Bill Gross says don't expect double-digit returns anymore
He could very well be right. Part of returns come from inflation, which is currently running at an annual pace of 1.2 percent. If "normal" inflation is 3 percent, a 10 percent return in normal times is equivalent in real terms to 8 percent now. There is nothing necessarily wrong with that.
A modest step toward untangling housing markets
One of the impediments to housing transactions is appraisals. If appraisals (which are backward looking) don't support the offer price of a house, the financing for the house can disappear.
For low down payment deals, this is frustrating, but appropriate. But for deals involving a minimum of 20 percent down, it is hard to see how appraisers have a better sense of value than the potential buyer who is actually putting a lot of money at risk. It may make sense to allow buyers who put 20 percent down, and whose source of funds is well documented, to get a loan even if the appraisal comes in a little low.
For low down payment deals, this is frustrating, but appropriate. But for deals involving a minimum of 20 percent down, it is hard to see how appraisers have a better sense of value than the potential buyer who is actually putting a lot of money at risk. It may make sense to allow buyers who put 20 percent down, and whose source of funds is well documented, to get a loan even if the appraisal comes in a little low.
At what point will short sales become meaningful to restarting the housing market?
The Washington Post today forecasts 400,000 short sales this year. Lawrence Yun says there will be 2.5 million foreclosures in 2010. So while short sales have have increased substantially, they will still be only about 1/6 the number of foreclosures.
Don't get too excited
Nick Timiraos retweets Brad Hunter: Census numbers: Single family starts up 4.3% (+/- 12.4%) Plus or minus 12.4%!! It's in the fine print of their release!
I actually try my best not too make too big a deal out of any monthly number.
I actually try my best not too make too big a deal out of any monthly number.
To my macroeconomist friends: if you are going to do urban economics, please read the urban economics literature first.
I saw a paper from a famous macroeconomist a week or so ago that proposed that cities with high incomes relative to house prices produce more utility than those cities with low incomes realtive to house prices. Using this metric, he concluded that Flint was among the five highest utility cities in the US. This might have been a clue that there was something wrong with his utility measure.
The systems of cities literature (see Jan Brueckner's chapter in the Handbook of Urban Economics) and the quality of life literature (see Stuart Gabriel Joe Mattey & William Wascher's RSUE paper) shows that in a country with mobility, utility tends to get equalized across cities, and so that places with high house prices relative to income have more non-housing amenities than places with lower house prices. I can testify to the reasonableness of of this, as while Los Angeles is expensive (as well as congested), I do not find myself tempted to move anywhere else, suggesting that I, at least, derive a great deal of utility from living here (I recognize that lots of people are not so enamored of LA, but enough of us are to keep the price of housing high relative to other places). Other places like LA include New York, London, Paris, Singapore, Tokyo, Hong Kong, Sydney, etc.
This produces an efficient outcome, for if Los Angeles were less expensive, it would be even more congested. On the other hand, St. Louis' cheap house prices should eventually attract people back to it. But it also produces an unfair outcome, because it is very difficult for low income people in Los Angeles to find reasonably priced housing in reasonable locations. Perhaps the goal of housing policy should be to allow everyone to be able to choose the city in which to live, while at the same time distorting the relative prices of cities as little as possible. I am not sure how one does both.
The systems of cities literature (see Jan Brueckner's chapter in the Handbook of Urban Economics) and the quality of life literature (see Stuart Gabriel Joe Mattey & William Wascher's RSUE paper) shows that in a country with mobility, utility tends to get equalized across cities, and so that places with high house prices relative to income have more non-housing amenities than places with lower house prices. I can testify to the reasonableness of of this, as while Los Angeles is expensive (as well as congested), I do not find myself tempted to move anywhere else, suggesting that I, at least, derive a great deal of utility from living here (I recognize that lots of people are not so enamored of LA, but enough of us are to keep the price of housing high relative to other places). Other places like LA include New York, London, Paris, Singapore, Tokyo, Hong Kong, Sydney, etc.
This produces an efficient outcome, for if Los Angeles were less expensive, it would be even more congested. On the other hand, St. Louis' cheap house prices should eventually attract people back to it. But it also produces an unfair outcome, because it is very difficult for low income people in Los Angeles to find reasonably priced housing in reasonable locations. Perhaps the goal of housing policy should be to allow everyone to be able to choose the city in which to live, while at the same time distorting the relative prices of cities as little as possible. I am not sure how one does both.
While Arrow showed the impossibility of a well defined ordering of social preferences...
...we tend to act as if there is one anyway. That is, we place a lot of focus on GDP per capita when evaluating economic success. By this measure, the US is, of course, successful. By a slightly different measure from the OECD (go to page 37), average disposable income per household, the US ranks second after Luxembourg among the nations measured. Luxembourg has about the same population of Long Beach, so it is hard to worry too much about it.
But a social welfare function that looks at the lowest decile of income is just as legitimate (or perhaps I should say, illegitimate). By this measure, the US ranks 20th among countries measured, which places it toward the bottom of the OECD pack, with levels similar to Greece and Italy.
On the other hand, the top 40 percent of American household are better off than their counterparts in all other countries (with the exception of Luxembourg), reflecting a great deal of affluence across a large number of people. So where to pick? As Arrow would say, that is really impossible.
But a social welfare function that looks at the lowest decile of income is just as legitimate (or perhaps I should say, illegitimate). By this measure, the US ranks 20th among countries measured, which places it toward the bottom of the OECD pack, with levels similar to Greece and Italy.
On the other hand, the top 40 percent of American household are better off than their counterparts in all other countries (with the exception of Luxembourg), reflecting a great deal of affluence across a large number of people. So where to pick? As Arrow would say, that is really impossible.
When assumptions drive the result
I have spent the past few days at the Wisconsin-St Louis Fed conference on Housing, Urban, Labor and Macroeconomics; it is a third in a series that Morris Davis had organized, and the papers were thought-provoking and well done.
The macro paper, however, was about whether government can effectively counteract negative shocks to one sector of the economy. To the standard macro model it added a friction where workers had to retrain in the event of a shock to one sector of the economy so as to be able to work in another sector. This is clever and important.
But while the model allowed for frictions, it failed to allow for involuntary unemployment, and so it found that government interventions were ineffective. Well, duh...
The macro paper, however, was about whether government can effectively counteract negative shocks to one sector of the economy. To the standard macro model it added a friction where workers had to retrain in the event of a shock to one sector of the economy so as to be able to work in another sector. This is clever and important.
But while the model allowed for frictions, it failed to allow for involuntary unemployment, and so it found that government interventions were ineffective. Well, duh...
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