Testimony to Senate Banking Committee on the Need for Mortgage Guarantees

I testified yesterday.

If the Walt Disney Company ran LA Metro...

People would pay $80 a day to leave their cars in a garage, and then walk from one mode of rail transit to another.  And the rail trips would leave you where you started.

Jim Follain has a proposal for empirical macro

He writes:

First, let’s do more research to help reduce the uncertainty regarding the fiscal situation we face and the new, modern and more complex economy in which we live. This step will involve de-emphasizing a number of metrics underlying macroeconomics built around national totals, such as national income, GDP and the aggregate unemployment rate. Instead, we are wise to take a more geographically granular view of our economy that measures regional, state and local economic activity and adapts policies specific to these areas. Focusing upon the national aggregate or the national average masks the extraordinary variation among markets in this country and, indeed, can even make it harder to identify seriously stressful events until it’s too late. This is difficult to do, but c’est la vie.

Ten-Year Treasury Below 2 percent!

If I am reading this graph correctly, we are at a 130 year record:

Those bond vigilantes sure are being vengeful.  And how about that S&P downgrade?

The good news graph of the day, though, comes from the Fed:

This is the average financial obligation ratio, which is debt service plus rent over disposable income.  Lower interest rates do seem to be helping, although it would be useful to know what has happened to the median, as opposed to average, household.  I refinanced my mortgage earlier this year, and it was great, and meant my financial obligation ratio fell by ten percent or so. But underwater borrowers who can't refinance (or households whose income fell enough to precent qualification for a new mortgage) may be worse off than before.  It is hence possible that while the average has improved, the median has not.

Where are the Medicis when you need them?

Richard White's Railroaded: The Transcontinentals and the Making of Modern America, is a wonderful book.  In it he shows how the railroad barons were crooks and swindlers who suckled on the federal teat every bit as much as the deposed yet still wealthy CEOs of failed Wall Street and mortgage firms.

But at least the Huntingtons (well, Collis' nephew Henry, anyway) left us with the Huntington Library and Gardens, an institution that by itself makes a trip to Pasadena worthwhile.  And Leland Stanford left us with, well, Stanford.  Angelo?  Dick?  We're waiting.

Realtors should love school spending

In the most recent Wisconsin gubernatorial election, Realtors and homebuilders were the leading campaign contributors to Scott Walker. As governor, Walker has shown hostility toward public education in general and school teachers in particular.  If one were to analyze what ails Wisconsin, public education would not rise to the top of the list, because Wisconsin has among the highest high school graduation rates in the country (or conversely. among the lowest drop-out rates), along with strong SAT and ACT scores.  Milwaukee public schools are another matter, but somehow I do not think the school children of Milwaukee are among the top of Governor Walker's concerns.

Beyond all this, however, it puzzles me as to why real estate people would support someone hostile to public education.  There is a very long literature that shows that spending on schools produces higher property values, particularly in the suburbs that are the places where Realtors and homebuilders make most of their money.  Lisa Barrow and Cecilia Rouse:

In this paper we use a 'market-based' approach to examine whether increased school expenditures are valued by potential residents and whether the current level of public school provision is inefficient. We do so by employing an instrumental variables strategy to estimate the effect of state education aid on residential property values. We find evidence that, on net, additional state aid is valued by potential residents and that school districts do not appear to overspend on education. We also find that school districts may overspend in areas in which residents are poor or less educated, in large districts, and in districts with higher shares of rental property. One interpretation of these results is that increased competition has the potential to reduce overspending on public schools in some areas.

A money quote from the NBER digest on the paper:

… A $1.00 increase in per pupil state aid increases aggregate per pupil housing values by about $20.00, indicating that potential residents value education expenditure."


The Barrow and Rouse paper are not alone in their findings: starting with Wally Oates' seminal 1969 paper through Hilber and Mayer's recent work, the empirical literature finds that school expenditures produce higher property values.


Wisconsin's economy has real problems, among which is a startling poor culture of entrepeneurship: if one looks at venture capital, it ranks very poorly.  As such, the children that it educates well leave for other states to find opportunity (despite the stellar performance of its schools, its adult labor force is below average in share of workers with a college degree).  But to attack one of the things the state does well--public education--makes no sense.   And for Realtors to abet an attack that diminishes their own earning power makes even less sense.

A point I wish I had made to NPR

I just finished taping an interview with Robert Siegel on finding our way out of the housing crisis.  I agreed with Elizabeth Duke about the need to blow out second liens, and with the Hubbard-Mayer-Gross plan to allow current underwater borrowers to refinance easily.

My contribution was that we needed to perform a kind of triage--that places that had massive house price declines and have very high unemployment (i.e., Miami, Las Vegas, Fresno) should get debt relief, lest it take forever for them to recover.  What I didn't say (and I wish I had) is that one way or another, many loans in these places will fail, because it will be nearly impossible for borrowers to get above water.  We might as well take the pain of the write-offs now, rather than have zombie-loans hanging around.