If in 1987 you bought the average house in the average place...

…you have about broken even relative to the consumer price index. The Case-Shiller National Index for March 1987 was 62.03; for March 2013, it was 136.70.  The Consumer Price Index in March 1987 was 112.7; in March 2013 it was 232.77.  So the Case-Shiller Index has risen by  120.4 percent in 26 years; the CPI has risen by 106.5 percent.  So in inflation adjusted terms, the average house in the average place has risen by 13 percent over the past 26 years, or a little less than half of one percent per year.

[At the suggestion of Austin Kelly, I looked to see what would happen if I used the unit-weighted FHFA index instead of the value-weighted Case-Shiller index.  I found that based on FHFA, real house prices rose by 11 percent since 1991 (the first year for which data are available), or a little less than .5 percent per year.  So even though the index is different, the result is the same.]

Reposted from Forbes.

Could someone explain the market failure that protecting car dealerships solves?

The Wall Street Journal has a good story today about how car dealerships are (successfully) lobbying legislatures to ban Tesla Motors from marketing their cars directly to consumers.  GOP legislators, who get the willies about regulation that actually solves real problems, are on board with supporting protectionist policies for auto dealerships.

Does anyone really think that the industrial organization of the automobile retail industry works well?  My family buys a car every five years or so, and our experience is that no one tries to exploit asymmetric information like auto dealers.  I have lots of reasons to believe that our experiences are not unique.

What amazes me is that even in the age of the internet, when one can use sites like Edmunds to figure out what to pay for a car, dealers start out by assuming that the consumer is stupid, hope they get an absurdly marked up price, and only get reasonable when they find out their customer actually knows something.

Elon Musk is a visionary in many ways.  With the Tesla, he might make two important contributions--he might free  from petroleum, and he might free us from car dealers.

Crisis can be overcome with the energetic rehabilitation of the houses

Legambiente: "Is it possible to activate 3 billion euro of investments and 120,000 jobs per year"

Rome - The crisis can be overcome by the eco-renovation of houses and buildings thanks to which, according to Legambiente "can be activated 3 billion euro of investments and 120.000 jobs per year". For this reason, the Italian environmental organization has proposed - during a conference organized together with AzzeroCo2 - "a new system of incentives for energy improvement that allows to halve fuel consumption in the condo buildings".

"In light of the current situation emerges," according to Legambiente, "the need for new policies that may trigger a widespread  upgrading of the energy efficiency in buildings". With an eye especially for apartment buildings, where live about 24 million people in Italy and where very often the energy consumption are higher than the already high national average, especially if built after the 50's. According to estimates by Istat and Cresme, exists more than one million buildings with more than five rooms in which there is a condominium management. And, unfortunately for those who live there, hopes to reduce spending on energy bills are very few, given that the existing mechanisms are ineffective and often impossible to implement".

The aim of Legambiente is an average reduction of 50% of the housing consumption, certified by skipping energy class; based on a simulation carried out on condos in Milan, Rome and Bari average return through incentives varies between 31 and 36%, there would be a benefit in the bill and in the comfort both winter and summer, in addition, depending on the intervention, there could be a reduction in heating bills by about 50% within a maximum of 11 years for an amount that varies between 800 and 1300 euro per year.

According to Legambiente is necessary to introduce a new system of incentives that may apply in particular to condominiums, which offers a real possibility of reducing energy expenditure for families and at the same time attack the bulk of the energy coming from the building. "The model to look at is that of the Green Deal introduced in the UK, which allows the creation of interventions at no cost to families to pay for themselves with the savings made in fuel consumption," says Vice-President Edward Zanchini. "To realize these projects in Italy, in our proposal, they would Esco (Energy Service Company, ed) and construction companies, which could see from this scenario, a way out of the crisis in the sector."

"The interventation spaces to make our buildings more energy efficient are very broad, as shown by all the studies known," added Beppe Gamba, President of AzzeroCO2. "The economic obstacles that today's families have to carry out operations of this type can be overcome, and also creating good jobs, with the widespread intervention of the Esco that invest in their own and recover the investments with the savings made in the bill. But why is this virtuous cycle can spread requires new tools and a guarantee fund for loans to businesses. We are confident that the new Parliament will be able to tackle these issues in a constructive way".

< Source: CercaCasa.it >

A metaphor for why Goodness of Fit tests are, well, not very good.

I am proud to say I learned my econometric from Art Goldberger, who had little use for R-squared.

Anyway, a smart friend of mine (who works in industry and therefore might not want to be named) pointed out that he could probably fit the brushstrokes of a Jackson Pollack painting with a 17 degree polynomial and get an excellent R-squared.  But he still couldn't predict what a next brush stroke might look like.

A painting by Morgan Green

Reposting from my Forbes blog: the debate on Debt and GDP

My two cents:

Within the past day or so, economics conversations have been all about Rogoff and Reinhart and their critics, Herndon, Ash and Pollin.  The Rogoff and Reinhart (RR) paper purported to show that countries with more debt grow more slowly than countries with less; Herndon, Ash and Pollen (HAP) show that Rogoff and Reinhart’s data contains mistakes, and there is not much dispute about whether Herndon, Ash and Pollin’s corrections are right–they are.

HAP also do a pretty good job of showing that connections between debt to gdp ratio are not robust–they are sensitive to time period and country.  But they do not ask the question about direction of causality between debt and growth (page 3):

For the purposes of this discussion, we follow RR in assuming that causation runs from public debt to GDP growth. RR concludes, “At the very minimum, this would suggest that traditional debt management issues should be at the forefront of public policy concerns” (RR 2010a p. 578). In other work (see, for example, Reinhart and Rogo (2011)), Reinhart and Rogo acknowledge the potential for reverse causality, i.e., that weak economic growth may increase debt by reducing tax revenue and increasing public expenditures. RR 2010a and 2010b, however, make clear that the implied direction of causation runs from public debt to GDP growth.

But the question of direction matters a lot.  Consider a country whose GDP weakens–both tax revenues fall and social spending (on things like unemployment insurance) rises.  This means that in the absence of a policy change, weak GDP leads to higher debt.

There is a simple way to take a first cut at the question of direction of causation–by using a technique known as Granger Causality.  The set up is to try to explain something (such as GDP growth) by looking at its own lagged values and the lagged values of another variable (such as debt-to-GDP ratio).  I took the  data set in Herndon, Ash and Pollen and ran Granger tests using one lag explaining real GDP growth and debt-to-GDP ratios; I ran separate regressions for each country in the data set. I tested for significance at the 90 percent level of confidence.  I am happy to share my results with anyone who is interested (richarkg@usc.edu).

In the tests where I was exploring whether debt-to-GDP “caused” GDP growth, I found that debt’s impact was negative in five countries (Austria, Germany,Italy, Japan and Portugal); positive in four countries (Australia, Canada, New Zealand and Norway), and zero in 11 countries (Belgium, Denmark, Finland, France, Greece, Ireland, the Netherlands, Spain, Sweden, the UK and the US; although France was close to being statistically negative).

RR emphasize that there is a critical point at which debt becomes toxic, and that is at a debt-to-GDP ratio of more than 90 percent.  Doing Granger tests using this variable (on “on-off switch” for a country being at greater than 90 percent), we find that the impact of greater than 90 percent debt on GDP growth is positive in two cases (Australia and New Zealand), and is not statistically different from zero in eight cases (Belgium, Canada, Greece, Ireland, Japan, the UK and the US).  Ten countries have not had debt-to-GDP ratios above 90 percent.

When we look in the other direction, however, the impact of GDP growth on debt is negative 12 times (Australia, Austria, Belgium, Denmark, Finland, Germany, Greece, Ireland, Italy, Japan, Netherlands, and Sweden) and is not statistically different from zero in the eight other countries (Canada, France, New Zealand, Norway, Portugal, Spain, the UK and the US).  Reverse causality IS a big issue here, and until it is really sorted out, we can’t say what the true, structural relationship between GDP and debt really is.

The eclipse of real estate

Is the end near ?

In the first quarter of 2012, direct investments in real estate in the world fell by 21% compared to the same period last year. The data have been published by the Consulting Agency Jones Lang Lasalle; the flow of global capital allocated to the sector decreased despite only in the USA there has been a 

+25% and +52% in Canada in the year. Poor performances for Europe, Asia and Middle East.

According to Juan Manuel Ortega, director of capital markets for Jones Lang Lasalle Spain, "this year will be dominated by the reactions of governments to the continuing economic uncertainty, subject to international investors continue forward. We also anticipate that the continued deleveraging banking attract more capital funds seeking opportunities in debt and assets used in the U.S. and Europe."

At the level of large investments the offices market is the one that pulls the rest, with a 54% of the total. Also the industrial sector showed improvement, while the residential is the worse.

< News source: ElConfidencial >

< Image source: http://randomtechie27.deviantart.com/art/Eclipse-303550050 >