The Real Value Added of Fannie and Freddie?

Mark Thoma has a nice post on adverse selection and mortgages. Adverse selection can only happen, of course, in the presence of unobserved heterogeneity.

Fannie and Freddie, owing to their market power, could require loan originators to collect a long checklist of information and documentation about borrowers: everyone who obtains a conforming, conventional, prime mortgage fills out the same forms. Much of the information on these forms is not particularly useful for estimating probit or logit models of loan default; however, they are filled out only by borrowers who are willing to reveal a lot of information about themselves. This alone will reduce unobserved borrower heterogeneity, and therefore reduce adverse selection problems. Borrowers once were willing to fill out the forms (along with associated documentation) because they HAD to do so in order to get a mortgage. Now they fill them out is they want to get the pass-through benefit of the of the Fannie-Freddie subsidy. I think one of the lessons of the current crisis is that we need to return to the day when only well-documented borrowers get loans.

This doesn't mean we need to go back to a rationed market (which i what we had in the pre-subprime days). In fact, by requiring borrowers to disclose sufficient information, the market might be able to price mortgage risk better in the future.

Highest per capita Restaurant Quality in the Country?

Brad Delong today wrote about the virtues of Caribou Coffee in Washington. This reminded me of how much I missed Victors Coffee in Madison when I lived in Washington. And it in turn brought back memories of all the great tastes in Madison.

For me, Madison has the country's best ice cream (Michael's Frozen Custard), hamburger (Dotty Dumpling's Dowery), beer (New Glarus Spotted Cow) and coffee (Victor Allen's). It also features the best bagel outside of NYC (Bagel's forever). For special occasions, L'Etoile was, to me, a match for Chez Pannise in Berkeley. Madison had two very good Italian restaurants (Pasta par Tutti and Wild Iris) and two very good Mexican restaurants (La Hacienda and El Dorado Grill). Monte's blue plate diner always served delicious, creative food, and was fun. Needless to say, prices at these places were much lower than prices in New York, Washington or even Chicago.

So while LA and San Francisco and New York have more good restaurants than Madison, or a per capita basis, Madison may well beat them all.

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

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

NSW Railways - a great site

This post simply records the link to a great site I found on the NSW railway system including its history. I am posting it so that I do not lose it. Rolfe Bozier should be congratulated for his work!

A little more on Mortgage Debt and Aging

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

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

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

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

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

Property Rights and Property Values in Asia

Global Property Guide is a wonderful web site with lots of fun facts about property markets around the world. I was looking through its data this morning in order to get information for a project I am doing at the moment, and I couldn't help but draw a plot:





The X axis is a measure of property rights by country: property rights are weakest in Vietnam and strongest in Singapore and Hong Kong. Note the correlation. Even though the property rights index is only ordinal, it has a correlation of .78 with the price per square meter of a 120 square meter flat in the national and or financial capital of each country.

On the one hand, one would expect freer property rights to encourage productivity, and therefore produce higher incomes which would leads to higher prices. On the other hand, stronger property rights should also make housing supply more elastic, and therefore reduce property values.

India is (as is often the case) the outlier here: property rights are not strong, but prices are very high. Indeed, the price of a flat in Mumbai, where per capita PPP income is at about 1/6 the US's, is comparable to Manhattan, and much more expensive than Los Angeles. But Indian policy has fettered housing construction over the years, and Mumbai is the financial and cultural capital of India, so its very high prices (especially in context) should not be surprising.

New England Australia's Chinese - Reference Post

Photo: Wing Hing Long store, Tingha. Now a museum.

This post simply records some web references on New England's Chinese for general reference, along with my own posts on the topic. As well as New Englanders, I think that Chinese whether overseas or in Australia along with Australians of Chinese ancestry - there are a lot - will find the material interesting.

Web References

The Chinese-Australian Historical Images in Australia (CHIA) database is a catalogue of historical images of Chinese, Chinese immigrants and their descendants held in Australia. You can search by town or name. The photos are great.

Golden Threads records the history of the Chinese in regional NSW in the period 1850-1950. Necessarily it has a strong New England focus simply because the Chinese were important in New England. The site includes a regional search facility along with a number of specific feature stories. Photo Kwong Sing store Glen Innes.

There is also a Chinese Australian Historical Society, although I have yet to follow them up.

Posts linked in some way to New England's Chinese community

26 February 2015. New England's Chinese - Introductory Post

11 November 2006. Secrets of New England - along the Fossickers Way Day Two Nundle

23 February 2015. End Week Reflections - Quong Tart and the Chinese in Australia

28 March 2015. Emmaville Mining Musuem

25 June 2015. Gwydir River - Rocky River

25 June 2015. Towards a Course on the History of New England- The Colonial Period.

10 November 2015. Death of New England Writer Eric Rolls (1923-2015)

2 May 2015. Wing Hing Long & Co - Tingha

Dick Cavett gives Public Speaking Advice

I really enjoyed this.

Tip #1. Change all “I wills” and “I shalls” from the speech to “I’ll’; Also, “I haves” and “I ams” to “I’ve” and “I’m,” etc. You’d be surprised how much this cuts down on the oratory tone.
Tip #2. Pretend you are speaking to one person. One single person. Because that’s what everybody is. No one watching or sitting in the audience is an “all of you” or an “everyone” or a “those of you” or a “Hi, everybody,” and no one is a “ladies and gentlemen.” You, out there, are a “you.” So, speaker, think of yourself as being viewed by only two eyes. (Presumably on the same person.) The most magical word you can use, short of a person’s name, is “you.”
The great Arthur Godfrey practiced this invariably. “How are you?” he said, is all-important. “Ladies and gentlemen of the radio audience,” he said, “is bull and reaches no one.” With emphasis on “one.” On radio he had millions of listeners, largely adoring women in the daytime, each convinced he was speaking to her personally. Including my grandmother. (You knew it worked because in a ruthless Nebraska summer, when all the windows were open, I could hear Arthur uninterruptedly as I passed one house after the other.)
Tip #3. I feel almost silly when I do this one, but it works. Grab a bunch of words off the prompter and, instead of staring straight ahead, glance down and to one side as you do — in real life — when thinking just what to say next. Then look back and deliver those snatched-up words to the camera. It works like a charm. (As a beloved childhood magic catalogue of mine used to say — with unintended ambiguity — “We cannot recommend this trick too highly.”)
If I were McCain’s adviser I would shock everyone by having him come out carrying his script, and saying — not “ladies and gentlemen,” as we just learned, but launch right into, “You know, I don’t use these teleprompters very well. I guess I’m just not one of those people who can fool you into thinking I’m making it up as I go along . . . which these things are supposed to do. I don’t even fool myself. I cringe when I watch myself trying to bring off that ‘electronic deception,’ you might call it . . . Anyway, here’s my

This couldn't help but remind me of the teachings of my high school speech/debating coach, Michael Sipe. The two tips I learned from him that I will never forget:

(1) Don't use a podium. It's a crutch, and it puts distance between you and your audience. If you need notes, better to hold them in your hand. Remember how good Elizabeth Dole was at the RNC in '96? I don't mean what she said (I actually don't remember much about that, except that her husband was a war hero); I mean how well she came across. I don't think Daniel Webster used a podium.

(2) Never say, "in conclusion" at the end of a speech. You don't say, "in beginning" at the beginning of a speech!

Mr. Sipe had an important impact on my life. I heard some time ago that he died at a rather young age. I feel sorry for the younger Wisconsin debaters who never got to know him

Ed Glaeser has a nice essay on John Kenneth Galbraith

Reading this is a pleasant way to spend five minutes on an early evening Sunday.

I have three comments. First, I don't think Americans (or others, for that matter) nowadays have much sense of how poor the country was in the 1930s. I was teaching students here in India about the New Deal Institutions that under girded the development of the modern housing finance system. While doing so, I pointed out that many people in the US went hungry in the 1930s, and that little more than half of households had indoor plumbing in 1940, the first year the census kept track. It was not until after WWII that the US did in fact become an affluent society.

Second, on the issue of wealth vs distribution, I can't help but think that the GDP standings focus too much on means and medians, and not enough on quintiles and deciles. Some time I ago, I took the World Bank World Development Report and looked at PPP Incomes by quintile. If I remember correctly The US was the number one country for the top three quintiles, but fell to something like 20 for the bottom quintile (as soon as I get back to Washington I will find the spreadsheet where I did this). Now lots of people in the bottom quintile go to work every day, so it is not as if perverse incentives could somehow explain the US's relatively lackluster performance. It is also possible that many Americans are comfortable with their country's relatively low rank for this group of people. But it is important that we go beyond means and medians when we debate social welfare policy. I know there are also GINI coefficients that say pretty much the same thing, but try explaining a GINI coefficient to a politician.

Finally, Ed says that much of the housing mess has arisen from overregulation. I think he is talking about the regulation of land markets, and with this I agree. But we did not have excess regulation in financial markets, and I would guess that the lack of regulation in the mortgage market was more important for explaining the housing bubble than was overregulation in the land market.

Worth rereading: Deng, Quigley and Van Order from 13 years ago

Mark Thoma tries to unravel the mystery of why house prices matter more than rate resets. The paper by D, Q and VO is Mortgage Default and Low Downpayment Loans: The Costs of Public Subsidy, and I think it helps answer the question. The abstract:

This paper presents a unified model of the default and prepayment behavior of homeowners in a proportional hazard framework. The model uses the option-based approach to analyze default and prepayment and considers these two interdependent hazards as competing risks. The results indicate the sensitivity of default to the initial loan-to-value ratio of the loan and the course of housing equity. The latter is a measure of the extent to which the default option is in the money. The results also indicate the importance of trigger events, namely unemployment and divorce, in affecting prepayment and default behavior. The empirical results are used to analyze the costs of a current policy proposal -- stimulating homeownership by offering low downpayment loans. We simulate default probabilities and costs on zero-downpayment loans and compare them to conventional loans with conventional underwriting standards. The results indicate that if zero-downpayment loans were priced as if they were mortgages with ten percent downpayments, then the additional program costs would be two to four percent of funds made available -- when housing prices increase steadily. If housing prices remained constant, the costs of the program would be much larger indeed. Our estimates suggest that additional program costs could be between $74,000 and $87,000 per million dollars of lending. If the expected losses from such a program were not priced at all, the losses from default alone could exceed ten percent of the funds made available for loans.

When households have equity in their house, they don't default. This is why the unprecedented drop in nominal house prices nationally is so calamitous. At the same time, households don't usually default unless they face a trigger event, such as unemployment, divorce and illness. A large rate reset may also constitute such a trigger event, but as three Boston Fed economists show, these are not all that common. Trigger events, moroever, are not sufficient conditions for default, and negative equity is a necessary condition for default.

The first two points of Obama's plan for Regulating Financial Institutions

I think these are right on the nose:

1. Provide the Federal Reserve with basic supervisory authority over any financial
institution to which it may make credit available as a lender of last resort. The Federal Reserve does not exist to bail out financial institutions, but rather to ensure stability in our financial markets. For that reason, it is essential to make clear that while the government may step in during times of crisis to prevent instability, financial institutions must play by the rules. Any institution that has access to the sacred trust of the American government when everything else goes wrong — the ability to use the Federal Reserve as the lender of last resort — must be subject to prudential oversight to ensure it is not taking excessive risks with the American taxpayer's money. Barack Obama believes that we should not give
access to the discount window or similar facilities as a favor to banks. It is entirely for the benefit of the American people and their interest in the safety and soundness of credit markets. The nature of such oversight should be commensurate with the degree and extent of contingent exposure for the Federal Reserve to specific institutions. At a minimum, it should include liquidity and capital requirements.

2. Capital, liquidity and disclosure requirements should be developed and strengthened for all financial institutions. Barack Obama believes that capital requirements should be reexamined and strengthened, especially with respect to complex financial instruments such as many of the mortgage-backed securities that lie at the heart of current problems. New standards for managing liquidity risk, which has been neglected in the past, must be developed and rigorously applied. And the events of the last year have also highlighted the need for more disclosure. Though transparency cannot rectify everything that has gone wrong, it is imperative that we enhance information flows to shareholders and counterparties of financial institutions in order to increase market discipline, as well as greater disclosure of off-balance sheet risks such as exposure to Structured Investment Vehicles. Finally, Obama believes we need to look into the issue of the rating agencies. This problem was illustrated in the subprime market crisis in which credit rating agencies
strongly rated subprime mortgage securities even as there were significant indications of large numbers of foreclosures and a weakening housing market.

Yes I am supporting the man--I have even done a (very) small amount of work for the campaign. But even if I weren't, I would be impressed with the level of sophistication that these points demonstrate. And as I have said in many previous posts, capital is THE crucial issue.

Emmaville Mining Musuem

Photo: Foley's General Store, Emmaville

I have so far carried two stories on this blog referring to Emmaville or Vegetable Creek. The first post introduced the story of the Chinese in New England, the second story dealt with mining, arsenic and the New England pastoral industry.

In both stories I forgot to mention that Emmaville has a mining museum located in the old Foley's general store. This has a major collection of minerals and photographs providing an interesting picture of Emmaville's past.

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

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

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

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

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

The Inventors of Popeye's Fried Chicken and the Egg McMuffin have died

I read the news today, oh boy.

These past few weeks in India have been for me a nearly meatless experience, and I was doing fine until I read the story. I actually haven't done Popeye's in a long time, but it sure is good. Maybe I'll have some when I get home on Sunday.

Arthur Anderson Redux?

The New York Times on KPMG and New Century:

New Century Financial, whose failure just a year ago came at the start of the credit crisis, engaged in “significant improper and imprudent practices” that were condoned and enabled by auditors at the accounting firm KPMG, according to an independent report commissioned by the Justice Department.

I remember when Arthur Anderson was considered unassailable (all you had to do was talk to someone who worked there). I also wonder how accounting played into the Beat Stearns debacle...

Hidden New England - Comboyne Plateau

Photo: Comboyne Plateau, view from Mt Gibraltar.

There is so much of New England that I have yet to visit properly. This includes the Comboyne Plateau.

When my father retired and had more time, he took to long drives. As part of this, he and mum just spent time driving around the Comboyne taking photos.

The Comboyne Plateau lies between the valleys of the Manning River to the south and the Hastings River to the north. It is about 60km south-west of Port Macquarie, 35km west of Kew and 54km north-west of Taree.

The Plateau has an area of approximately 180 square kilometres. The topography is unique; it is a volcanic plateau, ranging from 600 – 800 metres above sea level. The region has deep red basalt soils and a high rainfall. The plateau was originally covered by spectacular rainforests, but extensive clearing has left only a few pockets of remnant vegetation.

The plateau edges are surrounded by several State Forests and Reserves. Since white settlement, about 100 years ago, the region has been a prime dairy farming area. Over recent years a number of horticultural enterprises have been established. These include plantings of avocados, macadamias, blueberries and other fruits and vegetables.

Photo: Comboyne village.

Today there are approximately 800 people on the Comboyne Plateau, with less than 200 in Comboyne village.

David Leonhardt's piece in today's NYT reminds me of one of my favorite papers on housing economics

The headline is: Be It Ever So Illogical: Homeowners Who Won’t Cut the Price

The story reminded me of a QJE paper by David Genesove and Chris Mayer: Loss Aversion and Seller Behavior: Evidence from the Housing Market

The abstract:

Data from downtown Boston in the 1990s show that loss aversion determines seller behavior in the housing market. Condominium owners subject to nominal losses 1) set higher asking prices of 25-35 percent of the difference between the property's expected selling price and their original purchase price; 2) attain higher selling prices of 3-18 percent of that difference; and 3) exhibit a much lower sale hazard than other sellers. The list price results are twice as large for owner-occupants as investors, but hold for both. These findings are consistent with prospect theory and help explain the positive price-volume correlation in real estate markets

If today my voting choice was between Mike Huckabee and Hillary Clinton...

Today (and today alone), I would vote for Huckabee.

Here is Huckabee (via James Fallows)and many others:

And one other thing I think we've gotta remember. As easy as it is for those of us who are white, to look back and say "That's a terrible statement!"...I grew up in a very segregated south. And I think that you have to cut some slack -- and I'm gonna be probably the only Conservative in America who's gonna say something like this, but I'm just tellin' you -- we've gotta cut some slack to people who grew up being called names, being told "you have to sit in the balcony when you go to the movie. You have to go to the back door to go into the restaurant. And you can't sit out there with everyone else. There's a separate waiting room in the doctor's office. Here's where you sit on the bus..."
And you know what? Sometimes people do have a chip on their shoulder and resentment. And you have to just say, I probably would too. I probably would too. In fact, I may have had more of a chip on my shoulder had it been me.

Here is Clinton:

"He [Wright] would not have been my pastor...you don't choose your family, but you choose what church you want to attend."

What is more, as Tim Noah points out, she said this said this to the Pittsburgh Tribune-Review, a newspaper owned by Richard Mellon Scaife, who was, in Tim's phrase, the CEO of the Vast Right-Wing Conspiracy.

The thing that is particularly sad is that Senator Clinton knows better...

Small Addictions

My daughters joined me last Sunday for my final week in India. Besides having the pleasure of their company, I again have the pleasure of drinking Victor Allen's coffee in the morning. Victor's is a Madison roaster: my wife and I (and now the kids) liked it so much that when we moved to Washington, we started mail ordering it. If you like good coffee, you should too.

A Bear Stearns Bailout

I thought it was fine when the Fed agreed to back Bear Stearns' obligations in exchange for a near liquidation of the company ($2 per share was close enough). But it now continues to back Bear's liabilities, and shareholders will get quintuple the price. To me, this amounts to a transfer from the US government (i.e., taxpayers) to Bear Stearn shareholders.

I have written in the past of my reluctance to award haircuts to homeowners in trouble, but I find such policies far preferable to taxpayer transfers to Investment Bank executives.

A LIttle Good News

According to NAR, existing home sales are up a little, and inventories are down a little, meaning that the months supply measure is down a little. It could all be within the confidence interval of the estimates, but still, it is the first decent news in awhile. Lawrence Yun's commentary is pretty much on the mark.

The big drop in the Case-Shiller Index is not so bad either. As prices fall, the rent-to-price index rises to a point where it is fundamentally wise to buy a house. The sooner this happens, the better.

NSW Elections 2015 New England Seat Results

I will do a post on the election outcomes across New England a little later.

In the meantime, for members of the New England diaspora interested in the results, I have put up an overall post on my personal blog. This includes links to the Electoral Commission where you can find detailed results for seats of interest down to the individual booth level.

If you are not sure which seat you are interested in because of boundary changes, you can do a town or locality search that will tell you.

Mickey Kaus and Bill Kristol want us all to shut-up about race

Kristol, in fact, "cringes" that Obama brought up the subject. But while my fellow white guys Kaus and Kristol (perhaps we need to find a third K?) think it is time to get over race, the problem is that many white people have yet to do so. Consequently, the best empirical evidence shows that while there is far less discrimination now than there was in the past, discrimination remains substantial, and arises from prejudice.

Here in an abstract from Zao, Ondrich and Yinger (2015):

This study examines racial and ethnic discrimination in discrete choices by real estate brokers using national audit data from the 2000 Housing Discrimination Study. It uses a fixed-effects logit model to estimate the probability that discrimination occurs and to study the causes of discrimination. The data make it possible to control for auditors’ actual demographic and socioeconomic characteristics and characteristics assigned for the purposes of the audit. The study finds that discrimination remains strong but has declined in both the scope and incidence since 1989. The estimations also identify both brokers’ prejudice and white customers’ prejudice as causes of discrimination.

Before any of us white folks who have never suffered meaningful discrimination or prejudice, or who have never even suffered the little indignities of being stopped by the police for no reason, or been followed by a security guard in a store, or been looked at suspiciously or altogether avoided on the street, tell the world that we don't need to talk about or think about race anymore, perhaps we need to try to walk in the shoes of someone who has suffered all these things.

Things are getting better. All I have to do is see how kids behave at my daughters' high school to know so; who knows, by the time my generation is dead, race may no longer be a problem. But we are not there yet. We are not even close. I think Obama's speech nailed where we are with remarkable precision.

Austin Kelly finds that Zero Down Mortgages perform really badly

His paper is here.

The abstract:

Previous research has focused on equity as a prime determinant of mortgage default propensities. This paper extends the analysis of mortgage default to include mortgages that require no down payment from the purchaser. A continuous time hazard model is used to estimate the conditional probability of a serious delinquency, or a claim, as a function of a host of standard control variables, and indicators for the presence and source of the down payment. The data consist of a nationally representative random sample of about 5,000 FHA insured single family mortgages endorsed in Fiscal Years 2000, 2001, and 2002, observed through September 30, 2015, and samples of about 1,000 FHA loans each from the Atlanta, Indianapolis, and Salt Lake City MSAs in the same time period. The results indicate that borrowers who provide down payments from their own resources have significantly lower default propensities than do borrowers whose down payments come from relatives, government agencies, or non-profits. Borrowers with down payments from seller-funded non-profits, who make no down payment at all, have the highest default rates. Additionally, borrowers who do not make down payments from their own resources tend to have higher loss given default in the small subset of loans that had completed the property disposition process.

Bush Wedding 1896

This photo from the Manning Valley Historical Society shows the 1896 marriage of Hugh White and Janet Minns.

First look at the surrounds. This is bush, not a park.

Now look at the clothes. Very formal. Imagine what it would have been like to wear this gear.

Think about getting ready. Then travelling by horse or sulky or buggy to get there.

One person's perspective on bonuses

When I followed my wife from Madison to Washington in 2002, I thought it would be a great opportunity to try something different from academia. While I enjoyed being a professor very much, it struck me that I could learn more from doing something else for awhile. I hence wound up at Freddie Mac--where in about 16 months I learned more about mortgages and human nature than I ever thought possible.

Money was actually not much of a motivation for the move. My salary at Freddie was slightly higher than my nine-month salary at Wisconsin's School of Business. But at Wisconsin I could get two-months of summer research support (or 22 percent), whereas at Freddie I might get a bonus (typically 15 percent). So in the end, total compensation in the two places was pretty much even--although Freddie's cafeteria was much better.

That said, I can't say that I ever counted on getting the bonus. Indeed, I figured that if the company did badly, there would be no bonus. As it happens, during the one full year I was at Freddie, 2003, the company did very badly indeed, not financially, but ethically. In the wake of an earnings smoothing scandal, most senior management was fired. I suppose this wasn't the fault of we worker bees, but it occurred to me that I should have seen it coming. Before I joined Freddie, I asked a Senior Vice President how Freddie could continue to make good on its promise of double digit earnings growth, given that the mortgage market was finite and that Fannie and Freddie together good gain no more than 100 percent of the conventional conforming market. Has answer was, "that is a good question."

I asked a good question, but I was too naive to consider the implications of a reasonable answer. So while I wasn't responsible for the company's troubles, I should have known enough to avoid the company, and having gotten myself into it, I shouldn't have been surprised if there were no bonuses.

It turned out we did get bonuses. The amount was not the full 15--I don't remember anymore exactly what it was--but it was substantial. I have to admit this mystified me until it dawned on me--workers tend to think of bonuses as an entitlement, rather than, well, a bonus.

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

The abstract:

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

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

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

Mortgages and Uncertainty

My understanding of the Obama-Geithner plan for restoring financial institutions is that it rests on a hope and a prayer: a hope that no more mortgages will go underwater, and a prayer that underwater mortgages will get paid back at something close to par.

FWIW, my view is this sort of dithering is similar to what the Japanese did in the 1990s, and what we did with the Savings and Loans through the 1980s. The argument is that the mortgages on bank balance sheets are worth more than their current market value, and that by basically forbearing, the financial system can wait out (sweat out?) the problem.

I fear that part of the problem is that Geithner doesn't have mortgage experts on his team. Many people who are brilliant at finance do not understand the behavioral aspects of mortgages (a year or so ago, Eugene Fama called mortgages uncomplicated). The problem is that mortgages have lots of embedded options, and that borrowers do not always exercise them ruthlessly. They exercise the call (prepayment) option when it is out of the money because they have to move. They fail to exercise the call option when it is in the money because they can't be bothered. They fail to exercise the put (default) options when it is in the money, because they care about their reputation for paying their bills, or because they don't know the real value of their house. They do exercise the put option when it is in the money because they lose their job, or they get sick, or they have marital difficulty. And the option can move in and out of the money with remarkable swiftness.

Modeling all of this is hard work, because financial models--such as those used to value callable corporates--are just not sufficient. If we set up something like a home owners loan corporation, we could recognize losses at their likely maximum, and keep mortgages current going forward. It seems to me that this would do the least harm and allow the financial system to reset.

No more no money down mortgages from Fannie and Freddie

Rhonda Porter says the 100 percent LTV products are history. This is a good thing. Owners with no equity in their houses from the beginning--are renters.

The mortgage market periodically tries zero down payment and negative amortization mortgages. They never seem to work. The HUD 235 program (little down, negative amortization) had default rates of around 35 percent. Graduated payment loans (which had negative amortization) got the not so kind nickname of "gypems." Skin in the game, people, skin in the game. I don't know that it needs to be a lot, but there has to be some.

The ultimate in branding?

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

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

NSW Elections 2015 - Impact on New England

Photo: Gordon Smith, black snake.

I had not intended to run another snake photo. But, somehow, this seemed suitable.

I have argued strongly on this blog that New England needs to develop an effective voice, that current Sydney Government policies and programs do not meet New England's needs. For some examples see here.

In election commentary on my personal blog I have pointed to some of the strangeness in this election, arguing that that the election has been a policy free zone on both sides with all parties confusing lists of promises and activities with policy. I call this the supermarket or Key Performance Indicator approach to politics.

One of New England's problems has always been the way in which Sydney Governments from the second half of the nineteenth century have used the mess of pottage approach - a school here, a road there - to divide and rule, preventing the development of more integrated approaches.

Reading the on-line editions of papers across New England we can see that this approach is alive and well. However, the current Labor Government has taken the approach to a new level through its ability to recycle and re-package previous promises into apparently new promises.

People know that this happens, but the Government can get away with it because of its control over sources of information. In particular, NSW is the only jurisdiction in the country where past Government policy statements and press releases are not available on line. Comparisons are hard without information.

Am I being unfair? Well, consider this.

You will find NSW Treasury's costings of all the Government's promises here. Let's look at some of them.

Take the Country Towns Water Supply and Sewerage Program. The headline number is an extra $160 million. When we look at the details, we see that this money will be made available from 2015-12 onwards. But we also see that, to use Treasury's word, earlier spending has been "reprofiled". By this they mean that planned expenditure in the next few years has actually been reduced to help fund later spend. "Reprofiling" indeed!

Or look at the paper headed North Coast. This actually deals just with health. There are two pages of commitments. Looks good. The Treasury costings show new spend of just $500,000. The rest are earlier promises repackaged.

If you look at the policy promises entitled New England, really the Tablelands and Western Slopes, the several pages of policy promises has no budget impact at all because they are all previous commitments repackaged.

The Hunter promises are much the same, although there is some new money here to fund upgrades to the Maitland and John Hunter Hospitals. But that is the only new money involved in pages of apparent promises!

I haven't had time to go through all the costings, but these examples illustrate the pattern. I just feel depressed.

Housing Bubble Hyderabad?

According to students here at ISB, the rent to price ratio in Hyderabad is between 2 and 3 percent. Mortgage rates are 12 percent; mortgage interest is tax deductible here, and the marginal tax rate for most buyers is 33 percent, so the after-tax cost of capital is 8 percent. Add to that maintenance costs and a risk premium on housing equity, and the housing market needs to appreciate something like ten percent a year to be sustainable. But of course this will not happen forever.

One surprise--in the formal market for housing in India, homebuyers can get mortgages with LTVs of up to 90 percent.

New England poet Peter Skrzynecki's Summer in the Country

Browsing around I came across a reference to a joint show done by New England poets' Peter Skrzynecki and Julian Croft. I mentioned Peter in passing in a post back in 2006 in an early story on New England writers.

Still browsing, I came across this poem on Neil Whitfield's English site.

Summer in the Country

Summer in the country

was brushing away
flies from your face
and wiping sweat from your eyes—

The flies, always a plague in sheep country. Hiking with the scouts, with packs flapping on backs, clouds of flies would be attracted by the salt in our sweat.

watching grasses and grains
shimmer in paddocks
or sheep and cattle
grazing beyond a windbreak of pines.

Pines are a common windbreak on the New England Tablelands and immediate slopes..

Galahs clanged over the homestead.
A windmill turned
when a breeze sprung up.
Cockatoos screeched from the pepper tree.

Windmills were a common sight, tall metal structures clanking in the moving air. Whereas the normal gum provides light shade, shade from pepper trees is dense. A self-sown one grew in the chook yard at home. We used to rub the leaves between our fingers to get the pepper smell.

Only crows frightened me
with their sorrowful cries
and the way they flew slowly
like black crosses.

There is something very lonely about the crow's call. On hot days when everything else is still, the call echoes across the paddocks.

The old slab-split shed
was a treasure-trove
of harnesses, bridles, farm
machinery, forty-four-gallon drums—

To a kid, these sheds are a treasure trove. The forty-four gallon drum or, earlier, the kerosene tin, was used for many things. In our case, cut in half with holes in the bottom, for catching yabbies.

its walls covered
with cobwebs that housed
unimaginable spiders
but where it was cool inside.

I hate spiders! Their webs were everywhere in those old sheds.

I didn’t miss Europe
like my parents did—
nor a Christmas without snow
I’d hear them talking about.

Poland was a long way from Australia.

Summer in the country
was being given a glass of cold lemonade
and falling asleep
under a red-gum’s shade.

The verse does capture the nostalgia of the past. Still, speaking from my own experience, the ground is bloody hard without some form of blanket!

Somewhat later

Neil suggested that this memories of childhood poem was probably set in the Parkes area rather than New England since Peter's early years were spent at Parkes.

I think that Neil is right. Still, like many good poems, it can be translated to another area and set of experiences. However, I needed to make the correction.

A post on my personal blog, Saturday Morning Musings - literature, locale and license, extends my overall analysis on New England writing.

For Excellence in Film Reviewing

Go to:

http://filmlinc.wordpress.com/

How big a tax advantage do owners have relative to renters?

Bill Wheaton's comment at UCI a few weeks ago continues to haunt me.

Let's ignore financing for a moment (because interest is deductible for both owner-occupants and landlords). According to Morris Davis, Gross Imputed Rent is about 4.6 percent of house value. One is functionally allowed to deduct the value of that income for determining taxes.

The depreciation schedule for rental property is 27.5 years/ straight line, or 3.6 percent of value. Only buildings are depreciable, and in the US, this is about 80 percent of value, so 3.6 percent x .8 = 2.9 percent. Owner-occupants may not deduct operating expenses, while landlords are allowed to do so. Figure this adds another one percent to the deduction. We are at a 4.6 percent deduction for owners, and 3.9 percent for landlords. This is a pretty small difference

But the average owner occupant is almost surely in a lower marginal tax bracket than the average investor in apartments. If the average owner pays a 20 percent marginal tax rate, and the average landlord pays 25 percent, the tax deduction to landlords is actually a little higher than the tax deduction to owners.

Neither owner-occupants nor landlords pay much in the way of capital gains taxes (owner-occupants get a large exemption, while landlords can use exchanges to defer capital gains taxes forever).

The tax treatment of housing still encourages high income people to buy bigger houses than they otherwise might (because the value of the subsidy increases with one's tax bracket), and this is distributionally obnoxious. But given the magnitudes we are talking about, I am guessing the deadweight loss created is pretty small.

I don't think the depreciation allowance for rental housing is unreasonably high: building that are not recapitalized will wear out before age 27.5 (try going without a new roof or furnace for 27 years). So it is not clear to me how the tax code particularly favors housing relative to other investments.

Wollomombi Falls

Photo: Gordon Smith, Wollomombi Falls after rain.

I see that Gordon Smith has started a new photo essay on New England's Gorge country. The starting link is given above.

Wollomombi Falls lie to the east of Armidale on Waterfall Way, the road between Armidale and Urunga on the coast. As he has done in other cases, Gordon has walked down into the gorge itself, taking photographs along the way.

I do enjoy his photo essays. Long may they continue.

A positive expected value bet

Fannie Mae and Freddie Mac's regulator is loosening their capital requirements. This is, I think, the correct call. It is possible that Fannie and Freddie can stablize mortgage credit markets by refinancing loans--particularly Jumbos--and mitigate house price declines in coastal markets (I don't think Florida and Inland California can be helped much).

I am not saying this will work, but if OFHEO had done nothing, we could be sure of a taxpayer bailout. At worst, the reduction in capital requirements will leave taxpayers no worse off. At best, the reduction could make everyone better off. This means that the expected impact of the policy decision is positive.

That said, Fannie and Freddie should now have their feet held to the fire about meeting their mission of liquidity provision.

Benighted policy of the Day

Ethanol subsidies. Ethanol does little to improve the environment--in fact some scientists have argued that it makes things worse. But one thing it manifestly does do is raise grain prices.

I was thinking about this because here in India, while incomes are generally rising, caloric intake among the lowest 30 percent of the income distribution in rural areas is falling. Making grains more expensive doesn't help any. So allowing Archer-Daniels-Midland to feed at the Federal trough is not only bad economic policy, it is making the World's hungriest hungrier.

US Housing Policy is about to get better

From today's Washington Post:

Raphael Bostic
Department of Housing and Urban Development
Assistant Secretary for Policy Development and Research
Announced: March 18, 2015


Bio
Education: Harvard University, AB; Stanford University, PhD
From: Los Angeles, CA
Ethnicity: Black
Bostic is a professor at the University of Southern California's School of Policy, Planning, and Development. He studies the roles that credit markets, financing and policy play in enhancing household access to economic and social amenities.

Last Job
University of Southern Çalifornia, professor at School of Policy, Planning and Development
Other Job
University of Southern Çalifornia, director of Master of Real Estate Development degree program

Morris Davis' Rent-to-Price Ratio is rising

Go to this page. Click on the word "here."

At 4.67% (based on Case-Shiller) it is it at its highest point since 2000. With mortgage rates as low as they are, this implies people think rents are going to fall for awhile.

I am doubtful Obama's MID cut-back would affect California much

President Obama has proposed reducing the rate at which households with incomes above $250,000 would benefit from the Mortgage Interest Deduction. The value of the deduction would be reduced from as much as 35 percent to 28 percent.

But here in California, where state income taxes are very high, I calculate that the vast majority of those with incomes in excess of $250,000 pay the Alternative Minimum Tax, which has a top marginal tax rate of 28 percent. (I base this claim on using the NBER TAXSIM model). This means most Californians would not be affected by the proposed change.

Perhaps I am missing something here--if so I would appreciate enlightenment.

Comments on William Fischel on Property Taxes and School Finance

Comment on William Fischel, “The Median Voter and School-Finance Reform:
How Tax-Base Sharing Undermines the Efficiency of the Property Tax”
Richard K. Green
University of Southern California
February 12, 2015

In the course of 18 years as an academic, I don’t think I have ever had an assignment as intimidating as discussing a paper by William Fischel on the property tax. The only thing worse would be to discuss a paper by Professor Fischel on zoning.

So let me begin by agreeing with many of the points Professor Fischel argues in his paper:

o The median voter in most instances makes pretty smart decisions. The anecdote about the general correctness of majority answers to his multiple-choice exams illustrates the point quite vividly.

o A tax price of unity for school funding produces good outcomes. Districts with tax prices of less than unity will spend more on schools, sometimes for good, and sometimes not. Districts with tax prices of greater than unity might well underspend on schools. Certainly, when tax prices are higher for schools, households are willing to spend less on schools.

o Redistributive funding mechanisms that raise the tax price of schools in some districts can be counter-productive.

In the end, though, this is not entirely satisfying. The fact is that differences in property values, and in tax prices (before redistribution) produce unequal outcomes for school children. As Oates (1970) showed, in a regime where schools are funded locally, higher school spending produces higher property values. The inference we may draw from this is that the net benefits of schools were greater than the net costs of funding them. At the same time, the inequality may be self-reinforcing, as I will discuss below.

To illustrate the problem, let me use as examples two places where I have lived: Wisconsin, and Metropolitan Washington. Wisconsin nicely illustrates two dilemmas about using the property tax to finance schools. First, the distribution of property values per pupil is both highly dispersed and skewed (Figure 1). The average school district in Wisconsin has taxable property per pupil of $664,000, while the standard deviation of property values is $773,000. The dispersion is not driven just by outliers: at the top quartile of the property value distribution, property value per pupil is roughly double the value at the lowest quartile of the distribution.

At the same time, the tax price of schools varies dramatically. In the Town of Brookfield, more than 50 percent of property value comes from commercial property, so the tax price is quite low. In the city of Wisconsin Rapids, on the other hand, substantial chunks of manufacturing property are exempt from the property tax, and farm land is taxed at use value. Because of this, residential property makes of a disproportionately large share of the tax base, and the tax price for schools is higher there than elsewhere.

Turning to Metropolitan Washington, we see the correlation between school quality and house prices, when we look at four suburban counties: Montgomery and Prince Georges Counties in Maryland, and Arlington and Fairfax Counties in Virginia. Average SATs in three of the four counties (Montgomery, Arlington and Fairfax) were above 1600, while the SAT in Prince George’s County was 1283 in 2007. At the same time, the median price of a house in Montgomery County was $475,000, and in Fairfax and Arlington Counties was above $500,000 in 2007, while in Prince George’s County it was $340,000. While house prices in Washington, DC are high (the median price was $450,000), the city has a shockingly small number of married couple families with children. Moreover, the parts of the city with the worst schools—the area east of the Anacostia River—have median house prices in the $250,000 range.

I don’t want to push this too far: Montgomery County is closer to the job centers of metropolitan Washington than Prince George’s County, but Montgomery’s network of roads is actually not as well developed. We of course cannot draw any statistical inferences about capitalization in the DC area, but we can certainly have suspicions.

If school quality gets capitalized into prices, we get both a current and intergenerational dilemma. Because house prices are so high in the areas around DC except for Prince George’s County, the best public schools in the region are not accessible to low-income students. This places these students, already at a disadvantage because of the circumstances of their households, at a disadvantage in accumulating human capital, leading to increasing income inequality across generations.

Because Professor Fischel related personal anecdotes, I will relate one too. My kids went to a magnet high school in Montgomery County, Maryland. Both the students with whom they went to school and their teachers were extraordinary. I often thought it must be both a pleasure and pain to be a teacher or principal in Montgomery County: a pleasure because the students are generally so serious; a pain because the parents are heavily involved with the schools, sometimes to the point of annoyance. The upshot was that my kids got a lot out of their school, and their parents were content with the education they received.

But I couldn’t help but think about the unfairness of it all. The schools (particularly the high schools) in Prince George’s County and Washington DC were dysfunctional, and the kids who were stuck there had much less promising futures than the kids who got to go to schools in one of the strong districts. While it may be a coincidence that recent data show increasing persistence in intergenerational wealth inequality—who your parents are seems to matter more now than it did a generation ago—my prior is that it is not.

Of course, there is a more direct method than redistributing resources across districts for putting children on a level playing field—vouchers that do not tie children to their local schools. Tom Nechyba argues that it makes no policy sense for geography to determine child outcomes. I tend to like vouchers myself. And yet it is the nexus of geography and schools that leads to the positive outcomes Professor Fischel attributes to property tax based school funding. At the same time, as a practical matter, it would be difficult for parents in Anacostia to transport their children to Rockville, Maryland or Falls Church Virginia, for school.

Compounding the dilemma is the fact that the evidence, much of it cited by Professor Fischel, suggests that central government funding of education does not work very well. Public school systems in California used to be jewels of the state. Over the years in which most school funding has flowed through Sacramento, public schools in California have deteriorated. So where does this leave us?

Perhaps an answer arises from a simple insight of microeconomics: that marginal things matter more than average things. The best policy (or perhaps I should say second best policy) might be one in which all schoolchildren had access to the minimum level of resources necessary to receive an adequate education. I think there might be a great deal of consensus about what constitutes this minimum: proficient reading and math test scores at the grade school level; sufficient numbers of classes to prepare students for college at the high school level.
Each school district would receive the funding necessary to provide the minimum level of education necessary. This might not include such things as AP courses.

From an efficiency standpoint, the ideal tax would be a lump-sum tax leveled at the state—or perhaps even federal—level. Such a tax would, of course, be politically infeasible and regressive. The least distortionary tax I can think or is a sales tax of a value added tax. Any spending a community did beyond the bare minimum would be determined and financed by the community. By doing this, the marginal tax price of marginal improvements in education would be close to unity. Such plans exist, and are known as foundation plans. Many of the people in this room have worked on such plans.

One final point. While the median voter model works well for Dartmouth economics students and New Hampshire Villages, it is not entirely clear that it works well everywhere. Alienation is a serious problem in some places. According to the Los Angeles County register’s web site, only 23.6 percent of registered voters in Compton voted in the last school board elections there. Perhaps more problematic for Los Angeles County is that a very large share of its residents are not even eligible to vote.

Do I suffer from NIMBY creep?

Revealed preference tells me I like living in older, close-in, suburbs. While in Madison, I technically lived near the middle of the city in a neighborhood called University Heights, from which I could walk to work (although if it dropped below -10 F, I would drive). But Madison is pretty small, so the neighborhood felt suburban. My house was built in 1927. From there I moved to Bethesda, MD and lived in a house built in 1936: a rare vintage for the US but not so much for the DC area. Now I live in a house built in 1911 in the south central part of Pasadena. Pasadena is unusual among suburbs, in that it is very much a stand alone city, with lots of employment and center-city amenities. But it is still a suburb.

The neighborhood in Madison has a number of tri-deckers; the neighborhood in Bethesda has nothing other than detached single-family units, but the houses, while nice, were kind of dull. Had someone suggested rezoning the neighborhood to allow denser development, I would have not objected.

Here in Pasadena, land values are sufficiently high that rezoning would doubtless produce an increase in multi-family housing. I think a four story, 16 unit building would fit on my lot rather easily. More than that would be a problem because of the street infrastructure around here.

This would allow Southern Californians of average means to live near shopping and schools and (perhaps) close to work who might otherwise live in the far eastern reaches of the San Gabriel Valley. It would allow more people to have access to the Gold Line, which is within walking distance. The economist in me thinks that the neighborhood should be rezoned to allow for higher density, and land values suggest that such rezoning would produce redevelopment when the market comes back.

The non-economist in me thinks this would be a shame. The neighborhood is filled with Arts and Crafts houses from around 100 years ago, most of which are lovingly maintained. As I walked home this morning from Peet's coffee (where I was discussing land use issues with my colleague Chris Redfearn), I marveled at the beauty of the old suburban landscape. Does this have policy implications? What are they?

Armidale-Kempsey Road - pretty but difficult

This photo by Gordon Smith shows the main road between the central New England Tablelands and the Macleay Valley.

The road is very pretty, but for some obscure reason most people take the longer, more roundabout, route. The distance between Kempsey and Armidale is not great, but I would not recommend trying the road at night.

The Sydney Harbour Bridge - a mixed symbol

Photo: Thousands walk across the Sydney Harbour Bridge to celebrate its 75th anniversary.

History is written by the victors. I was reminded of this during the week by disparaging comments by historians on Sydney radio that the the building of the Sydney Harbour Bridge was opposed only by a few winging country members of parliament.

Today the Bridge has iconic status because of its design, so thousands turned out to celebrate its opening. Yet the reality is that the Bridge was fiercely opposed by those who believed, correctly, that it was another diversion of money to the city. Debate was fierce. Those supporting the Bridge always had the numbers, but it was still a near run thing.

The initial bill to build the Bridge was introduced by Labor Premier James Dooley but not proceeded with because of the problems facing his Government. Then at the State elections in March 1922 the proposed Bridge was a major issue, igniting Sydney-country divides.

Following the election Nationalist leader Fuller became Premier but faced an uncertain position because of the balance of power position held by the Progressive (later Country then National Party). In formal terms, the Nationalists did in fact have a majority in the house, but tensions inside the Party created a degree of uncertainty.

Neither Fuller nor the Progressives would agree to a formal coalition arrangement. Fuller knew that the conservative wing of the Progressives would not support his defeat, so felt that he was in the box seat. For their part, the Progressives used every technique they could to make the Government's life miserable without actually defeating them.

All this played out over the Sydney Harbour Bridge bill reintroduced by Fuller to the house in August 1922. Recognising the problems he faced even in his own Party, Fuller made it a non-party measure. Labor adopted a similar position, notwithstanding its previous support for the bill.

The house promptly divided into Sydney members versus the rest.

County member after country member attacked the bill on the grounds that necessary country public works had been deferred for years because of lack of funds yet now 5.5 to 6 million pounds could be found for a work that would benefit Sydney alone.

Those supporting the bill always had the numbers, but it was a fierce battle. At one point, after a session lasting more than seventeen hours, a tired Premier was forced to complain that "it seems that the House has determined that this bill is not to pass." (NSWPD, vol 89, 25 October 1922, p3026).

While exact votes varied from division to division, the vote on the bill's third reading was typical of the general pattern.

Of the 39 members voting for the bill 32 came from Sydney, only seven from the rest of the state including five minsters. By contrast, of the 30 votes against, 27 were from non metro areas as compared to only three (including Jack Lang) from Sydney.

Of the New England members, 13 including all three Labor members from Newcastle voted against, two (both minsters) for. In Party terms, Nationalist supporters voted 29 for to six against, whereas Labor voted ten for and sixteen against, the Progressives none for and five against.

All this is hardly a few winging country members.

It's not just the mean, it's the distribution

David Brooks this morning says that house prices have fallen by 10 percent from peak and that "experts" think it will fall another 20. Actually, the biggest national peak-to-trough number I have seen is negative 8.9 percent (Case-Shiller), and I, for one, guess house prices nationally will fall but another 5-10 percent in nominal terms.

But that doesn't mean I am much more sanquine than Brooks. Around those mean changes are distributions, and I am wondering whether the distribution of house price outcome is getting larger--i.e., whether the standard deviations of the house price indexes is getting larger. If they are, from the standpoint of mortgage performance, the increased number of houses with large price declines will not be offset by an increased number of houses with rising prices.

Much to my surprise, when I look up my wife's and my house on Zillow, its value continues to increase; not by much, but nevertheless it is increasing. And it doesn't matter from a mortgage performance standpoint: we have a lot of equity in the house, so more won't do anything to improve our contribution to default performance. But of course if our house is holding its own in value, there is another house in the DC area that is doing much worse than a declining average, and therefore is very likely to default.

To really characterize this, it would be nice for Case-Shiller and Ofheo and NAR to not just give means and medians, but also quintiles or even deciles of house price performance. Then we would know what we are up against.

Casino Royale

Tonight, for the first time, I made myself the drink James Bond creates in Casino Royale:

"Just a moment. Three measures of Gordon’s, one of vodka, half a measure of Kina Lillet. Shake it very well until it’s ice-cold, then add a large slice of lemon-peel. Got it?’”

It is actually very good.

Mortgages and Houses

A few years ago, Alan Greenspan suggested that many households would have been better off financing their houses with adjustable rate mortgages. This is because for many years payments on adjustable rate mortgages were lower than on fixed rate mortgages--so after the fact, Greenspan was correct.

The problem with advising people to use adjustable rate mortgages, however, is that ARMs give households liabilities that have short duration--that is, liabilities whose market value remains close to face value at all times. This is because the rates on ARMs by definition change to meet market rates on a regular basis. Houses, on the other hand, are assets with lots of duration. The services they give to homeowners (shelter and a set of amenities) is pretty much invariant to market conditions. Consequently, house values change with market conditions, such as changing interest rates.

Good financial management practice suggests that to minimize risk, the duration of of assets and liabilities for any institution, including households, should be matched. In the case of houses, this means that households looking to minimize risk should use a fixed rate mortgage to finance their house. There are exceptions--if one buys a house and expects to sell it in five years, a five year ARM makes lots of sense, because the duration of the asset (housing services over five years) and the liability would match.

This is not to say there is anything wrong per se with people getting ARMS, so long as they explicitly understand the risk embedded in them. But a principle I have been pushing for years is that if people can't afford a house with a fixed-rate mortgage, they probably shouldn't buy a house. It is one thing to have the option of the FRM, and then decide to take the risk of the ARM anyway. One of the nice things about the United States is that FRMs are easy to come by--this is not true in most countries around the world. It is something else to be forced into taking a risk in order to buy. Under these circumstances, buying probably isn't worth it.

That said, there is probably too much ink being spilled on the downside of home-owning. The Times this morning had a piece that would make one wonder why anyone should own a house. But it is important to remember that renting is risky too--leases are usually only a year long, which means renters are subject to increases in rent or may even be forced to move every year.

Notice that I have not even mentioned the subprime market in this post. That will be for another day (probably tomorrow).

Program Note

I will be on KPCC tomorrow at 11:07, talking about Obama's plan to reduce the mortgage interest deduction for those making more than $250K. I am for it: those making that kind of income are going to be homeowners anyway, and it will slightly increase the incentive to own with equity instead of debt. There will be someone else on who is against the proposal.

A few words about urbanization and growth

From a paper I am writing for the World Bank:

Every affluent country in the world is urbanized. Among OECD countries, 77 percent of people live in urban areas, and among World Bank-designated high-income countries, 78 percent of people live in urban areas. The poorest two countries in the OECD, Turkey and Mexico, are 67 percent and 76 percent urbanized, respectively. The least urbanized affluent country, Portugal, is 55 or 59 percent urbanized, depending on source. At the same time, the world’s lowest income countries are generally not urbanized: in 2004, the urbanization rate among the World Bank’s designated low income countries was 31 percent. All of the countries with urbanization rates of less than 20 percent, Burkina Faso, Burundi, Cambodia, Ethiopia, Malawi, Nepal, Papua New Guinea, and Uganda, are low-income countries, all with Gross National Incomes Per Capita of less than $660, and most with GNIs that are substantially lower than that.[1] The correlation between urbanization and PPP Per Capita GDP in 2000 was .70. In short, urbanization accompanies affluence.

That urbanization accompanies affluence does not, however, mean that urbanization causes affluence. First, it is worth noting that Latin America and the Caribbean are 77 percent urbanized, and the countries in that region are certainly not among the World’s richest (nor are they in general, among the poorest). There are also very poor countries in Africa--Cameroon, Mauritania, and Senegal--that are at least 50 percent urbanized. All of these countries have per capita GNIs of less than $1010.[2] Hence affluence does not necessarily follow urbanization.

One of the most interesting questions in development economics, then, is whether urbanization causes affluence, or whether affluence causes urbanization. Knowing the direction of causation is important, because it will dictate whether policy should encourage urbanization or be neutral with respect to urbanization. Discussion below will outline arguments for both directions.

Principles set forth by Richard Freeman, however, suggests that the evidence is already sufficient to know that policy should not discourage urbanization. Freeman’s three rules of econometrics are: (1) it had better be there in the ordinary-least-squares regression; (2) it had better still be there in the econometrically-sophisticated high-tech instrument procedures; (3) it had better still be there for small technical tweaks to the econometrically-sophisticated procedures. That urbanization has a deleterious effect on affluence is not there in scatter-plots and correlations, and, as we shall see below, is not there in the OLS regressions in the literature.

The fact that there is no evidence that urbanization inhibits development is in itself important. On my visit to Bangladesh in 2004, some officials were convinced that urbanization was shown scientifically to be “immoral,” and wanted to know where to find the work that would prove it to be so. I disappointed them when I was not able to point them to any such work.

---

[1] Afghanistan is likely within this group as well, but there is no good current data on urbanization in the country.

[2] Gabon, a sub-Saharan that is 84 percent urbanized, has a per capita GNI of more than $5000, a very high number for the region. But the primary reason for the high number is the presence of oil.

How much context should Newspapers provide?

This past weekend, the Washington Post asked three finance gurus, Peter Lynch, Burton Malkiel and Bill Gross, for investment advice. All three are wonderfully smart and have different takes on the world. As such, the Post performed an important service by getting the opinions of the three.

But...Bill Gross advised against owning stocks at all. He runs a fixed-income fund. Do readers understand that he therefore directly benefits when bonds outperform stocks? Should this be explained to people? A few years ago, I had much more of a caveat emptor attitude toward investing, but the world has changed. I am not saying that Bill Gross doesn't believe in the advice he is giving--I have little doubt that he does. But his beliefs are, just like the rest of us, surely shaped in part by his own interests.

Long live the 767

The one daily non-stop flight between LAX and Lima takes about eight hours. The carrier is LAN, and the plane is a refurbished 767.

LAN seems to be nothing special--airline food at its typical worst and slightly surly service people--but the 767 is great. It is the only plane (I think) with 2-3-2 seating in coach. The combination of this seating plan and high ceilings make the plane feel more spacious than any other, and so makes long trips more tolerable. But 767s are getting old; I will miss them when they disappear.

Fight on!

The hardest adjustment to joining the USC faculty has been learning to root for the football team. When I was a kid, I would root for the Trojans against Notre Dame, but otherwise I have been a Big Ten guy my whole life, and USC was just too good.

But it has been a great pleasure to root for the Trojan Basketball team in the PAC-10 Tournament; particularly sweet was the victory over UCLA, with which I will always associate the magnificent and insufferable Bill Walton.

I think USC is underseeded in the NCAAs, and I look forward to further surprises.

What is wrong with this picture?

I gave a couple of lectures at the Central Bank of Peru last week. The driver who picked me up at the airport had returned to Lima after living in the United States for more than 15 years. The reason? he had prostate cancer and couldn't afford to get it treated in the US, so he moved back to Peru to get treated.

Clarification on Sprawl and Zoning

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

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

New England Tablelands-North West Events Calendar Autumn 2015

The people from Big Sky Tourism have supplied the following event Autumn details for New England-North West.

March

March 28-30 – Quilters and Patchworkers of New England Exhibition, Armidale. Quality local quilts on display, with the opportunity to purchase. Legacy Hall, Faulkner Street. Phone 02 67 71 2734.

March 29 – Narrabri Picnic Races. Traditional Picnic Race Day at the Narrabri Racecourse from 12 noon. Phone 02 6792 1198.

March 29 & 30 – Autumn Festival, Armidale. A wonderful street parade of local schools, car clubs, businesses and culture. Phone Armidale Visitor Information Centre 02 6772 4655.

March 30 – Markets in the Mall, Armidale. Beardy Street Mall, Armidale. Contact Matthew from the PCYC 02 6772 1023.

APRIL

April 4-6 – Oracles of the Bush, Tenterfield. Enjoy a feast of Australian bush culture including literature, music, bush poetry, plays and concerts at this four day event. A gathering of classic bush characters with plenty of Aussie spirit. Phone Tenterfield Visitor Information Centre 02 6736 1082. Admission prices vary please check the website for costs http://www.oraclesofthebush.com/

April 4 & 5 – Relay for Life, Inverell. Held at Varley Oval from 6pm to 6pm. Visit http://www.relayforlife.org.au/

April 5 – Gypsy Willow Markets, Narrabri. Phone 02 6799 6760.

April 5 – Gunnedah Bird Sale and Expo, Gunnedah Showground. The Gunnedah Bird Sale & Expo has grown to be the biggest bird sale in Australia. Admission is $2, canteen facilities, doors open at 10am. Phone Greg Brandon 0447 749 971. http://www.gunnedahbirdsale.com/.

April 5 – Nosh on the Namoi, Narrabri. A showcase of the region's great foods and fine wines, held on the banks of the Namoi River.

Relax to a jazz band while you sample delicious foods. Learn the cooking secrets of guest chef Ed Halmagyi from Better Homes & Gardens, or dance the night away at Nosh Night Out, a market style dinner with food, wine and entertainment from 4pm-10pm. Phone Narrabri Visitor Information Centre 02 6799 6761. http://www.noshonthenamoi.com.au/ Admission free. Sample plates for sale at various prices.

April 5 & 6 – Wee Waa Campdraft. Wee Waa Showground. Phone Narrabri Visitor Information Centre 02 6799 6761.

April 5 & 6 – Open Gardens, Wanderriby, Armidale. Astonishing array of trees, flowering shrubs, perennials and bulbs in an all-seasons garden. Over 200 camellias, towering rhododendrons, azaleas, prunus, magnolias and peonies. Open 10am to 4.30pm. Phone Liz Chappell 02 6734 4260.

April 6 – Jellicoe Park Markets, Moree. Plants, fresh fruit and vegetable produce, home baked goods, clothing, handcrafted furniture, poultry, a selection of food stalls, craft and novelty items, beading supplies, jewellery and crystals and more. Phone Tourism Moree 02 6757 3350.

April 6 – Inverell Hobby Markets. Campbell Park, Inverell Phone 02 6722 4693.

April 11-13 – Narrabri Show. This annual show includes horse events, wood chopping, cooking, photography, crafts, sideshows, fireworks trotting, showjumping and a Ute competition. Phone Narrabri Visitor Information 02 6799 6760.

April 13 – Glen Innes Markets. 8.00am to midday, Grey Street, Glen Innes. Contact Jenny Hodder 02 6732 5329.

April 13 – Kootingal Pumpkin Festival. All shapes and sizes of pumpkins, pumpkin products, pumpkin cooking, pumpkin bowling, pumpkin racing as well as food, wines, craft and products from all over the area. Phone 0429 602 352 or visit http://www.kootypumpkins.tripod.com/

April 18-20 – Gunnedah Show and Open Rodeo. Enjoy the pleasures, sights and sounds of a country show-the grand parade, pavilion displays, Spectacular fireworks, sideshow alley and an action packed rodeo! Gunnedah Showgrounds. Phone Gunnedah Show Society Office: Jackie Weston, Secretary 02 6742 1867 or George Avard, President 02 6742 4141. http://www.gunnedahshowsociety.com.au/

April 18-20 – Colours of Autumn Art and Craft Show, Bendemeer. This exciting show features notable artists from across Australia and includes folk art, oils, pastels, pencils and more! A great opportunity to purchase some arts and craft works for your collection. Admission by gold coin. Food and refreshments available on site. Phone Ruth Matthews 02 6769 6558.

April 18-20 – New England Caravan Camping 4WD and Boat Show. Tamworth Showgrounds. A complete outdoor recreation event, combining commercial and educational exhibitors for the outdoor enthusiasts. Visitors will be able to experience everything from caravans and motorhomes, camping, boats, the great outdoors, travel and touring. Adults $12; Aged Pensioners and Seniors Card Holders $9 (Government Issued Only); children up to 16 free. Phone: 02 6760 9544. http://www.ruralscene.com.au/

April 19 – Gunnedah Country Markets. From 8.30am at Wolseley Park, Conadilly Street, Gunnedah. Entry is Free. A wonderful choice of goods to be purchased, from delicious cakes/jams, pottery and craft to second hand goods/books/clothes. Contact 02 6742 2565.

April 20 – Peel St Cottage Craft Fair & Regional Produce Markets, Tamworth. Phone Tourism Tamworth 02 6767 5300.

April 25-27 – North West Autumn Classic Championship Dog Show, Gunnedah. This is an amazing dog show with all breeds under the sun-well worth a visit for any dog lover. Gunnedah Kennel Club Complex, Oxley Highway. Contact 02 6744 7866 or 02 6744 7892.

April 27 – Markets in the Mall, Armidale. Beardy Street Mall, Armidale. Contact Matthew from the PCYC 02 6772 1023.

April 25-28 – Drovers Campfire Weekend, Narrabri. Do you have a caravan, motorhome, camper 4x4, ute, tent or swag? A fun filled weekend – camp oven cooking, drover dressups, entertainment, craft displays, local tours, bush poetry and a chance to meet fellow campers and caravanners. Site fees from $5. Register via the website http://www.boggabri.com.au/ or phone Geoff Eather 02 6743 4469.

MAY

May 1 to 4 – Australian Celtic Festival, Glen Innes. Enjoy the culture, colour and pageantry of this great Celtic Festival at the only National Celtic monument in Australia – The Australian Standing Stones. A spectacular array of anything and everything Celtic. Special ceremonies for the Welsh, Manx, Scottish, Irish, Cornish and the Guardians of the Australian Standing Stones.

Saturday is the street parade and entertainment at the Standing Stones site. Thursday and Friday the entertainment is within the town and main street. Dog trials are held on Saturday and Sunday at the festival site. Detailed programs from the Glen Innes Visitor Information Centre 02 6730 2400. Day pass $25, weekend pass $30, children under 12 free. Visit http://www.australiancelticfestival.com/

May 1 to 4 – Australian Line Dance Festival, Tamworth. Australia's only Line Dance Festival featuring International and national celebrities. Over 16 workshops, ICE International qualifying competition, socials, vendors, and street line dancing. Contact Tourism Tamworth 02 6767 5300.

May 3 – Gypsy Willow Markets, Narrabri. Phone 02 6799 6760.

May 3 & 4 – Quirindi Heritage Rally. Quirindi Rural Heritage Village is holding its 10th Annual Rally and Swap Meet at the Heritage Village site, on the Kamilaroi Highway. Highlights include completion of the 750m circular miniature railway, working dairy displays, blacksmith’s shop and tractor pull. English manufactured tractors and engines will feature along with other vintage tractors, steam engines, Army vehicles, cars, motor bikes and displays. Catering and bush camping facilities are available and over 120 swap sites will operate. Phone Beryl Mannion 02 6746 1479 or visit the website http://quirindiruralheritag.tripod.com/

May 4 – Jellicoe Park Markets, Moree. Plants, fresh fruit and vegetable produce, home baked goods, clothing, handcrafted furniture, poultry, a selection of food stalls, craft and novelty items, beading supplies, jewellery and crystals and more. Phone Tourism Moree 02 6757 3350.

May 4 – Inverell Hobby Markets. Campbell Park, Inverell Phone 02 6722 4693.

May 4 – Great Nundle Dog Race. Nundle Recreational Ground. Join in all the fun, featuring canine and human events with all funds raised going towards the Nundle Public School. Free admission but bring your money for the food and activities. Phone Joy 02 6769 3253.

May 7-11 – Narrabri Veterans Golf Week. Narrabri Golf Club 02 6792 2148.

May 8 -11 – New England Bach Festival, Armidale. Leading Baroque performers from Australia and overseas, including Hans-Georg Wimmer, The Tall Poppeas, Australian Baroque Brass, Claire Edwardes. Phone Benjamin Thorn: 02 6772 5889.

May 9 & 10 – Moree on a Plate. Fabulous food and wine showcasing some of New England North West’s finest food products. Friday night is food and music at The Max Centre with John Field and his band, while Saturday is cooking classes with Womens Weekly celebrity chef Lydney Milan and a day of sampling delicious food at the Moree Secondary College. Sample plates for sale at various prices. Phone Moree Tourism 02 6757 3350.

May 9-11 – New England Wool Expo, Armidale. From paddock to parade and plate - yard dog championships, shearing and fleece spectaculars, alpacas, fashion parades, wool crafts, regional food and wine, rural and retail exhibitors, 'kindergarten to PhD' education sectors in New England and family entertainment. Visit http://www.woolexpo.com.au/ Phone 02 6772 8974.

May 11 – Gunnedah Mother's Day Race Meeting. For a great day of country racing make a day of it at Gunnedah Riverside Racecourse, full TAB facilities. Phone Debbie Watson Club Secretary 02 6742 0093.

May 11 – Glen Innes Markets. 8.00am to midday, Grey Street, Glen Innes. Contact Jenny Hodder 02 6732 5329.

May 16 & 17 – Wee Waa Country Show. Wee Waa's annual show is renowned for featuring some of the western plains' of NSW finest sheep and cattle. "Fashions in the Pen" is a special segment where fashion designers submit creative entries made from wool or cotton. Phone 02 6795 4315.

May 17 – Gunnedah Country Markets. From 8.30am at Wolseley Park, Conadilly Street, Gunnedah. Entry is Free. A wonderful choice of goods to be purchased, from delicious cakes/jams, pottery and craft to second hand goods/books/clothes. Contact 02 6742 2565.

May 17 & 18 – Bingara Show. The annual show with all the traditional and popular events. Phone Bingara Show Society President Kelly Holland 02 6724 1201.

May 18 – Peel St Cottage Craft Fair & Regional Produce Markets, Tamworth. Phone Tourism Tamworth 02 6767 5300.

May 25 – Markets in the Mall, Armidale. Beardy Street Mall, Armidale. Contact Matthew from the PCYC 02 6772 1023.

May 28 & 29 – Australian National Cotton Trade Show, Moree. Moree TAFE Agricultural Centre. Celebrating 10 years, this is the largest single industry trade show in Australia, with over 200 exhibitors. Visit http://www.cottontradeshow.com.au/ Phone Brian O’Connell 07 4659 3555.