the past.

In Businessweek, disturbing news from Wisconsin

Today, twice as many Wisconsin-Madison professors are leaving to work elsewhere as was the case five years ago. Huge piles of cash aren't always the issue; sometimes it's the bureaucratic or political constraints more common on public campuses. Among the faculty that Farrell particularly regretted losing was Robert W. Carpick, a fast-rising associate professor specializing in nanotribology (the study of friction at the atomic level) who defected to the University of Pennsylvania a year ago. Carpick, who took much of his $550,000 in outside research grants with him to Penn, accepted a salary only 10% higher than the $90,000 he was making. The main reason he left Wisconsin is that it is prohibited by state law from paying domestic partner benefits, Carpick says. "I also was concerned about the effects of dwindling state support on the public university model."

Back to the City?

I go to lots of meetings where people claim that baby boomers are returning to central cities. Here are some data on population growth change of the 25 largest cities and the US between 2000-2006.

Detroit city -8.43%
Philadelphia -4.56%
San Francisco -4.21%
Milwaukee city -3.96%
Baltimore city -3.04%
Chicago city -2.16%
Boston city 0.28%
Indianapolis 0.48%
Washington city 1.66%
New York city 2.57%
San Diego city 2.74%
Columbus city 3.05%
Memphis city 3.20%
Seattle city 3.39%
Dallas city 3.73%
San Jose city 3.91%
Los Angeles 4.18%
United States 6.30%
Jacksonville 8.01%
El Paso city 8.12%
Austin city 8.12%
Houston city 9.77%
San Antonio 13.28%
Phoenix city 14.53%
Charlotte city 16.58%
Fort Worth city 22.19%

The data are estimates that come from the census web site. First note that all but eight cities have grown less rapidly than the country as a whole; this means that their population growth comes from births over deaths, rather than net in-migration from, say, the suburbs. Moreover, in New York, San Diego, Los Angeles and San Jose (perhaps others as well), much of the in-migration comes from abroad, meaning that domestic out-migration is larger than the raw figures would suggest. Finally, those cities that grew faster than the country--Jacksonville, El Paso, Austin, Houston, San Antonio Phoenix, Charlotte and Fort Worth--either have strong annexation powers or lots of land at the urban fringe inside of municipal boundaries. They do not reflect population moving from the fringe into the center city.

Some cities are doing well despite the absence of much population growth. And here in Washington, the population of white affluent people is growing, but it is pushing out low-income African-Americans, largely to Prince George's County (a suburban county to the northeast). The affluent moving in are more likely to be childless (according to Julia Friedman, only five percent of taxpayers in the District are married couples with children), and so they are driving down density per housing unit. This is why population is not growing much, but the fiscal condition of the city has improved dramatically.

When you say Wisconsin!

You've said it all! This is a Badger football cheer, that seems to be the heart of a remarkable naming gift:

http://www.businessweek.com/bschools/content/nov2007/bs2007118_022592.htm

Understanding both the modest Midwest tradition and the school pride of its alums, Mike Knetter organized a collective $85 million naming gift that will preserve the name Wisconsin School of Business for at least 20 years.

There are universities that instill a fervent love among their students and faculty, and Wisconsin is among them. I always thought the motto of the place should be "excellence without stuffiness."

Airplanes and Real Estate

James Hamilton's analysis of the surprisingly strong 3rd quarter GDP number is here:

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

Jim's description is, as usual, clear and insightful. One striking point: while residential construction declines subtracted about one percentage point from GDP, around 40 percent of that was offset by exports from just one sector, civilian aircraft and engines. Because Boeing is the only civilian commercial (as opposed to private) aircraft company remaining in the United States, this means it has taken on a remarkable share of the burden of keeping the country out of recession.

So here is a fanciful question: how much do consumer preferences about aircraft shape airline decisions about what they purchase? The nicest airplane I have ever flown on is the Airbus 340-500 (it is the one that can fly from Newark to Singapore), and I would much rather fly on an Airbus 319-320 than a Boeing 737. Pilots have also told me that Airbuses can land in conditions of extremely low visibility (perhaps Boeings can as well, I don't know).

I am guessing that passenger comfort pales in comparison to operating and acquisition costs, and Boeing may have the edge there (I know the 787 is supposed to be very economical). Perhaps I am also unusual in my preference for Airbuses...

I was waiting for this

From this morning's Wall Street Journal

Even as the national housing market has been hit by slow sales and falling prices, Manhattan has continued to shine. But now its light may be dimming.
[Manhattan]
Upper East Side townhouse was listed in July for $24.5 million. Current asking price: $19.5 million.

Fewer apartments are being sold -- 858 went into contract in September, a 9.9% drop from a year ago and the lowest total in two years, according to brokerage Corcoran Group -- and the inventory of unsold apartments is increasing. Prices are also leveling off. The median price of a Manhattan apartment fell 3.4% in the third quarter from the previous one, according to the research firm Radar Logic. The firm says properties are sitting on the market longer, too, an average of 123 days, up from 94 days at the peak of the market in 2005.

Developers used to seeing yet-to-be-built apartments get snapped up sight-unseen are increasingly offering incentives, from help with closing costs to museum memberships, to jump-start sales. "Buyers are more hesitant," says Hall Willkie, president of brokerage Brown Harris Stevens.

I wrote a paper some years ago on the effect of the tech stock market on house prices in California. Short answer: none in LA, lots in San Jose. I am guessing that the stock value of investment banks (and the bonuses of their employees) has the impact on Manhattan real estate that the stock value of tech companies has on Silicon Valley real estate.

Harvard Joint Center for Housing Conference on Understanding Consumer Credit

I have spent the past two days participating in a conference at Harvard Business School on Consumer Credit (so it became a conference about subprime). Some impressions:

(1) When it comes to mortgages, very few of us are really informed about what we are doing. Of the people in the audience who had an adjustable rate mortgage, no one could say what their payment would be if it rose to the fully indexed amount next year. And the audience was filled with law professors and economists who teach at places like, um, Harvard. This has pretty profound implications about the meaning of consumer choice in the mortgage market.

(2) John Campbell noted that competitive pressures lead lenders to offer products that rely on somebody being stupid (the stupid subsidize the savvy). The 2-28 ARM may be just such a product. While I couldn't imagine myself saying this a year ago, it may be welfare improving to reduce mortgage choice. A menu that contains 30-year fixed mortgages, and fully indexed one, three and five year ARMS may be enough (although I reserve the right to change my mind on this).

(3) Amy Cutts showed (I think) that when lenders can foreclose more rapidly, there is a greater tendency for both cures and mortgages.

(4) Everyone involved in the mortgage process needs to have some capital at stake--including borrowers (i.e., no down payment mortgages just don't make sense).

(5) The housing market may be getting bad enough that some sort of bail-out might not create serious moral hazard problems--that is, many people who did nothing wring are now at risk, and for the sake of the macroeconomy, we need to think about how to help them.

(5) They regulate the mortgage chain far more in the UK and the Continent than in the US. Good news: defaults are much rarer. Bad news, consumers have much less mortgage choice. Borrowers in the UK can't get fixed-rate mortgages; borrowers in Germany can't prepay their loans.

(6) I love visiting Cambridge (I know, HBS is in Alston, but close enough).

Fareed Zakaria's column this week is worth reading

It is here:

http://www.newsweek.com/id/70991

The point is that America is shooting itself in the foot by making it difficult for foreigners to come here for tourism and short business meetings. I did a paper last year on the importance of airports as engines of growth, and the results are sufficiently powerful that I really believe them (see Airports and Economic Development, Real Estate Economics, Spring 2007).

We seem to have made it a national policy to make visiting here as unpleasant as possible. Among other things, our airports are not good (Singapore, Hong King Dubai and Frankfort have our airports beat hands down; thank goodness that Narita, Charles de Gaulle, and Heathrow are as bad as anything we have). And I guess that dealing with the INS is just no fun for foreigners. While I find Dubai and Singapore somewhat oppressive, their immigration processes are remarkably efficient. Put all this together, and we are losing business meetings (and world-class graduate students) to other countries.

If any of this was really preventing terrorism, one might make the cost-benefit calculation and decide that the cost to us economically was worth it. But I am skeptical of the utility of our hostility to foreign visitors. I also think nothing does a better job of instilling good feelings about the United States among foreigners like allowing them to have pleasant visits here. And we need all the sympathy we can get.

Hoisted from Mark Thoma's comments

Mark Thoma was kind enough to refer to my post on forecasting housing prices. ONe of the comments came from Fishy Math:

Fishy math says...

Wait a second! This formula is based on a perpetuity! Of course you are going to get huge swings resulting from relatively modest changes in assumptions. If you believe that housing prices will decrease by 5% per year INDEFINITELY, then you're correct. More likely, we will experience sharp depreciation for a couple of years, followed by a resumption of whatever the normal level of appreciation in housing in perpetuity.

Assuming 2 years of 10% declines followed by a resumption of 5% annual increases, I get a multiple of about 16x capitalized rents.

I want to make it clear that I am NOT forecasting declines of 5 percent in perpetuity. My point was that expectations, which overshot on the upside before, could now overshoot on the downside, and that we have rather poor estimates of what expectations are--although the CSW housing futures index suggests that those who are putting money on the line think that prices are going to fall for quite awhile. People also seem to be myopic when they form expectations.

The most important point, as Mark notes, is that small changes in expectations can lead to big changes in prices. To use a less extreme example, if expected appreciation drops from five percent to two percent per year, values would fall by about 40 percent. I think that is quite enough.

Three principles for avoiding future subprime messes

Changes in policy should accomplish three things:

(1) It should make sure that all parties in the lending chain have “skin in the game.” While reputational risk mitigates against bad behavior, there is no substitute for financial incentives.

(2) It should make sure that all parties in the lending chain are subject to federal supervision. This will reduce regulatory arbitrage.

(3) It should do what it can to improve disclosures throughout the lending chain. Borrowers must be better informed as to the consequences of their lending choices (although this will be difficult); ratings must be consistent, and securities must be more transparent.

Long run vs Short run

I should follow us my earlier post by noting that while expectations can be ideosyncratic in the short run, they are probably about right in the long run.

With that in mind, let me point out that in 2002 I thought that house prices in most cities (with the possible exceptions of Boston, San Diego and San Jose) were tied pretty well to fundamentals. So if you want to know long-run house prices in most places, look at values in 2002 and add around 3 percent per year. Alas, many places had double-digit increases per year between then and now...

Pleasant memories

One of my cousins got married this weekend, and in the course of the festivities, my family (all my immediate and some of my extended) went to the MIT museum. It was there that I was reminded of one of the most exciting experiences of my life.

The MIT museum has an exhibit dedicated to the work of Harold, or Doc, Edgerton, "the man who made time stand still." When I was 16, I made a campus visit to MIT. I wanted to go to college there, as my very smart Aunt and Uncle had Ph.Ds from the place, and my very smart cousin, who worked on Apollo rockets, was an engineering alum (since then, yet another cousin got at Econ Ph.D. there--he now teaches at Northwestern). During the campus visit, I was taken to Doc Edgerton's lab, where the man himself was working (playing?) with his strobe. He asked if I wanted to see how it worked! And so it was for the first time that I saw milk drops falling and eggs smashing at a speed at which every detail was visible (it was like watching CSI for real, only not so bloody).

Boy, did that make me want to go to the Institute! In the end, they made the wise decision not to take me (I am really not good enough at math), so I spent four nice years a couple of miles down the street. But I hadn't thought about that day for a long time, and it was nice to have it returned to me.

Brad Delong cites the FT on The Arnold and Subprime

http://delong.typepad.com/sdj/2007/11/i-may-have-to-r.html

By bringing together four large subprime lenders and getting them to cooperate, Schwarzenegger has done something incredibly important--he has gotten lenders out of the prisoner's dillemma and onto a welfare-improving cooperative equilibrium.

Unless everyone agrees to modify their loans, everyone has an incentive not to modify (if there are going to be lots of defaults,one might as well get a high coupon rate for each mortgage that stays current). But now all the players have an incentive to modity, so long as everyone else modifies. This will prevent some defaults, and thus reduce the inventory of houses for sale relative to what it might have been.

But if any one of the four lenders starts fooling around, the whole thing will come unglued. It is important that the Terminator use his ability to intimidate to keep the deal together.

The problem with forecasting house prices

The value of a house should, in equilibrium, be its capitalized rents. Its capitalization rate is (roughly) the after-tax required rate of return, plus depreciation and expenses less expected appreciation. We may write this out as:

r + m - pi.

The r and the m are relatively easy to measure. Households in the conventional conforming market can borrow at an after-tax mortgage rate of about 5 percent right now, and with very little equity, they can borrow at around 6 percent (the cost of interest plus mortgage insurance). Let's add a risk premium and put the total around 7 percent (this is probably a bit high). Depreciation and expenses will run around 2 percent of house value. So the value of a house is the value of its rent divided by 9 percent less expected appreciation.

Now let's see what happens when we let expectations about future prices rangs from an increase of 5 percent in a year to a decrease of 5 percent in a year. If expected prices increase five percent, values are 25 times rent (rent/.04); if the decrease 5 percent in a year, values are about 7 times rent. So a ten percentage point deline in expectations could cause house prices to fall by two-thirds.

I think this is part of the current problem. On the one hand, after roughly 2002, prices in many markets shot up well past the 25 to 1 point (on a quality adjusted basis), in part because of very low interest rates, and in part because of unrealistic expectations. Now that prices are falling (as inevitably they would), expectations have reversed, although it is not yet clear by how much.

Some months ago, when others were writing that the bottom was coming, I wrote that I didn't know when the bottom of the housing market was coming, and neither did anyone else. I wish I had been wrong.

Happy Thanksgiving!

Let's hope nothing too eventful happens this weekend. See you on the Mass Pike!

Oy vey

On July 16 I wrote:

The current 10 years treasury rate is 5.1 percent; Cap Rates on San Francisco office buildings are running around 5.5 percent.

On the one hand, rents rise, meaning that the expected IRR on a San Francisco office building is higher than 5.5; on the other hand, buildings depreciate and need to be recapitalized, meaning that net stablized net cash flow growth will be less than market rent growth. While office rents in San Francisco rose smartly last year, they had been stagnant for serveral years before, and office buildings always have the potential for substantial vacancy. So would I buy an office building at a 40 basis point spread over Treasuries? I don't think so...

The good news: 10 years Treasuries are now at around 4 percent. The bad news: see web.mit.edu/cre. Commercial real estate values are falling. Just what we need.

Freddie Mac's Earnings

Yesterday was not a good one for Freddie Mac: its earnings were substantially more negative than nearly everyone was expecting, and the value of the stock slid by 30 percent.

I am not entirely sure yet why earnings were so poor, but press accounts suggest that the heart of the problem was the mark-downs the company took on delinquent loans that it had repurchased from loan pools. The losses on these loans have not actually been realized in a cash-flow sense (Freddie has not sold them at below market value), but in light of the fact that these are by definition problem loans and that losses conditional upon default seem to be rising, the write-down seems appropriate.

The episode brings home several points. First, it was not long ago that Fannie and Freddie were criticized for having returns on equity that were "too high" and for charging guarantee fees that were also "too high." Guarantee fees are the insurance premium the GSEs charge to sellers of loans to guarantee timely payment of principal and interest. The reason ROES were so high for years is because house prices rose everywhere, and so default losses were nearly non-existent. The companies faced an environment analogous to a casualty company with a book of business in Florida that didn't face a serious hurricane for five years. It one looks at the long term history of default in the United States, Fannie/Freddie G-fees were not excessive (fwiw, I made this point at least as far back as 2005).

Second, as Freddie is confined to conventional/conforming loans, and focuses on prime loans, the markdown at which the market is pricing its non-current loans reflects the fact that the market is building in a high risk-premium for all loans. One thing we know about prime mortgages from the past is that people actually rarely defaulted on them, unless they were facing job loss, divorce or illness, regardless of house price movements. It is possible that attitudes toward default among prime borrowers have changed--we are in the middle of an experiment that will allow us to find out.

Finally, it is an important and open question as to what the role of the companies should be going forward. If the regulatory climate (such as capital requirements) remains tight, the inability of the companies to purchase loans could make housing conditions worse. On the other hand, if house prices overshot up, they will likely overshoot down regardless of credit market conditions. Congress and regulators need to ask themselves whether they are willing to hang on tight if they allow Fannie and Freddie to increase lending in such an environment.

We went through a ride like this in the early 1980s, where because of interest rate changes, Fannie Mae was technically insolvent (and bleeding cash flow). The government decided to forbear, and once interest rates fell, Fannie was OK again.

144 years ago yesterday

Brad Delong's blog reminds me that this was spoken:

Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.

Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure. We are met on a great battle-field of that war. We have come to dedicate a portion of that field, as a final resting place for those who here gave their lives that that nation might live. It is altogether fitting and proper that we should do this.

But, in a larger sense, we can not dedicate -- we can not consecrate -- we can not hallow -- this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us -- that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion -- that we here highly resolve that these dead shall not have died in vain -- that this nation, under God, shall have a new birth of freedom -- and that government of the people, by the people, for the people, shall not perish from the earth.

Gary Wills' book on the Gettysburg Address is among my all-time favorites. Lincoln used the occasion to replace the Constitution with the Declaration of Independence as the document that declared our principles (as opposed to out legal structure). We have been better as a country ever since. The Declaration declared that all men are created equal, while the Constitution as is existed at that time condoned slavery. It was only when the 13th, 14th and 15th amendments came into being that our laws began to match our aspirations.

How to reform Division I sports?

This is from Gregg Easterbrook's TMQ column today. I don't care that much for his "serious" stuff, but he has the best football column going. And today, he reported on a beauty of a suggestion from his brother:

Thus Lewis' article gives me an opening to repeat the reform proposal made by Official Brother Neil Easterbrook, a professor at TCU -- for every year a Division I football or men's basketball player performs, he receives an additional year of tuition, room and board at the school. That way, when NCAA eligibility expires and the player realizes no NFL or NBA payday will ever happen, he can buckle down, get serious about studying and obtain the college education that will help him advance in life. Neil's rule would ensure that Division I football and men's basketball players are not used up and tossed away by the sports-factory schools; would create a strong incentive for those schools to be serious about teaching their athletes, so they graduate on time and don't represent extra years of costs; and would create a campus presence of once-star players who didn't make the NFL or NBA and are now at the library studying, radiating the message that you'd better study. How about it, NCAA? Why not use your billions of dollars to set up a system that would allow revenue-sport athletes who have brought you cash and glory on the field to remain in school until their degrees are complete?

Worthwhile reading on Wamu vs Cuomo

http://globaleconomicanalysis.blogspot.com/2007/11/tanta-on-wamu-vs-cuomo.html

Tanta On WaMu vs. Cuomo

There was a great post by Tanta on Calculated Risk's blog about a legal battle involving Cuomo, Fannie Mae, and Washington Mutual.

For background information on the lawsuit please see WaMu Collapses Under Appraisal Probe. My ending comment was "If Washington Mutual has to buy back those loans from Fannie Mae, the patient will die."

Tanta took things further, looking at the entire appraisal industry itself, including some legal repercussions of what might happen depending on how the lawsuit progresses.

Tanta's must read post is called WaMu and The Rep War.
Following are a few snips:

Fannie Mae is saying that WaMu will take back any loans with dubious appraisals this "independent examiner" digs up. WaMu is saying that it will "rigorously" avoid doing so.

WaMu is also saying, in effect, that it signed a contract with eAppraiseIT that puts all liability for inflated appraisals on eAppraiseIT.

Fannie Mae is saying, in effect, that it signed a contract with WaMu that puts all liability for inflated appraisals on WaMu.

This is very interesting precisely because it isn't going to be about inflated appraisals. It's going to be about how far anyone can get away with two practices that are the lynch-pins of the mortgage industry: outsourcing regulatory liability to a third party bag-holder and doing business on a representation and warranty basis without pre-sale due diligence.

....

Trust me; all of that stuff is detailed and specific enough that it isn't that hard to find contractual grounds to declare breach and demand repurchase of a loan.

...

Anyway, this is why the whole flap is scaring the panties off everyone in the mortgage industry, far, far beyond any worry over stiffer appraisal regulation. The core issue here is a cornerstone of the whole "originate and sell" model that has created such a crisis.

If Cuomo's suit makes any headway at all, it will put eAppraiseIT out of business one way or the other. That's because if appraisal management companies are no longer willing or able to write these liability swaps into their contracts, they won't be able to offer what the lenders really want from them. The advantage of doing business this way isn't really about saving a few dollars on outsourcing administrative work for the lenders, it's about getting out from under a huge expensive compliance and legal risk.

No wonder Cramer's head is exploding again. This thing really isn't about appraisals, it's about stopping the game of risk-layoff.

Yes, WaMu (WM) will collapse if it has to take back those loans, but the bigger picture is the entire "originate and sell" model might collapse along with it. Won't that be fun?

The originate to sell model has taken a reputational hit as a result of subprime. Nevertheless, the old-fashioned retail-depository model had had its share of problems throughout its history; we shouldn't forget that securitization helped solve the savings and loan crisis. It would be a shame if in the midst of our current troubles we forgot about how the ability to sell mortgages has deepened the liquidity of prime mortgages, and enabled households to become attached to capital markets in a positive manner.

A Clue as to Why Goldman is So Good

The Times this morning has a flattering piece on Goldman-Sachs. And no wonder: they took hedge positions that have increased the company's profitability at a time when other investment banks are having, shall we say, serious problems.

The Times gives some reasons about why the company is so good, but let me suggest another. My limited exposure to people in the company suggests to me that part of the culture is actually to encourage reflective study. Instead of making decisions coming "straight from the gut," people at the company read current literature and appreciate the history of financial markets. Unlike its competitors, Goldman has people who understood that house values could not go up forever in all markets. This simple insight was fundamental to the company having a very sensible (and in the end) profitable risk management strategy.

It is often the case that ex post high payoffs result from nothing more than a favorable draw from a distribution of outcomes. But every now and then, one sees an institution that gets the favorable draw time-after-time. Berkshire-Hathaway seems to be one of these institutions, GS is another. The probability of getting great draws at random again and again becomes vanishingly small. I am willing to believe that Goldman Sachs is just plain smarter than its competitors.

Manski and Identification

I am teaching Charles Manski's great book on Identification Problems in the Social Sciences right now (I must say that I find his writing much clearer than the class I had with him as a grad student).

One of this important points is that one cannot evaluate the counter factual or a persons' life. Suppose we find that children who come from in fact families graduate from high school at an 87 percent rate. Then without assuming a lot of structure, all we can know is if children in non-intact families could magically be transported to intact families, the children's graduate rate would lie between 0 and 100 percent. It is only if we assume that kids got randomly picked into intact and non-intact families that we can assert that all kids in in-tact families will graduate at the 87 percent clip. But this assumptions seems hardly reasonable. More on this tomorrow...

Suburbs Separated at Birth?

I live in Bethesda, Maryland a suburb immediately outside of Washington. My in-laws live in S. Pasadena, CA, a suburb immediately outside of LA. I was comparing rents and prices on a per square foot basis in both towns, and they seem remarkably similar. I will need to investigate this more carefully (making adjustments for housing quality etc.), but still...

Bethesda and Pasadena have a couple of things in common. They have always had town centers, and as such have long had a greater sense of identity than the typical cookie-cutter suburb. They have also seen their downtowns develop remarkably in recent years. In fact, Pasadena is one of the great urban renewal stories of the post-War era. Twenty-five years ago, the heart of downtown Pasadena, the corner of Fair Oaks and Colorado, was a dump. It is now very beautiful, with nice retail and many interesting restaurants. Bethesda never got as down-in-the-mouth as Pasadena, but it was pretty dull when I first lived in the DC area immediately after college. Downtown Bethesda is now lively. Both downtowns have lots of street life. Both towns have nice residential districts with some distinguished houses architecturally (I particularly like the craftsmen bungalows in Pasadena).

They are also convenient to many employment centers within thriving metropolitan areas.

Why we get in this business

GW inaugurated its new president last week, and I attended or was involved with a number of events surrounding the festivities. The highlight for me was a lunch, where the new President, the President of the Alumni Association, and a Senator who is an alum spoke. It wasn't the speeches, however, that made the lunch.

The lunch was rather made by the two undergraduates who sat at my table--one was a freshman, and one a junior. They were engaged, curious and highly intelligent, and just lots of fun to talk with. We spoke largely about potential opportunities for real estate development in China and India. The conversation centered around the fact that the challenges facing developers in these fast growing places are more grounded in politics than economic feasibility: if one can build a block of flats in Mumbai, they will sell. The issue is getting the government to give permission to build them. We also discussed the problems of property rights in China, and the remaining suspicion of foreign investment in India.

Other than a few seminars, I think the last time I taught undergraduates was 2004, when I taught 120 undergrads at Wharton. I need to get back into undergraduate teaching....

Foreclosures

From this morning's WSJ:

Among the nation's 100 largest metropolitan areas, Stockton, Calif.; Detroit; and Riverside-San Bernardino, Calif., posted the highest third-quarter foreclosure rates, RealtyTrac said Wednesday. Stockton had one foreclosure filing for every 31 households; Detroit had one for every 33 households; and Riverside-San Bernardino had one for every 43 households. Riverside-San Bernardino also had the most foreclosure filings overall -- 31,661 -- followed by Los Angeles, Detroit and Atlanta.

Other cities with top foreclosure rates were Fort Lauderdale, Fla.; Las Vegas; Sacramento, Calif.; Cleveland; Miami; Bakersfield, Calif.; and Oakland, Calif.

The Stockton, Detroit and Riverside numbers are truly astonishing. They mean that nearly everyone in these areas knows someone who is in foreclosure. That can't help but undermine confidence in the housing market, and therefore produce greater expectations of future house price declines. My best guess is that house prices in these places will overshoot downward, so it is going to be a long time before we see a bottom.

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.

This paper is a lot of fun

It ranks concert halls by acoustical quality. Concert halls are, after all, a type of real estate.

http://www.leoberanek.com/pages/eightyeighthalls.pdf.

I agree with the Boston ranking. But I think San Francisco (now) has a nice hall, and am surprised it does so badly. Three halls I like not mentioned here are the new Strathmore Hall in North Bethesda, Maryland (so shoot me, I'm a homer, but it really is good), Uihlein Hall in Milwaukee, and Orchestra Hall in Minneapolis. Perhaps I am especially fond of the last, because it was my first "real" concert hall. I was 15, I think, and I remember hearing Martha Argerich play the Chopin F-minor Piano concerto with the Minnesota Orchestra. It was amazing.

The Future of the GOP?

Data from the US Census. Population Projections.

Couldn't help but think about this while I watched the debate for a few minutes last night.

When leaving the Ukraine

Don't wear a sportscoat or a suit or anything that might make it appear that you have money. The following conversation more or less happened immeidately after passport control:

Guy in Border Guard Uniform: How much money do you have with you

Me: I don't know, maybe $400 and 200 Euros

Border Uniform: Let me see it

Me (opening wallet): here it is

Border Uniform: I want to count it

Me (handing over money): OK

Border Uniform (fans out money like cards, and then unfans): OK, here is is back. You can go.

Me (assuming I am $20-$40 lighter): thank you sir.

Lots of people are posting this

So I will join them:

http://www.etc.cmu.edu/global_news/?q=node/42

Pausch is magnificent. He is also about my age (he's six months younger). His children are considerably younger than mine; I can't imagine how much it would sadden me not to have been able to see my kids grow up.

The Argumentative Indian

About a year ago, my Senior Associate Dean recommended Sen's book to me; my wife bought it for me the other day. It is so far very good. I am particularly taken with this passage.

"The nature of [western descriptions of the Indian intellectual tradition] has tended to undermine an adequately pluralistic understand of Indian Intellectual traditions. While India has certainly inherited a vast religious literature, a large wealth of mystical poetry, grand speculation on transcendental issues,
and so on, there is also a huge--often pioneering--literature, stretching over two and a half millennia, on mathematics, logic, epistemology, astronomy, physiology, linguistics, phonetics, economics, political science and psychology, among other subjects concerned with the here and now.

Even on religious subjects, the only world religion that is firmly agnostic (Buddhism) is of Indian origin, and further the atheistic schools of Varvaka and Lokatay have generated extensive arguments that have been studied by Indian religious scholars. themselves...

...What is in dispute here is not the recognition of mysticism and religious initiatives in India, but the overlooking of all other intellectual activities that are also abundantly present. In fact, despite the grave sobriety of Indian religious preoccupations, it would not be erroneous to say that India is a country of fun and games..."

I have been privileged to visit many places in my life. I am gaining a better understanding about why India has been among my favorite.

Is the Ukraine the most efficient country in the World?

In one respect, it appears to be. The bid-ask spread for currencies is less than .5 percent. It is hard to imagine how the small cambios in this business make a profit. I don't think there are price controls either, because there are dozens (if not more) currency exchamge businesses within a 20 minute walk of my hotel.

Now if only the passport lines at the airport were faster...

Bethesda House Prices

Forgive the selfishness of reporting a price index for my neighborhood, but I was just looking at Zillow data.

The top line (light blue) is my zip code; the bottom line (dark blue) is the zillow estimate of my house.

The last year is likely all inside the zillow confidence interval, but it does suggest that prices, after declining, have firmed this year.

Silly things.

There are blogs that blame the National Association of Realtors for the run-up in house prices, saying that without their cheer leading of the housing market, prices never would have risen so much. I give people more credit than that--most people can guess that Realtors like houses as much as Steve Jobs likes ipods.

On the other hand, NAR is saying it's the media's fault that the housing market is so lousy now. The media have little to do with it--the housing market is bad because there is excess supply and because credit outside of the conforming prime loan market has gotten relatively expensive. Until inventories begin to fall, it won't matter what either the media or NAR say.

Not to be snarky, but...

Leslie Stahl, in introducing a section of her 60 minutes interview with Alan Greenspan, said, "Alan Greenspan will give his economic predictions for the future." Not his predictions for the present or past?

This is Disheartening

http://www.latimes.com/news/local/la-me-ucilaw13sep13,0,5893599.story?coll=la-home-center

I thought UC-Irvine was a school on the rise. I now know not to take it seriously until it gets a new Chancellor.

Greatest Conductor of the last 100 Years?

I love music, and especially symphonies. There are only a few things that thrill me as much as a great orchestra playing a great symphony (such as Beethoven 3, Schubert 9, Bruckner 7 or Mahler 6) really well.

I've been listening to a wonderful recording of Brahms 2 tonight. It features the London Symphony, with a conductor who is distinctly unglamorous, and who is not particularly famous in the US. But compared to him, Bernstein (who I really like, by the way) is too fussy; Karajan is too slick, Solti and Toscanini are too driven, Furtwangler is too sloppy, and Abbado is too slack.

Bernard Haintink has been making extraordinarily satisfying recordings for more than 40 years now, before with the Concertgebouw Orchestra of Amsterdam, and now with the London Symphony. His Brahms, Beethoven, Schubert, Mahler and Bruckner are all great. He did a wonderful Zauberflaute, too. Now if only he'd get around to Haydn, Berlioz and Sibelius, but I guess we have Colin Davis to take care of that.