The frustration of following "affordable housing" policy in California

The United States is sufficiently rich that all people should have decent housing they can afford.  Decent means sanitary, safe, and, if not spacious, not overcrowded either.  This housing should be available such that when households pay for it, they have money left over for other things, like food and education.

In Los Angeles, this is not the case.  Absent housing assistance, a renter at the 25th percentile of the income distribution must pay more than 45 percent of income in order to rent a unit at the 25th percentile of the rent distribution.

The vast majority of those eligible for housing assistance do not get it, because housing is not an entitlement, and budgets for housing assistance are, in the overall scheme of things, small.

Yet we can do far better in Los Angeles than we do.  For starters, even though we are the second largest and second densest metropolitan area in the United States, the impediments to building dense housing here are enormous.  I just judged a case competition for our RMPIRE executive program here at USC, and was impressed at the creativity of a team that wanted to use a particular lot's floor area ratio allowance of 6 to build densely packed units on a site no more than one mile from downtown Los Angeles.  The residential use would require a zoning change, however, and many judges felt that getting such zoning approved would be next to impossible.  It depresses me to say so, but I happen to agree with them.

But there is another problem as well.  While I have little doubt that allowing denser housing would lower rents in LA, it still wouldn't solve the problem--there would still be a "gap" between the present value of rents lower income households could afford to pay and the cost of building units.  This gap would need to be filled by government financing.

And so we come to the next problem--when we build "affordable housing" here, we do so in a remarkably inefficient fashion.  Government financing rarely comes from a single source, but rather comes in layers of financing from various local, state, and federal agencies.  Each slice of financing involves fees that go to consultants who arrange for the financing.  All of this adds to the amount of time and expense that are required to get financing, which ultimately pushes up the cost of bringing a project to market.  At the same time, communities require "affordable" units to have design amenities and, worse, covered parking.  This can drive the cost of production of an affordable unit to $400,000 and more.

Meanwhile, the median sales price of a house in Los Angeles County is $287,000.  See the problem here?  To provide "affordable housing," it would actually be cheaper to purchase the median priced home (hardly a bad house) than it would be to build something new.  But of course, there are many people who gain when $400,000 is spent to bring an affordable unit to market--just not taxpayers or low income users of houses.

Vicky Been on why underwater borrowers don't default

She has been doing a study that shows that people do not know how underwater they are. Cognitive bias can be helpful sometimes.

Lew Ranieri on why the REO rental business is tougher than you think

When renters turnover, the cost of getting the house ready for the next tenant can be 10 times higher than getting an apartment ready.

The problem with a widespread principal reduction program

Chris Mayer points out that 90 percent of underwater borrowers are current on their mortgages. A broad principal write-down program would surely change this.

The irony of Victor Davis Hanson

Hanson complains that universities suffer under the iron grip of "grandees."

So far as I know, the only sort of person who would use a word as pretentious as "grandees," would fancy himself a grandee.

Hanson also doesn't care for the fact that white guys can't do whatever they damn well please anymore.

What is Zachary Woolfe talking about?

In his review of the LA Phil's Don Giovanni, he writes, "silence greeted Mozart’s winking quotation of his own “Nozze di Figaro” during the final scene. It was an opera in-joke in search of an opera audience."


At the performance I attended, the audience giggled at the reference.  Perhaps New Yorkers can't imagine that the city that attracted Schoenberg, Mann and Faulkner can have a subtle sense of humor.

FDR on preventing a bank run

What is a "middle-class house" in California?

Alex Lazo had a nice story in this morning's LA Times about the absence of housing supply in Southern California. One person he interviewed was frustrated because he could not find anything he wanted at $525,000. As he pointed out, he is a "middle-class" guy.

This underlines a problem with California. Even after the crash, large swaths of the state (not just Malibu) have expensive houses.

Let us think about what a middle-class household can afford. The median income for a family of four in California is about $70,000. Once upon a time (i.e., before around 2002), the "front-end" ratio for a mortgage borrower was supposed to be no more than 28 percent of gross income. The front-end ratio is the ratio of principal, interest, property taxes and insurance to gross income.  If one assumes that a borrower can get a 30-year mortgage at a 3.75% rate, pays 1.1% of property value in property taxes, and an insurance premium of 0.2% per year, AND assumes that the borrower has a 20 percent down payment, a household earning $70,000 per year can afford a $250,000 house.  So the value of a "middle-class" house is $250K.  This is a long way from $525,000.

Pushing refinancing can really help

Recent news reports suggest current borrowers are still having some difficulties getting a HARP 2.0 refinancing.  This is too bad, because HARP 2.0 can potentially help a lot in getting many people out from under their troubles.

Consider someone who is 20 percent underwater on her house.  If she moves from a six percent loan to a 3.5 percent loan (today's rate on Zillow), and if house prices go up by only one percent per year (something that I think likely will happen in most markets, for reasons I stated a week or so ago) and if the borrower keeps her payment constant, she will be right-side-up in around four years.  If she remains in the six percent mortgage, however, she won't be right-side up for about nine years.

Note the HARP 2.0 is not rewarding "bad behavior."  It is program for people who are current on their payments but who are also upside down.  Many people can look at four years and see a tunnel's end--I am not sure that is true about nine years.

Of course, refinancing will not solve the Vegas-Phoenix-Inland Empire problem, where many borrowers are 30 percent underwater and more.  But for a whole lot of the country, HARP 2 could be a game changer.

Joan Ling at UCLA tells me transit ridership's share in LA is falling...

...and two car families are rising.  Zero car families are falling too.  This after about $12 billion of spending on rail transit.  Hmmmm.

Having just finished Robert Caro's magnificent The Passage to Power, I have two questions:

(1) Absent LBJ, would we have civil rights laws even now?

(2) Absent LBJ's awful personality traits, would we have civil rights laws even now?

To Boskin and Cogan: California does not attract non-taxpayers (earlier post corrected)

I was listening to an industry type give a speech on the woes facing California, and heard him state that a "Stanford study" show that while 10 million people had migrated here since 1985, only 150,000 people more paid taxes.  This made absolutely no sense to me, so when I got home, I did a little Googling, and found an ob-ed from Michael Boskin and John Cogan that said:

From the mid-1980s to 2005, California's population grew by 10 million, while Medicaid recipients soared by seven million; tax filers paying income taxes rose by just 150,000; and the prison population swelled by 115,000.

The 150,000 number made no sense to me, so I went to the IRS SOI tax stats page to see what was up.  The data there go back to 1997, and in any event, I am not sure what year the authors mean by "mid-1980s."

So here are the data (download the spreadsheets and go to line 94 for 1997 and 108 for 2009)--from 1997 until 2009, the number of individual tax returns with taxable income in California fell  from 10.8 million to 10.3 million, suggesting that California was a land attracting non-taxpayers.  But the number of individual tax returns with taxable income nationally fell from 98.5 million in 1997 to 91.0 million in 2009, or by more in percentage terms than California.  The reasons for these declines are the rise of the Earned Income Tax Credit (which is good) and a reduction in incomes at the bottom of the income distribution (which is bad).

I do need to figure out where to get data from the middle 1980s, but going back to the late 90s seems more relevant at this point.  In any event, context matters.

Maybe I am too eager to believe it, and...

..I expect to be smote down for saying it, but I think the two month old, mediocre, Case-Shiller number that came out today is consistent with the idea that the housing market will really come back big this year (I said so in the paper and on the radio today, so I might as well say it here).


Inventories in many hard hit markets are now low by historical standards.  Time on market has fallen.  HARP II can accelerate amortization (which is its most important feature).  Prices are really cheap, both when the user cost they produce is compared with rent, and when compared with incomes (by World standards).

State growth and the composition of spending

Paul Krugman rightly calls out Arthur Laffer's junk economics on the impact of state and local taxes on economic growth (I have no idea about why anyone listens to Laffer about anything, but that is for another day).  At the same time, however, a good, liberal friend of mine told  me yesterday that for the first time in his life, he will vote against a tax increase in California--the temporary tax increase proposed by Jerry Brown that will be on the ballot on November 6.

My friend has no issue with government spending per se; his problem is that he gets to observe the doings in Sacramento quite closely, and as he puts it, "it is even worse than you think up there."

California's state and local governments spend a lot of money.  We ranked 4th in 2010 among the 50 states in per capita state and local spending.     Yet if one looks at education spending, we are only average.  Even worse (from the standpoint of my parochial pride, anyway), we trail Texas in education spending per capita.

My understanding is that once upon a time, California had among the most efficient and accountable governments in the country.  The public schools were a particular source of pride.  But the vast amounts of money are not being well managed now--such mismanagement is harmful whether it occurs in the public or private sector.  How well government money is spent may be just as important as how much money is spent.

Hannah Green:What is the purpose of protesting? - The Daily Northwestern - Northwestern University

She writes:

As we took the Red Line back from the protest, I continued to have mixed feelings about it. I thought that the rally especially had been too disorganized and too angry. I thought that Salek was making fun of me when he said that a protest wasn’t the same thing as an academic forum (He later told me that he wasn’t). A rally isn’t meant to convince people of anything, he said, but to get people who were already convinced energized. He said that there wasn’t enough time during the rally for all those with important issues to completely clarify their positions subtlety. There had been forums and discussions earlier in the week for that.

I then became nostalgic for a time that I had never lived in. I thought of protests from the ’60s and ’70s that I’d heard about. Protesters were convincing because they made their cases by showing their humanity rather than their anger. But this is a different kind of protest, Salek said. There was a wider variety of problems on the table. Part of the point was to just make people aware of the diversity of the issues and stake, and, yes, to give people a place to (peacefully) channel their anger. That’s how a movement can gain its momentum.

Omit needless words...

My dear friend Steve Malpezzi on John Quigley

He writes:

I first encountered Professor Quigley through his research; later, we connected through our mutual friend the late Steve Mayo. I was honored to count John as a friend, but he was also a professional and scholarly inspiration to me, and to many, many others. Professor Quigley was an active researcher and teacher for over four decades; a long career by some standards, but he left those of us who knew him, and his work, wishing we could have had a fifth, if not a sixth.

In the history of the allied fields of urban economics, real estate economics and finance, after the original generation of William Alonso, Richard Muth, Edwin Mills and John Kain, John Quigley shaped our field like no one else. The breadth of his contributions, in urban, housing, public finance, finance, and many other fields, is breathtaking.

I’m not alone in that judgment, and those of us that hold it can easily show that it’s not simply sentiment for a passed friend. Many colleagues share my high opinion of John Quigley, and have said so, unbidden, for years, long before his illness. Several years ago, for fun, I asked six PhD students to write down the name of the person who, according to their study, all-in, made the greatest contributions to our field. (I told them they couldn’t name anyone from Wisconsin, but of course that was to save face :-).

Five wrote “Quigley.” Well, it wasn’t all six, but I’m not going to stretch the truth for the sake of the story!

Read the whole thing.

Yongheng Deng, Gary Painter, and Christian Redfearn on the Life of John Quigley

Yongheng, Gary and Chris write a lovely tribute for AREUEA:

Monday, May 14, the community of AREUEA was deeply saddened to learn that John Quigley passed away on Saturday, May 12, 2012.

Since our early years at Berkeley, John has been a wonderful mentor and friend to us. John has been a member of 84 PhD committees since 1990, chairing 26 of them (including the three of us). He was a distinguished academic, a mentor for his students throughout their entire career. He excelled in each of the areas we value: research, teaching, and service. He published 22 articles in just the past three years alone, and his work has earned more than 10,000 citations. His service to the profession is unparalleled.

Within AREUEA, John served in many capacities including President and most recently as the chair of the International Selection Committee. He served as the chair of the Department of Economics at UC Berkeley, the editor of Regional Science and Urban Economics, and as a role model to many. Beyond these which can be counted, John's mix of conviction, energy, and laughter made him a singular character in our worlds. We will remain ever grateful for his guidance and advice, but beyond all of it, we also just liked him. He was good company--on a panel just as he was on the train from Shanghai to Beijing. John made life fun. He not only helped us join a profession, but helped us become part of a community. Simply put, we would not be the academics that we are today, if it not for him. We feel so fortunate that we have had him as a teacher, mentor, friend and collaborator.

We will always cherish the memory of John in our heart as a great scholar, a wonderful human being, a man of great intelligence, kindness, dedication, generosity, and profound integrity. We will forever miss him and miss him dearly.

Yongheng Deng (NUS), Gary Painter (USC), and Chris Redfearn (USC)

AREUEA Officers and Board Members

$920 million for 12 mph

I have taken the new Expo line now three times from USC to downtown LA.  According to Google Maps, the distance is 2.5 miles.  The trip has, on average, taken 13 minutes.  This works out to 11.5 mile per hour.

Metro spent $920 million on a line that does not get signal priority at traffic lights--in other words, it expended huge capital costs on a large bus that is stuck on one route. 

Should Ohio Taxpayers assure that Ohio State students assume less debt?

The New York Times had a story yesterday about a "generation hobbled by the soaring cost of college."

The piece featured some disturbing stories--particularly about a student who had $120,000 in debt as the result of attending a college that I had never heard of before.  On the other hand, I also read that, "Three out of five undergraduates at Ohio State take out loans, and the average debt is $24,840."


Ohio State is a world class research university.  I am quite sure that graduates of Ohio State earn much higher lifetime incomes than the average Ohioan.  So higher subsidies to Ohio State students from Ohio taxpayers would effectively be a regressive transfer.  


Should the state subsidize the University?  Almost surely, because its research and its college graduates produce positive externalities.  But does an average debt load of $24,840 keep large numbers of students away from Ohio State?  Enough that it diminishes the positive externalities created by their attendance?  That would be a much tougher argument to make.  My guess is that almost everyone who goes to Ohio State would go to some college, one way or another (just as it is the case that nearly every homeowner who takes the mortgage interest deduction would be a homeowner in its absence).


In order to stimulate upward mobility, there must be financial aid (in the form of grants, not loans) to students coming from low-income households.  But for everyone else, well, it seems like $25K in debt in exchange for an Ohio State education is a very good financial proposition.

Dowell Myers: Those born in California stay in California. Nevadans, not so much.

From Dowell's piece in Zocalo Public Square:

Do Californians really care how many New Yorkers move back to New York or on to Las Vegas? For the most part, no. What local residents care about is how many of our own friends, especially our children, leave the state. If native Californians start fleeing, then we know we are in trouble. So what do the data tell us on this?

California, in fact, holds its own. When it comes to retaining native sons and daughters, California has the fifth-strongest attraction of all 50 states. Among California-born adults who were at least 25 years of age and old enough to have moved away, fully 66.9 percent were still choosing to reside in the Golden State in 2007, the last year of high migration before the recession held people down. Texas, with 75.1 percent of native Texans still living in the state, has the strongest loyalty, and the other three rounding out the top five are Wisconsin, North Carolina, and Georgia. California’s top-five ranking is all the more impressive when you take into account the state’s high living costs and other negatives. We must have something going for us.

Nevada, as you can see here, ranks in the bottom five of states’ retention of native-born population, despite being touted as a beacon for those fleeing California. If you can’t hold your own, you’re not worth the chips you’re built on. On this key measure, California is a full house, Nevada a busted inside straight. And yet you’d never know how enticing California is for its native-born residents from the overwrought narratives.

This is indeed cheering news for those of us who live in California.  It is also striking how good Texas looks..again.

If it is all about age, what should the homeownership rate be?

Last week's report of a continuing drop in the homeownership rate to its 1997 rate of 65.4 percent made me decide to revisit a question I looked at in a paper some years ago: holding demographics constant, would should the homeownership rate be?

I don;t think anyone would argue that 1990 was a year in which the homeownership rate, at 64.2 percent, was unnaturally high.  In fact, the rate had been stuck around 64 percent for around 20 years.

One of the reasons for this is that the country at the time was moving through a period with lots of young adults.  In 1990, the homeownership rates by age were as follows:

15 to 24 years	17.1%
25 to 34 years	45.3%
35 to 44 years	66.2%
45 to 54 years	75.3%
55 to 64 years	79.7%
65 to 74 years	78.8%
75 and more years	70.4%

Source: 1990 Census of Population and Housing

At the time time, the age shares of household heads at the time were:

15 to 24 years	5.5%
25 to 34 years	21.6%
35 to 44 years	22.2%
45 to 54 years	15.6%
55 to 64 years	13.5%
65 to 74 years	12.5%
75 and more years	9.2%

Source: 1990 Census of Population and Housing

Now let us look at age shares in 2010.  They are:

15 to 24 years	4.6%
25 to 34 years	15.4%
35 to 44 years	18.2%
45 to 54 years	21.3%
55 to 64 years	18.3%
65 to 74 years	11.6%
75 and more years	10.6%

Source: 2010 Census of Population and Housing

If we apply those population shares to the homeownership rate by age in 1990, we get an "age-predicted" homeownership rate of 67.0 percent.  This suggests that the rate has fallen below where it "should be."  Why might this be?  Let's look at the ownership rate among non-hispanic whites and everyone else in 1990:

White (non-hispanic)	69.1%
Non-white or hispanic	44.6%

Source: 1990 Census of Population and Housing and my tabulations.

In 1990, 80 percent of household heads were non-hispanic whites; according to the 2009 American Housing Survey, 70 percent of household heads that year were non-hispanic white.  If we hold ownership rates by race constant (as well as age) and allow race/ethnicity of household heads to vary, we would have seen a decline in the ownership rate to 61.9 percent.  Age by itself therefore pushed up the rate by 2.8 percentage points, and race/ethnicity reduced it by 2.3 percentage points, so if the effects of age and race stayed constant (and we ignore interactions of age and race for now), we would expect the ownership rate in 2010 to be about 64.7 percent.

I do wish to emphasize that the difference in ownership rates across races and ethnicities is NOT acceptable; one cannot explain difference by just looking at such things as economic status and marital status.  My reading of the literature is that African-Americans and hispanics continue to suffer from discrimination in the housing market.  All that said, it is not difficult to explain why the ownership rate is returning back to where it was.  I also think there is no reason to believe it will settle at a much lower rate than where it is right now.

  

Who (or what) is an insider?

Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen have a paper on the mortgage crisis that argues that most commentary about the sources of the crisis has been misguided, if not outright wrong.  They produce twelve things they call facts in order to support their point of view.  Among the most pointed is Fact 10: that "insiders" were the big losers in the crisis.  Therefore, the argument goes, there could have been no "inside job."

But their evidence that the insiders lost is that large financial institutions--Citigroup, UBS, etc.--were large losers.  But this suggests that the institutions--and their shareholders--were insiders.  I think it more likely that the shareholders were outsiders.  The insiders were corporate senior management, traders, and mortgage brokers.  I don't know for sure whether they came out ahead or not, but I sure have my suspicions...

Update: the paper does note that Bear Stearns executives invested in (and lost money on) mortgage backed securities.  That is the only evidence that executives might have been net losers from the mortgage business.

  

I am watching the Milken Global Conference panel on tax reform, and I want to shout....

...the reason fewer people are paying federal income taxes is that more people are making low incomes.

Both George Will and Paul Krugman are right about the retirement/social insurance problem

I watched the economic panel on This Week with George Stephanopolous this morning.  Toward the end, both Will and Krugman made salient points about Social Security.  Will pointed out that increased life expectancies have produced longer average payout periods for Social Security to beneficiaries.  Krugman pointed out that the more affluent half of the country has seen life expectancy rise far more rapidly than the lower half.  Will used the former statistics to argue for raising the retirement age.  Krugman used the latter statistics to argue that raising the retirement age would be regressive policy.

At minimum, all this suggests that one "fix" to Social Security (which actually needs less fixing than a lot of other things, but never mind that for now) would be to lift the cap on incomes that pay into the retirement portion of FICA.  But I can't help but think there is something to what Will says about life expectancy--I really see no reason why people with cushy jobs and long life expectancies shouldn't retire at a later age.  I am just not sure how one creates a retirement policy that links retirement age to lifetime income without creating some really weird incentives effects.

The National Association of Realtors misrepresents how many people use the Mortgage Interest Deduction

An NAR Spokesperson says:

“NAR is actively engaged to ensure that the nation’s 75 million homeowners will continue to receive this important benefit, and we will remain vigilant in opposing any plan that modifies or excludes the deductibility of mortgage interest.”

The problem is that not all homeowners use the mortgage interest deduction.  Those without debt don't use it.  Those who don't itemize don't use it.  According to the US Treasury Department, in 2009, only about 37 million households took the mortgage interest deduction.

NAR is in the business of representing its members, who benefit from the mortgage interest deduction.  But they still need to get their facts right.  


(For data on number of returns with deductions, go to the SOI site, scroll down to "Individual Income Tax Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items," choose 2009, and look at column CA in Table 2.1).

Has the Variable Rate Mortgage saved the European Mortgage Market?

Just as in the United States, many European countries have had large run-ups and crashes in house 

prices. Consider the data from the European Central Bank below: one sees in particular large price increases and declines in Spain and Ireland.

Remarkably, default rates in Ireland and Spain in 2009, while high by historical standards at 3.6 and 2.9 percent respectively, were substantially lower than in the United States, where the default rate was 13 percent (see Fiorante and Mortgage Bankers Association of America).  Dwight Jaffee has argued that this difference in performance is the result of the fact that mortgages in Europe give lenders recourse to the borrower.  I find it plausible that recourse matters, but not that it matters quite so much.  For example, while purchase money loans in California are non-recourse, refinance loans are not.  The preponderance of mortgages in California are refinance loans, and California's default rate is extraordinarily high.

So why haven't borrowers in Spain and Ireland defaulted more?  According to the European Mortgage Federation, more than 80 percent of loans in Spain and Ireland are variable rate mortgages.  As a consequence, as market interest rates fell, so too did mortgage interest rates.   The typical mortgage borrower in Ireland and Spain is currently paying considerable less than 4 percent on their mortgage.

s

 This has almost certainly been beneficial to Europeans, and suggests that robust TARP 2 program, where underwater borrowers can refinance their loans at lower interest rates, could help mitigate default.  On the other hand, as interest rates rise in Europe, we might have reason to become very, very concerned about defaults there in the months to come.

Hannah Green on racial profiling - The Daily Northwestern - Northwestern University

Green: Indian movie star’s detention shows profiling - The Daily Northwestern - Northwestern University

I like Romney's "secret" policy plan of the day.

Cutting back tax deductions (and especially the deduction for second homes) for the affluent?  What a good idea!

Thomas Phillipon asks why financial services are so expensive (h/t Tim Noah)

An abstract:

Despite its fast computers and credit derivatives, the current financial system does not seem better at transferring funds from savers to borrowers than the financial system of 1910.

Phillipon notes that while finance has grown rapidly as a share of GDP, stock prices have become no more informative of future cash flows, and risk sharing has not improved.  But as Paul Volker might say, at least we have the ATM now.

Mixed feelings about falling e-book prices

Amazon's cutting of e-book prices is a good thing for consumers.  But...

Here in Pasadena, there survive independent bricks and mortar book (Vroman's) and music (Canterbury's) stores.  It is great to have them around, because browsing is fun.  I spend more than I have to for books and cds because I want them to stick around (sort of like public radio, I guess).

Nevertheless, I have a Kindle, and I buy stuff from Amazon too, because of (1) convenience and (2) inventory.  Vroman's  is great, but it can't stock everything.  When I want to read something, given the choice between waiting for a special order  or waiting for some electrons to arrive, I will take the electrons.  When I travel, I find that electrons are lot lighter than books too.

Hence it is not price that drives my purchasing decisions, but I am enough of an economist to know that prices drive the decisions of most others.  If that price gap between Amazon and Vroman's grows even larger, I am not sure how Vroman's survives.  Pasadena without Vroman's is not quite as nice a place as Pasadena with Vroman's.

How apartment rents and vacancies can rise (or fall) simultaneously

We at the Lusk Center put out the Casden Forecast for apartment economics in Southern California every spring.  When we put out our San Diego numbers last week, we presented a result that confused people--we expect both rents and vacancies to rise in the next year.

The reason this can (and often does) happen is that real estate markets operate with lags, and feature "natural" rates of vacancy.  The "natural" rate is the rate at which real rents stay constant--if vacancies fall below the natural rate, real rents rise; if they rise above, rents fall.  Stuart Gabriel and Frank Nothaft did a nice paper on this some time ago.

Consider a tinker toy model of rents that is characterized by two equations (the ts in parentheses are subscripts for time):

Vac(t) = Vac(t-1)+(Rent(t-1)-1)*.05

and

Rent(t) = Rent(t-1)-(Vac(t-1)-.05)*Rent(t-1)

So when rents fall below $1, absorption picks up, otherwise it falls; the natural vacancy rate (the rate at which real rents rise or fall) is 5 percent.  This produces the following picture of rents and vacancies:

As one can see, this simple model shows periods where rents and vacancies rise and fall together.

Of course, this is all in real terms.  When there is inflation, nominal rents can rise even when the vacancy rate is above the natural rate, because rising nominal rents are masking real falling rents.  

When government is the solution

Having spent the past month in a country where one always has to be careful about what one eats and drinks, I have a renewed appreciation of first rate sewer and water systems.  Such things require
governments.

I can imagine, however, that there are people of a certain stripe would would argue that clean water and good public health should no more be fundamental rights than, say, broccoli.

Mr DeMarco, Would you consider a debt-equity swap?

From Bloomberg:

The U.S. government has spent $190 billion to shore up the companies since they were taken into federal conservatorship in 2008 after their investments in risky loans soured. DeMarco said adding to the firms’ costs would be a violation of his legal responsibility to restore them to financial health.

Using principal forbearance instead of forgiveness so far has been better for taxpayers, DeMarco said. Forbearance reduces monthly payments while requiring borrowers to pay back the full amount of the loan when they sell the house.

“If the borrower is successful on the modification, allows them to stay in their house and they stay in their house and start making mortgage payments, the taxpayer gets to share in the upside of that borrower’s success,” DeMarco said in the Bloomberg Television interview. “If we forgive the principal up front and the borrower is successful, that upside all goes to the borrower and is not shared with the taxpayer.”

There is another way to allow taxpayers to get the upside of borrowers' success--replace the debt they owe with a shared equity arrangement.  The taxpayer may be better off with principal forbearance for houses that are 10 percent underwater, because through amortization people can get themselves right-side up in a relatively short time (particularly if they can get a refinance at a low rate of interest).

But for places like Las Vegas and the Central Valley of California, where many people are 40-70 percent underwater,  it is hard to see how default and large losses aren't inevitable.  A debt-equity swap would allow people to move freely, which aligning incentives between lenders and borrowers.

  

Andrew Zimbalist on Frank McCourt's sale of the Dodgers

From ESPN:

"It's problematic," Zimbalist said. "He was looking for some kind of ongoing income stream and he got it. Here's a guy who borrowed practically all the money to buy the team for $430 million and now he's selling it for $2.15 billion and he's coming out with a healthy capital gain -- it's repulsive. This is someone who doesn't deserve to walk away with a healthy profit after eight years of running the Dodgers in the most egregious, the most inefficient, the most self-interested, and the most vainglorious, idiotic way possible. It really is repulsive that he will still be making a profit in some way."

If ever there were a parable about how some people can thumb their nose at the rules and make out like bandits, the story of McCourt's ownership of the Dodgers is it. 

A poignant moment from a poor country

The laundry here "ruined" a couple of my shirts--whoever ironed tore the collars a bit from the bodies of the shirts. Being an American, I threw them in my trash basket. 


The man who cleans my room, upon discovering them in the trash, asked if he could have them. I said, "of course." 


He then asked me to write a note, saying that I had explicitly told him he could have them, lest anyone think he might have stolen them. Of course I did that as well. He seemed extremely happy to have the shirts.

When liberals undermine liberalism

I consider myself a liberal.  On social issues, I am very liberal; on economic issues, while in general I like markets, I think governments can and should correct large market failures (such as failures in private insurance markets and negative externalities), that the one percent (maybe even the ten percent) should pay higher taxes than they do now, and that there should be a floor on living standards.

It therefore drives me crazy when liberals embrace waste and hypocrisy.  So the following paragraph in the LA Times caught my eye:

Instead, the rail authority has agreed to run fewer trains at slower speeds on tracks shared with commuter rail systems, Amtrak and freight trains. In the early years, passengers will probably have to transfer trains to get from one end of the system to the other. The concept, known as the blended approach, was pushed last year by Bay Area politicians, who fought the original plan to run high-speed trains through the region on 60-foot high viaducts over local neighborhoods. The idea has attracted support in Southern California as well.

So places that will rail against the automobile are doing everything possible to make sure "bullet train" service (whose potential for success I am skeptical about anyway) cannot possibly be a competitive transport mode. The "blended" system will also make freight rail relatively less competitive with trucks, and will waste a lot of money that could be better spent on places California really needs to spend money, such as K-12 education and state universities (and no, I do not work at one).

The whole thing reminds me of perhaps my all time favorite Onion headline.

Mark Twain on Monetary Policy (h/t Patricia Harris)

First published in 1879 as "Mark Twain as a Presidential Candidate."

My financial views are of the most decided character, but they are not likely, perhaps, to increase my popularity with the advocates of inflation. I do not insist upon the special supremacy of rag money or hard money. The great fundamental principle of my life is to take any kind I can get.

New data since I posted yesterday

From this morning's Economic Times (one of India's leading newspapers).

NEW DELHI: The number of India's poor fell to 29.8% of its population in 2009-10 from 37.2% in 2004-05, one of the sharpest falls ever. This suggests India has not only grown faster than the world economy, but that this growth has lifted millions out of poverty. 

In absolute terms, the number of poor in the country declined by around 13% to 354 million during the fiveyear period with rural poverty falling faster thanurban poverty. During the period, rural poverty declined by 8 percentage points to 33.8%, almost double the decline of urban poor by 4.8 percentage points to 20.9%. 

"This is not surprising. Such an outcome is on expected lines as this is the period when the government increased the expenditure on flagship programmes substantially. We gave money to the people and the result is a direct impact of that," said Mihir Shah, member, Planning Commission. 
The numbers also re-affirm the impact of the government's flagship Mahatma Gandhi National Rural Employment Guarantee Scheme that entitles 100 days of work at a minimum rate of Rs 100 per day to all rural households. The scheme was launched in 2006 and has single-handedly transformed rural India. 

It is interesting that India started a war on poverty in 2006, and it seems to be winning.  Not that one thing necessarily caused the other, but it is some coincidence.

What would Rawls say?

Since India liberalized its economy in 1991, PPP GDP per capita has increased from about 1400 in 1992 to about 3200 in 2009 (see Penn World Tables, I am using only two significant digits because the exact numbers depend on definition).  That is 5 percent per capita per year; by any standard this is an impressive performance.  Eyes, moreover, don't lie--I have been coming to India for eight years now, and one can see living standards improving.  This is gratifying.

But in an enormously important dimension, India has not improved at all.  According to the Food and Agriculture Organization of the United Nations, the share of undernourished people in India moved from 20 percent in 1992 to 19 percent in 2008; the number of hungry rose from 177 million to 224 million. 

China has done much better, having cut the rate of hunger nearly in half over the same time period (from 18 to 10 percent), despite the fact that its GINI coefficient is higher. 

  

Rail transit and what is physically possible

I have written posts in the past that reflect my admiration for John Kain's work in transportation economics.  He is known, among other things, for training legions of students: "bus good, trains bad."

In general, buses are cheaper and much more flexible to operate than trains.  But a visit to Bangalore made me wonder if it can really thrive as a city without a metro system (which it is currently in the process of building).  Bangalore is very dense and the streets are, for the most part, very narrow.  Congestion is already terrible, and is composed mostly of auto-rickshaws, motorcycles, and scooters. The city already has many buses, that move dreadfully slowly.  To get from the airport into the business district, a distance of 40 kilometers, takes a minimum of 90 minutes.

People who know these things better than I have told me metro systems are never cost effective.  In this particular case, however, I can't help but wonder.

"Green Jobs" will be real, but invisible

John Whitehead quotes Joe Romm:

Last week economist William Nordhaus slammed global warming deniersand explained that the cost of delaying action is $4 Trillion. As I wrote, Nordhaus’s blunt piece — “Why the Global Warming Skeptics Are Wrong” – is worth reading because, like most mainstream climate economists, he is no climate hawk. 

Those costs are real.  Those costs shift the supply curve for stuff in.  Those costs reduce employment.  So "Green Jobs" are largely not those building windmills and solar panels (the total number of these jobs will be small relative to the economy).  "Green Jobs" will be the jobs saved from cost reductions associated with reduced greenhouse gases.  This is why good environmental policy is also good economic policy.

(h/t Mark Thoma)

Why owning a house may not be the American Dream

Lots of societies outside of America seem to have a preference for home-ownership. I have spoken to policy makers and scholars in several countries--India, Bangladesh, South Africa, Peru--about the importance of a well functioning rental sector.  Rental housing allows for mobility, and for people to use savings to invest in such things as small businesses.  Rental housing is also a way for small entrepreneurs to earn a return on investment.

Yet everywhere I go, I am told that people don't want to rent, they want to own.  The principal reason seems to be security of tenure; in places where enforcement of contracts remains an issue, fear of abuse by landlords sours people on renting as an option.  And so it is that people want to be owners.

Many countries in Western Europe--Germany and Switzerland in particular--do not have fetishes about homeownership.  But tenant protections in these countries are strong (see this piece on Germany and this piece on security of tenure beyond lease terms in Switzerland), so renting is sort of "owning-light" in these countries.  

Who are you going to hug?

As I watch the ridiculous controversy over Barack Obama's hugging Derrick Bell, I can't help but think that if only people who agreed with me hugged me, I would never be hugged.

When I wrongly and mistakenly supported the second war in Iraq, my wife and daughters all told me how wrong and mistaken I was.  And yet they continued give me hugs, thank goodness.

Banks seem to be lending

The Flow of Funds data for the fourth quarter of 2011 is out.  Total net lending by commercial banks and savings institutions has been solid for two quarters in a row, and the fourth quarter was quite strong.  This is indeed a good sign.

Eduardo Porter reminds me of a favorite Joan Robinson quote

...the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.  From Economic Philosophy.

James Q. Wilson the teacher

The past few days have brought encomiums to and reflections of the work and life of James Q. Wilson (see here for example). But I have yet to see anything about Wilson the teacher.

When I was 17 years old, I took Government 30, American Government, from Wilson, Sydney Verba and H. Douglas Price.  The whole course was good, but I found Wilson to be an awe-inspiring figure.  He behaved the way I thought a Harvard professor was supposed to be--he was elegant, he had an easy-to-listen-to voice, and despite the fact that we had been a national champion debater, he never spoke too quickly or aggressively.

Both the style and substance of his lectures were memorable.  Leonard Bernstein once wrote of Beethoven that has never had a note out of place--every note followed inevitably from the previous note.  The same was true with Wilson and words.  The prose coming out of his mouth was flawless, but never flowery.  I remember that some of my classmates didn't like this--they deemed the polish to be slickness.  To me, however, the pristineness of his language meant that it never detracted from the substance he was communicating.  His lectures were also models of organization and clarity; as such, he made sophisticated ideas easy to grasp.

Because I was a 17 year old naive liberal from Wisconsin (a state once known for clean government and progressive traditions), I came to college thinking that people got involved in government because they wanted to do good.  Wilson managed to convey the idea that bureaucrats, members of congress and interest groups often behaved in, well, their own interests.  This may seem obvious, but it was actually a bit of a bolt out of the blue for me at the time.  But the great thing is that he conveyed these "conservative" sentiments without demeaning the idea that there is a role for idealism in government.







 

Not sure when it will pop, but it must be a bubble

Rental yields on housing in India are now at times less than one percent in some large cities; people have been saying to me "it's OK--we are getting 15 percent appreciation."  

A nice sentence by Peter King of Sports Illustrated

Peter King is, by far, my favorite football writer.  But I liked this non-football related gem today:

Dick Ebersol has urged me not to mention anything about politics in this presidential-election year. And so I won't. But as a college grad and father of two college graduates and a husband of a college graduate, boy, am I dying to.

The wonders of great design

I am making my annual visit to the Indian School of Business in Hyderabad (I will report on rent data collected by students here in a couple of weeks).  The temperature is in the upper 90s F. today, and yet I was comfortable eating lunch in an open air setting, specifically here:

This is the atrium of the Academic Centre, which was designed by John Portman (the picture comes from the ISB web site).

The air flows so well through it that it is comfortable to sit in, even when the outside temperature is very high.  Portman thus created functional space that doesn't need to be air conditioned, even on beastly hot afternoons.  

Feroli, Harris, Sufi and West on Housing and the Transmission of Monetary Policy

I will share a link when I find one.  Let me pull out a couple of paragraphs from the executive summary:

In this report, we focus on weakness in housing. Our analysis makes two broad points. First, weakness in housing and residential investment is a main impediment to a robust recovery. Second, problems related to housing have affected the transmission of monetary policy. More specifically, the unprecedented decline in house prices and residential investment has introduced headwinds that may require a more aggressive monetary response than in normal downturns. Further, problems related to housing markets may reduce the sensitivity of real economic activity to the interest rates that monetary policy can affect. Or in the parlance of textbook intermediate macroeconomics, housing problems have likely shifted the IS curve leftwards and steepened the slope of the curve by introducing a gap between policy rates and effective rates. For both of these reasons, problems related to housing introduce significant challenges to monetary policy-making.
There are six steps in our analysis:
1. We begin by placing housing in the context of the broader economic recovery. The overall recovery in GDP has been one of the weakest in the postwar period even though the recession was the largest in the postwar period. Residential investment has been a particularly dismal performer. Further, the other weakest components of GDP--consumption of services and state and local government expenditures--can also be closely linked to weakness in housing markets. Focusing just on the direct impact of housing—home construction and housing service consumption—the sector accounts for about a third of the shortfall of growth relative to a typical recovery. Obviously the full impact of the housing crisis is bigger if we include indirect impacts on local governments and consumption of housing-related durables. We also show evidence from other countries that a collapse in housing is associated with subsequently weak recoveries....

If one looks at business cycle histories (see here, here and here), it is hard to imagine full recovery without housing market recovery.  Warren Buffet this morning said it was time for one.  I hope he is right.

Still playing consumers for suckers

So I am having a lazy Saturday watching ESPN, and see an ad where the husband says, "I need the TV," and the wife says, "We can't afford more credit card debt," and the announcer says--"you can have your TV and not take on credit card debt--by renting."

Of course, by renting, consumers are paying an implicit interest rates to RAC, the company peddling the scheme.  The price of renting a Sony 55" television is $29.99 a week.  The cost of a Sony 55" is $1899 on Amazon.  Let's say the expected life of a Sony is four years (it is probably longer).  That is an implicit IRR of 1.51 percent per week, or 117 percent per year.  There used to be a word for this kind of thing, and the word was usury.

This is different from legitimate rental businesses, that rent out equipment for short periods and that have to keep inventory that often sits idle.  But to suggest to consumers that they are better off not using their 24 percent APR credit cards for this scheme--it is disgraceful.

Matthew Yglesias says low income people face lower inflation

More specifically, he writes:

At the same time, it’s worth noting that stagnating real working-class wages are calculated by using a meaningless overall average rate of price inflation. Some things—college tuition, apartments in Manhattan, health care—have gotten more expensive much faster than average. This means that people who buy a below-average amount of those things are better off than the statistics show.

So I repeated an exercise I did a few years back--I looked at expenditure shares for different goods for each income quintile, and then looked at price dynamics for each expenditure category in the CPI (the matches between the CES and CPI are not perfect, but they are close.  I am not sure what to do with the expenditure categories "cash contributions" and "pension contributions.").

In any event, I find that the effective CPI for each income category is pretty much the same for 2009-2010: the CPI increase for the lowest quintile was 1.6, for the second lowest was 1.4, for the third 1.7, the fourth 1.8 and the highest 1.7.  These differences look like noise to me.

I will try to figure out something using longer term data, but since expenditure shares change over time, it will be harder to glean meaning from differences in CPIs.

 

What do these two places have in common?

Cudahy, California

New York, NY

What they have in common is that Cudahy's population density, at 21,684 per square mile, is not dissimilar to New York's 26,402 per square mile.  I can't be positive, but I am pretty sure no building in Cudahy is more than three floors tall.  New York is the 5th densest municipality in the US, while Cudahy's is 10th.  If one visits Cudahy, one won't feel particularly crowded either.  But there is no wasted space.

3quarksdaily: Learning Urdu

3quarksdaily: Learning Urdu

Professor Judith Green reminds me of the meaning of "begging the question"

Fowler defines "begging the question" as the "fallacy of
founding a conclusion on a basis that as much needs to be proved as
the conclusion itself."

I learned this in high school, and just forgot (or just got sloppy). It is a good phrase with a specific meaning--we should keep it.

Paul Krugman essentially invites the question: should California secede?

In his column this morning, Paul Krugman discusses a recent Times article that shows that the reddest states receive more of their personal income from government programs than blue states. An implication of this is that places such as California would be better off fiscally by seceding from the union (my colleague Lisa Schweitzer shows that California gets less than its fair share of the gasoline tax as well).

So as someone who lives in California (and who plans to remain here until I no longer have any say about where I live), I should support secession, or at minimum, a substantial reduction in federal taxes and spending, which could then be replaced with state taxes and spending. But I care about the elderly and the poor in Oklahoma, so I guess I am stuck; yet the average voter in Oklahoma seems not to care at all about the elderly and poor in California. This leaves us stuck again.

Hannah Green: The problems of engaging in blind warfare - Forum - The Daily Northwestern - Northwestern University

My daughter on drones.

Green: The problems of engaging in blind warfare - Forum - The Daily Northwestern - Northwestern University

Adam Levitin on the San Francisco Audit: Why no investigation?

Adam writes:

Here's a bombshell: the San Francisco City Assessor commissioned a serious audit of foreclosure documentation filed in the past few years. The audit examined 400 foreclosures. It found problems with 85% of them, often multiple problems. What's more, some of the problems are pretty serious as they implicate not only borrowers' rights, but the integrity of mortgage-backed securities and the property title system. 

The San Francisco City Assessor's audit also serves as a benchmark for evaluating the Federal-State servicing settlement. The San Francisco City Assessor managed to accomplish in a few months what the Federal government and state Attorneys General weren't able to do in nearly a year and a half with far greater resources at their disposal: perform a credible investigation of foreclosure documentation with serious implications about the securitization process in general. That's a lot of egg on the face of Shaun Donovan, Eric Holder, Tom Miller, et al. The SF City Assessor report shows that it really wasn't so hard for a motivated party to undertake a serious investigation. And that raises the question of why the largest consumer fraud settlement in history proceeded with virtually no investigation...

Read the San Francisco Assessor's Audit on Mortgage Compliance.

It is jaw-dropping.  Among other things, around 30 percent of the foreclosed loans sampled from San Francsico have a minimum of three clear compliance issues. 

One should not draw inferences about the rest of California from San Francisco alone--so it is time to replicate the study for some other counties. 

Did David Brooks think the social fabric was better when...

...we had Jim Crow?  When the military was segregated? When Chinese were denied citizenship?  When husbands could beat their wives?  Not so long ago, this was part of the social fabric.

Why do people confuse "transit" with rail?

Perhaps the most important transportation economist since World War II was John Kain.  Professor Kain liked transit very much, but be showed, over and over again, that urban buses were more efficient in virtually every context than urban rail: for the same amount of money, buses can take more passengers more places more conveniently than trains. 

When transit agencies build expensive rail systems, they inevitably cannibalize bus systems.  This has happened in Salt Lake City, in Portland, in Atlanta and in Dallas.  The goal of transit should be to move people as efficiently as possible.  The evidence is overwhelming that rubber tire transit beats fixed rail pretty much everywhere.  So why the nostalga for an obsolete technology?  I just don't understand.




 

My lexicographic voting preferences

I could no more vote for someone that opposed marriage equality than I could for someone who supported anti-miscegenation laws. And yes, for me that pretty much trumps everything else.

Lisa Schweitzer on Shouting People Down

It starts:

One problem with planning, particularly for planning in the academy, concerns its normative basis: the good city, the just city, etc. Recently, a commenter here said:
That describes what a university SHOULD be, but not what I have found most universities to actually be. Anyone that disagrees with the mainstream academic viewpoint is not engaged in discussion, but shouted down. Students aren’t encouraged to explore and come up with new ideas, but to validate the ideas of their professors. Seems like the “debate” (or lack thereof) is not longer intellectual, but political and ideological.

That comment meshes with my experience in the planning academy, but not my experience with social scientists. Social scientists have their own sets of problems and limitations, but planning’s normative basis means that once consensus forms on what is good, deviations from that will be condemned not as misguided or inaccurate, but as evil. I’m not naive enough to believe the social sciences aren’t subjective and subject to ideological influences. But a common theoretical basis, such as that held in economics (however flawed), allows even for deep divisions to run alongside a rigorous body of empirical work. That is, unless you’re in macro, where ideologies rule and big names bellow at each other like mammoths across the primordial swamp about how to interpret theoretical models that have a weak empirical basis.

Read the whole thing.

Two strong positives for the new Obama refinance plan

(1) It finally allows underwater borrowers to exercise an option that investors knew existed when they purchased mortgage backed securities--the prepayment option. Right now, the fact that borrowers are underwater allows investors to earn a windfall by collecting a premium on what is effectively a callable bond.

(2) It imposes a Pigou tax on large banks. When a small bank fails, the negative externality is small to non-existent. When a TBTF bank fails, the negative externality can be catastrophic.  Taxes on large banks help internalize the externality.

Rolf Pendall: Racial Segregation is Still a Reality

Rolf responds to Glaeser and Vigdor:

The Manhattan Institute for Policy Research’s website made a triumphal proclamation this week that we have reached “the end of the segregated century.” The New York Times dutifully spread the news, leading with the headline “Segregation Curtailed in U.S. Cities, Study Finds.” The story beneath the spin, however, shows that segregation isn’t just a phenomenon to look back on regretfully during African American History Month (which begins today). Segregation lives on in far too many American cities.

In 1970, two years had elapsed since Congress enacted the end of private-sector apartheid with the Fair Housing Act; only a few years before that, President Kennedy had ordered the desegregation of public housing. Why should we wonder that segregation levels have declined since then? Shouldn’t the real story be that in the nation’s second-largest metropolitan area, Chicago, over 70 percent of African Americans would have to move to a predominantly non-black neighborhood (or the same proportion of whites would have to move to mostly non-white areas) to achieve an even racial distribution? Chicago isn’t the only metropolitan area in this position: Detroit, Cleveland, and St. Louis also surpass 70 on this segregation index. New York, Baltimore, and Philadelphia—that is, a continuous band of urbanization stretching from just north of Washington, DC, to the middle of Connecticut with well over 25 million inhabitants—stand between 60 and 65. The heart of the northeast corridor still lives in a segregated century, as does the fringe of the Great Lakes. Even “less segregated” metropolitan areas still have levels of racial segregation far higher than the Fair Housing Act promised.

Rolf underscores an uncomfortable point--that Northern cities have more black-white segregation than Southern cities.  The largest city in my home state of Wisconsin, Milwaukee, is the most segregated large city in the country.