Housing Bust

There are a lot of detailed explanations being offered about why the housing market started to collapse sometime around the beginning of 2006. I don't have one of those explanations, but I do have a picture, which may help put some of it into perspective.


I use 1987 as the base year simply because that is the year that the Case-Shiller index started tracking home prices. I use the national home price index and nationwide Census statistics simply because they are easily available. Anyone can recreate this graph for any particular housing market, but I suspect the pattern will be similar regardless of geography.

Surprisingly, the growth in housing stock has only marginally outpaced the growth in population since 1987. By 2006, both had grown between 23% and 24%. During that same time period, the value of that housing stock shot up over 200% (thats more than tripling your money, an incredible return on any bet).

Even before the bust, as prices soared, growth in vacant housing units outpaced overall growth in housing stock. By 2006, vacant units had grown by about 44% compared to total unit growth of about 24% and (not displayed on the graph) only about 21% for occupied units.

Not surprisingly, growth in vacant units picked up after the price bust, accompanied by media stories about ghost-town subdivisions and entire urban neighborhoods that have lost nearly all of their legitimate residents. The politically correct solutions coming out of Washington are to fix the falling prices and get builders building again. For years we've been using statistics like "housing starts" and "new home sales" as signals of economic progress, but at what cost?

Chicago's Best Bet

Question: which city hosted the Olympics in 2002? Do you remember? Do you care? I went to Salt Lake City in 2004 and locals were nearly apologetic for how dreary and lackluster the city had become. They were still talking about how great and exciting Salt Lake City had been in the years leading up to the 2002 Olympics and how since it's been, well... not. In the months after the 2002 games, the LA Times declared that "the post-Olympic blues have hit Salt Lake City hard" and the New York Times wrote:
Alas, downtown Salt Lake City is struggling and has been for some time. Many downtown stores, especially along Main Street, are in deep trouble. Empty buildings that were spruced up and filled with souvenir shops during the Games have ''For Lease'' signs plastered on what are now grimy windows.
The situation isn't just specific to the Western United States. The Boston Globe has recently commented on Beijing's fallout from the 2008 summer games. There is no doubt that China has experienced explosive growth in the past decade; but now that entire skyscrapers sit completely vacant, one had to wonder how much of it was merely for show. While the jury is still out on the long-term benefits for cities that host the Olympics, Mischa Gaus recently wrote in In These Times that the games would displace thousands of Chicagoans, disrupt progress toward providing affordable housing, and put money in the pockets of the wealthy at the expense of the poor. Although traditional economic models would still classify this as growth, its obviously not always so straightforward.

Nevertheless, earlier this month Chicagoist reported that long-proposed CTA Circle Line had several million dollars earmarked in Congress's omnibus spending package.


It's true that Olympics bring improved infrastructure to the host cities. In the case of Chicago, Circle Line plans might still be locked up in a drawer somewhere right now if it weren't for the Olympic bid. The Olympic Committee will select the host city in October. There is no guarantee the Circle Line won't get scrapped if Chicago's bid gets rejected; but if the project continues to progress regardless of the outcome, then perhaps Chicago can cash in on a few solid infrastructure improvements without the burden of having to actually host the games.
John Stossel recently featured a 20/20 piece suggesting a means to "fix" the problem of traffic congestion.



While Stossel isn't completely off the mark - he's only hitting the edge of the board. The part he gets correct is that under-priced and "free" roads have caused a lot of the traffic problems we now have to deal with. Market Urbanism draws an analogy to another basic necessity. If free roads are so crucial to the lives of Americans, why don't we demand government hand out free bread to everyone? Why are people more than willing to pay for a fresh loaf at the store but not to zip along on the freeway? I guess if government had always given away free bread and we didn't know any other way, it would be a brutally difficult social adjustment. But if there were a shortage of bread because everyone tried to over consume, we would have a major problem.

The part Stossel gets wrong is that government is doomed to do anything about it. State operated roads can be tolled just as easily as privately-owned roads. The reason many of them aren't is because politicians face fierce opposition from their own constituents when they try to implement these solutions. Hence, the problem isn't with government, per se; the problem is with the way politicians' constituents interpret the situation.

People see traffic congestion as a "problem" that needs to get "fixed" - but fixed is defined in the narrowest of terms. In other words, for too many people, the only way congestion can be appropriately corrected is if everyone can still live in the suburbs, can still commute 20 miles each way to work, can cruise down freeways at 60 mph at any hour of the day, and not have to pay a dime to do it. It's that attitude that puts so much pressure on government to resist implementing solutions like smart tolls and congestion pricing. It's that attitude that pressures politicians to vote against gasoline tax hikes. Vote for a higher gasoline tax and you might be able to fill in pot-holes or vote to toll the local highway and you might be able to slash traffic congestion, but you'll probably get tossed out of office. Resist the change and people will whine and complain and demand action but at least you'll get to keep your job.

Stossel's segment paints government as a villain and drivers as innocent bystanders, and like most of his segments, it's hardly a balanced interpretation.

Open-Source Learning

A few months ago I sent out a tweet asking if anyone knew of a good (read: not sleep-inducing) introductory book on game theory - I didn't get any responses. But last week I discovered that Open Yale has a course available on the topic - Econ 159 with Ben Polak. I've only watched the 3 of the 24 lectures so far, but the course seems highly promising.

When it comes to this "open" model for distributing lectures and other education materials - I think it makes a lot of sense and hope that more universities jump on board. I know that MIT has a few free courses posted on iTunes, but they are on more scientifically technical topics that I'm not particularly interested in. It is still pretty slim pickings at Open Yale right now, so hopefully they do add more courses on more topics. Nevertheless, they did recently add a Financial Markets course with Bob Shiller that looks pretty solid.

The cost for universities to record and distribute courses online is very little (though admittedly there is some cost to record, transcribe and host all of the materials) and the benefit to society is potentially large. Of course, there is an argument to be made that you can't expect people to pay hundreds of dollars per credit hour to attend a class that they could watch online for free; but that's not necessarily how higher education works anyway. People who apply to schools like Yale are unlikely to get an acceptance letter but then decide not to attend, since they can watch the same courses for free at home. It doesn't really matter if you watch every lecture, read every textbook, and ace every exam for every course in Open Yale, because there are two things you can only get if you pay for it: the degree and the "experience" - and as long as society places a value on them, there will be plenty of people willing to pay for those two things.

For the rest of us, distributing courses online is an good way to get stress-free exposure to subjects we either don't know whether or not we might like or, in my case, to gain some knowlege on a topic of interest that isn't offered at the university I attend. I particularly like that I can watch the lectures on my own time; not while I'm half awake or stressed out over something esle. I appreciate that I can pause the video and grab lunch if I get hungry in the middle of the lecture. Now if only Open Yale would post the lectures in iPod format...

Hedging Against Recession

Sometimes an economic downturn can affect people in unpredictable ways. It probably wasn't reasonable for people going into the tech industry in the late 90s to expect that the market would quickly go bust - nor was it unreasonable for people earning incredible salaries and bonuses in finance recently to think that it might soon go away forever. What's beyond your control is beyond your control; but is there a way to hedge your bets against economic uncertainty? Don't own a home, the Economist writes:
Some cannot sell their homes at all. Others could, but don’t want to take a big loss on an investment they thought was safe as houses. Either way, they are stuck. If a good job comes up in another town, they cannot take it. This effect is partly offset by the impact of foreclosures. Last month alone 291,000 homes received a foreclosure notice. The newly evicted are not merely free but obliged to move. This is unfortunate, but although jobs are in short supply nearly everywhere, being mobile at least increases the odds of finding one.
By this same logic, short term lease contracts are better than long-term contracts. A landlord is likely to ask for a premium on a 6-month lease over a 1-year or 3-year lease, but that premium should be looked at as insurance against being stuck in a place that isn't where you need to be.
According to the Census Bureau, New Yorkers have the longest average commute of anyone in America. New York City also has the most comprehensive transit system in America, the most daily riders by a long shot, and the highest percentage of residents who commute via transit in the country. I've seen arguments that the extensive use of transit in NYC is the cause of these long commutes, that transit is slower and less efficient in getting someone from point A to point B, and therefore policy should that attempts to expand transit will only make commutes worse (read more time-consuming). While I can't argue with the first two points, I take major issue with the third.

Using data from the Census's American Community Survey, take a look at the relationship between commute time and transit usage for America's 50 biggest metro areas:


The relationship is similar if I plot the relationship between commute time and individuals who commute by means other than driving (ie. transit, walking, bicycling, etc.):


If you're quick to assume that correlation means causation, you could make the case that transit does equate to longer commute times. But look what happens when I plot commute times against the Texas Transportation Institutes's congestion index:


It seems just as reasonable to suggest that long commute times stem from congestion problems as much as they do from transit inefficiencies. In which case, policy that seeks to reduce commute times should primarily target congestion-reduction. Additionally, well-designed transit systems could serve as an excellent means of reducing congestion. Yes, it is an expensive option, but given the choice between new lane miles and new transit lines, policymakers should opt for the latter. The beauty is that the relationship between drivers and congestion isn't necessarily linear; even a small decline in drivers can result in a big decline in congestion.

New transit lines would also decrease some of the inefficiency inherent in these existing systems; and even if commute times are still longer, one thing that people who drive everywhere don't seem able or willing to comprehend is that not all commutes are created equally. A 30 minute commute via car, train and bike are all significantly different. Driving alone means that you're spending an hour of your day, well, driving alone. An hour round-trip commute via train or bus gives you the opportunity to spend some time reading the newspaper, magazine, book, or sleeping. An hour-long commute via bike is an hour of exercise per day, and I'm not sure there are many who couldn't use more exercise. So while longer commutes are worse than shorter commutes, regardless of mode, they're not necessarily equally worse.
Darren Rovell blogs that Americans will wager an estimated $3 billion in March Madness pools this year, and my guess is that only a few of the wagers being made online, thanks to the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006. I didn't say none of the wagers because, despite the law, online gambling is still big business, even in the United States. With Democrats in power of both the executive and the legislative branch, now is a good a time as ever to overturn the law.

The UIGEA is an amendment to the SAFE Port Act, which was passed by a Republican congress and signed by George Bush in late 2006. The ban was championed by Christian-value Republicans like Bill Frist and it arguably had to be part of the SAFE Port Act because the legislation would not have held up on its own merit.

The idea that online gambling should be banned for moral reasons is laughable in light of the existing state of gambling in America. Catholic churches from coast to coast hold frequent bingo games to generate revenue for their parishes. Plenty of states have legalized gambling in one form or another; some have full-fledged resort casinos, others allow cardrooms or racetracks. Even residents of Utah can buy lottery tickets at their local corner store. There is no part of the country where all forms of gambling are illegal, the differences stem from which forms are protected and how much of the revenue goes to the government.

A new report suggests that the US could raise over $50 billion in tax revenue over the next ten years by legalizing and regulating online gambling. With all the talk of decriminalizing certain drugs and scaling back or ending the drug war, I'm surprised that there isn't more talk in editorial circles about overturning the UIGEA. At a time when the US government could use all of the revenue it can get and Americans are desperate for work, this is a policy that progressives, libertarians and fiscal conservatives can all get behind.

Executive Compensation

It's a hot topic. PBS's Now covered it in January, Vanity Fair had a feature about it in their last issue, and just about everybody seems to have an opinion about it. The recent AIG bonus debacle has only helped fuel the fire. How executives can live with themselves after accepting huge amounts of money while nearly everyone else suffers is not entirely known. Nevertheless, now might be an appropriate time to reconsider a hypothesis that Steven Levitt presented in 2004 (video skips to the appropriate starting point):



I think more research is needed on this question.

The Homeownership Trap

NPR’s Day to Day aired an interesting story last Friday about the impact the recession is having on minorities and other underprivileged individuals. One part of the piece that caught my attention was a conversation with Steve Perry, founder and principal of a high school in Hartford, Connecticut, who suggests that idea of homeownership makes it more difficult for families that are struggling financially to improve their quality of life:

…buying a home was a long term investment, but somewhere around 2004 people began to buy them as a means of, almost a get-rich quick plan, and thinking that they could own a home that was beyond their means; and as specifically as African Americans go, some 63% of our wealth is tied-up in our homes, where, compared to white folks, it’s about 38%. And so when a person is mortgaged to the teeth, they have more house than they can manage, then they find themselves, from a very practical level, spending more time working to pay the bills. Why does that matter? Well, I am a principal, and founder of a high school, and when parents are working second and third shift they find less time to prepare their children for school. Long term ramifications of that are: when children are not prepared and parents are not participating in high wage jobs, we find a vicious cycle: that which brought them to this circumstance, which is a lack of understanding of the economy and how to manage money, is passed on the next generation, thereby deepening the impact and extending it to a second and in some cases a third generation.
Now, you might be quick to argue that the problem here is not the fact that people want to own homes, the problem is that they want to own homes beyond their means; and this is true. But it's hard to ignore the fact that a lot of people saw homeownership as a means of moving to a better part of town or living in a nicer home. As much as people tout equity-building as a reason for wanting to own, another equally valid reason is that homeownership allowed people to move "up and out" to places they could only afford in the fictitious world of cheap and limitless credit. And at the end of the day, there weren't many people (not bankers, not local leaders, not the President of the United States) who told them that it might not be the best thing to do.

Viva Hong Kong Transit

World Focus provides an interesting take on what is probably one of the world's most successful transit systems.



I don't know enough about MTR to confidently suggest the model would work in any particular city, but one thing that is clear is that intelligently developing real estate around rail stations is key to the success of the system. Whether the same agency that operates transit or another public-private partnership takes the lead, it's been disappointing to see so many promising transit systems branded as mediocre because no one stepped up and got it done.
It's amazing to think that less than a year ago the blogosphere (and the rest of the media) was all fired up about stories regarding oil and gasoline prices and the upcoming energy crisis - I certainly took part myself. The energy crisis seems to have taken a backseat to the financial crisis for the time being, but it will be back, because in a lot of ways the financial crisis and the energy crisis are mutually exclusive events.

Politically, it was popular to blame last year's explosion of energy prices on belligerent traders and speculators, but I've always been skeptical of that view. It's entirely likely that the inflation of energy prices was the result of incredible economic growth, particularly in emerging markets like China, where energy usage is still only a fraction of what it is in the Unite States. This growth, of course has recently collapsed, promoting even the World Bank to predict that the global economy will shrink in 2009 - the first time in decades. Nevertheless, energy prices really aren't particularly cheap by historical standards; given the fact that we are in the middle of winter (the season when prices are cyclically lowest) and in a major economic crisis not seen in decades (theoretically crushing demand for commodities like energy), there should really be some cause for concern. As long as the current goal is to get the economy back on track (and few will deny that it is) then we are setting ourselves up to walk right into another entirely predictable crisis. I suspect, however, that the predictability won't make much of a difference.

The bright side (if you could call it such) is that the current economic crisis might soften the blow of the coming energy crisis if it changes our behavior significantly enough. Abandoning unnecessarily large McMansions on suburban fringes for more modest-sized homes or increasing the size of households could theoretically help reduce electricity and home heating consumption. Learning how to use public transit or ride a bike because it's awefully expensive to drive a car everywhere while unemployed could help people make the switch more easily when the energy crisis reemerges. Don't get me wrong, I don't expect behavioral change on any large scale; but there will be some, if only a few, who will become more prepared for the next crisis.

Transit in Trouble

PBS's Blueprint America has been doing an excellent job covering America's infrastructure crisis, and the two part series on transit that aired this week on Newshour is no exception. Check it out.

Part One from Monday, on the conundrum of system cutbacks despite record ridership :



Part Two from Tuesday, on the role the financial crisis is playing inside transit agencies:

More Skyscrapers, Please

Following up last week's commentary on hybrid vehicles, Ed Glaeser does some research on carbon emissions of urban and suburban lifestyles:
In almost every metropolitan area, we found the central city residents emitted less carbon than the suburban counterparts. In New York and San Francisco, the average urban family emits more than two tons less carbon annually because it drives less... But cars represent only one-third of the gap in carbon emissions between New Yorkers and their suburbanites. The gap in electricity usage between New York City and its suburbs is also about two tons. The gap in emissions from home heating is almost three tons. All told, we estimate a seven-ton difference in carbon emissions between the residents of Manhattan’s urban aeries and the good burghers of Westchester County. Living surrounded by concrete is actually pretty green. Living surrounded by trees is not.
This has been anecdotally obvious for a while, but it's nice to see some solid economic research on this question. The implication is that fuel economy alone can't save us - hopefully this point becomes more clear going forward.

Ode to CNBC

I will admit that I used to watch a lot of CNBC. A lot. I could have told you who Rick Santelli was long before the rest of the world gave him his 15 minutes of fame. Regardless, I've avoided blogging about the Santelli rant because I didn't think the guy deserved any extra attention, but John Stewart makes it more than worth it.



Some irony is that when Fox Business Channel launched in October 2007 (did you even know that Fox had a business network?), they tried to sell the new channel as a "pro-business" alternative to CNBC. After all, this strategy was gold for Fox News, which Rupert Murdoch spun as an alternative to the typical "liberal media." The problem, of course, is that when Fox News launched in 1996, cable TV news probably did have a liberal slant. CNBC, the network of Jim Cramer and Larry Kulow, after all, was never particularly anti-business.

Death to Mutual Funds?

Bethany McLean's new piece in Vanity Fair suggests that the era of hedge fund dominance could be over. Perhaps a major financial crisis was all we needed to convince rich people that incredibly overpriced managed funds that relied on leveraged, illiquid and otherwise high-risk assets just isn't worth it. The less pressing question right now seems to be what might happen to the hedge fund's ugly stepbrother, the mutual fund.

It's well known in investing circles that most mutual funds fail to outperform broad stock market indexes and low-cost index and exchange traded funds. Nevertheless, when times are good, it's easy to justify investing in mutual funds. As long as you're making money, it's acceptable if you don't necessarily outperform comparison indexes. But when times are bad, people start to wonder what exactly they're paying for. Why should some so-called "expert" get a cut of their hard earned money just so they can flush more of it down the toilet. Index and exchange traded funds existed after the dot-com bust earlier in the decade, but this is really the first time that these products are widely available to the investing public. It seems entirely possible that those who have lost a lot of money in the past few years could make the switch out of mutual funds. If not for practical financial reasons, then to punish the mutual fund managers and advisers who don't seem to deserve the business anymore.

The Urban Family Debate

Cavan Wilk has a thought-provoking post up at Greater Greater Washington:
Car-dependent places design each area for one single land use. They also seem to design for single life stages, too. A large yard may make sense when a child is just learning to walk. However, what happens when children outgrow the yard and want to interact with their peers and explore the world around them? While it is clearly possible to raise children who become successful adults in car-dependent places, it clearly has its shortcomings for pre-teens and carless teenagers. Why does so much "conventional wisdom" claim that suburbia is inherently a better place to raise children? Suburbia has its advantages, but also more than its fair share of shortcomings.

I'm probably going to get a lot of negative feedback in the comments for this, but I suggest that the myth about suburbia being a better environment for children arose from a combination of suburban marketing and our collective attempt to rationalize the divestment and abandonment of our cities and towns. Amazingly, our society continues to collectively embrace the idea of car-dependent suburbia being best for children while, simultaneously, the baby boomer generation pines for the walkable towns and neighborhoods of their youth.
Wilk's thesis is perfectly valid on paper, I can attest from experience that the nature of many of today's suburbs make it extremely difficult for kids to interact with peers without a parent (or other adult) chauffeur. That aside, a commenter argues that poorly designed neighborhoods is a one-dimensional issue that fails to address the structural problem:
The fact that kids today are stuck in the house and not out exploring the neighborhood is more complex that walkable/car-dependent premise of this piece... I blame it on the culture of fear that has gripped our society. Parents, especially professionals, are scared to death of randomness. The idea that something could happen to junior is unthinkable.
This shift to "fear culture" appears to have occurred at some point between when baby boomers were starting families and today. Urban blight probably bottomed out around the late 80s when cities truly were unpleasant places to be. Given the remarkable turnaround and urban renewal that has taken place in a lot of cities, the question in my mind is whether the fear mindset is a phenomenon that will peak and begin to change direction too?

The Problem With Hybrids

It's almost ironic that urbanists were ever concerned that Ray LaHood wouldn't be liberal enough to push a progressive agenda in the Department of Transportation, as it was the Obama Administration that nixed LaHood's proposal for a Vehicle Miles Traveled tax in February. The policy really is quite good on paper and Robin Chase, founder of ZipCar and carsharing legend, made the economic case for the VMT tax recently in the Huffington Post. The Overhead Wire lists over 25 excuses floating around the blogosphere for why the VMT tax is a bad idea; admittedly, some are more legitimate than others. The one that caught my attention right away is the argument that a VMT tax punishes hybrid drivers.

While it's true that on-balance hybrids are better for the environment that other vehicle classes, comparisons are rarely so simple. For instance, it would technically be greener for someone to drive a pickup or an SUV one mile each morning to work than for her co-worker to drive a hybrid 20 miles. When gasoline prices crossed three and four dollars over the summer, demand for hybrids exploded because, presumably, people were driving such long distances that the cost of purchasing fuel on a regular basis was becoming a financial burden. For someone who drives very little, it really wouldn't matter whether they drove a gas guzzler or a hybrid, as the monthly fuel bill wouldn't be particularly large either way.

In a lot of ways the hybrid car has become a scapegoating tool that allows environmentally conscious (but not downright green) individuals feel OK about excessive driving. Eric Morris recently wrote over at Freakonomics that increased fuel standards for cars will likely lead to increased driving, traffic and pollution, damage roads and exacerbate sprawl; none of which are particularly good for the environment. In that sense, the idea that driving a hybrid is environmentally OK because it gets good mileage is similar to the belief that buying bottled water is environmentally justified so long as you recycle the bottles. In both cases alternatives already exist. Drinking water from the tap is cheaper and greener than buying it in plastic bottles, even if the bottles are recycled. Not driving is cheaper and greener than driving, even if it's in a hybrid. But so long as we're convinced that the alternative is an unfair lifestyle sacrifice, it's hard to see much changing.

Vocabulary Check

Gallup released an interesting survey last week measuring public opinion about potential bank nationalization. When Gallup worded the question to ask if Americans support temporary bank takeovers, the policy is viewed as favorable by a majority of the sample...


And when the question asks about bank nationalization, the policy is viewed unfavorably...


These results aren't particularly surprising; they're part of the reason why talking points are so effective in politics (even despite attempts to reduce all the arguments on one side of the political spectrum to mere "talking points") and they offer somewhat compelling evidence that the result of any political opinion poll might be manipulated by simply changing the wording of the question.