Should house prices still be falling?

I'm not sure.  According to the National Association of Realtors, the median house price in the US is $170,500.  The most recent American Housing Survey data from 2008 shows median rent at $ 808 per month, and the CPI-Rent index is essentially flat since 2008.  This means the cash flow cost of renting is $9696 per year.

If we assume the mortgage interest rate on a 30-year fixed rate mortgage  is 4.5 percent, the cost of home equity is 10 percent, a buyer puts 20 percent down on a house, property taxes are one percent of house value, marginal income tax rates (state and local) are 25 percent, maintanence costs are one percent per year, and amortized closing costs are another one percent per year, the cash cost of owning is $12,162 per year.

But the median rental unit is 1300 square feet and the median owner unit is 1800 square feet, so owning the median owner unit costs about 10 percent less per square foot than renting the median rental unit.  This means house prices could fall and, in some places at least, still leave the owner better off than renters.

Neither renter nor owner markets are national, but I am hard pressed to think of a time when owning on a cash-flow basis looks so reasonable relative to renting. 

Ingrid Ellen, John Tye, and Mark Willis on Covered Bonds replacing GSES

They write:

Covered bonds have three potential advantages over MBSs as a method of mortgage finance.

First, they have the potential to reduce principal-agent problems, because the banks themselves

would hold the loans underlying covered bonds, giving them an interest in originating better

loans. Second, because the mortgage loans would simply remain on bank balance sheets and not

be put into special trusts subject to the incentives of servicers, banks could modify failing loans

far more easily than MBS trusts can. This could reduce foreclosures and maximize loan value.

Third, depending on how they are implemented, covered bonds also hold the possibility of

improving the options available to homebuyers who find themselves underwater. In Denmark,

covered bonds operate according to the “balance principle.” The balance principle requires a

match between each mortgage written and every bond issued. It permits homebuyers two options

for paying off their debt: they may either pay off their mortgage at par, or they may repurchase

their lender’s bonds on the open market, in an amount corresponding to the size of their

mortgage, and return those bonds to the lender. Falling house prices will often depress the

corresponding bond prices (though this may not always happen). When house and bond prices

fall together, homeowners can sometimes refinance their homes at the new, lower house price,

by buying back their bonds at the lower bond prices, and surrendering the bonds to the original

lender. This new option for refinancing could reduce foreclosures in the event of a widespread

decline in housing prices.

There is uncertainty, however, in the extent to which covered bonds would deliver the same level

of liquidity as GSE MBSs, because in a covered bond system, mortgage loans remain on bank

balance sheets. Moreover, it may be difficult for covered bonds to achieve the minimum efficient

scale to compete with government-backed GSE MBSs. As in Denmark, an effective covered

bond market would require standardized bond forms, and a high-volume market that could

demonstrate liquidity to potential buyers. If covered bonds were issued by hundreds of banks

across the country, each with different underwriting standards and bond structures, the extensive

market fragmentation would seriously reduce trading volume and liquidity for any particular

covered bond issue. The Danish covered bond system is effective because the market is highly

structured and homogenized, with only a few participating banks.

Me again: one of the selling points of covered bonds is that they remain on bank balance sheets, and, in Denmark anyway, have no explicit of implicit backing from the government.  But do they really lack such backing?  If the government is willing to inject liquidity into banks (and in Denmark, it is), do the bonds really lack a guarantee?  I am not so sure.

A thought experiment on airport screening and jobs

As noted in earlier posts, my students and I discussed Bill Cronon's Nature's Metropolis this past week.  One of Cronon's explanations for Chicago's extraordinary growth was its role as a distribution center: railroads had both eastern and western terminals in Chicago, and so lots of stuff got collected and moved in the city.  Chicago is not the only city whose development came about in part because of transshipments; one could tell such stories about Hong Kong and Singapore as well.

Coincidentally, Nate Silver had a blog post this week where he estimates that extra post-9-11 security screening reduced air travel by 6 percent.  This begs the question as to how much impediments to movement are also impeding the broader economy.

I wrote a paper a few years back that linked passenger traffic at airports to employment.  The finding was that an increase of one passenger per capita per year produced a 3 percent increase in jobs.  A typical large city has four boardings per year per capita, so let's run the math: -.06*4*.03 is a .72 percent reduction in jobs.  The US has about 139 million jobs, so a .72 percent reduction is about a million jobs.  So it is possible that impediments to travel mean we have a million fewer people working than we otherwise would.

This is very much a first cut, rough kind of number, but it does give one pause.  Is what we are doing at our airports worth sacrificing a meaningful number of jobs?  Perhaps.  But we should still think about the trade-offs explicitly.

Is US success a product of bailouts?

Hamilton "cemented" the Union by getting congress to agree to assume the states' debts from the American Revolution; in exchange, he gave up his desire to have New York be the federal capital.  Ron Chernow's recounting of Hamilton's genius at getting assumption done.

These thoughts cross my mind as I hear people say that the solution to our mortgage problems is to get rid of non-recourse loans.  We have long been more generous about bankruptcy than Europe, and it may explain why our economy is more dynamic and innovative.  The US is a country about second chances in so many ways (including education); it is a country where it is OK to fail and then come back.  We need to be careful about messing with that.

More BIll Cronon

I just finished my third reading of Nature's Metropolis, which I am teaching tomorrow.  It is among the best works on central place theory and aggomeration that I know. 

He also paints vivid pictures of wheat being harvested and shipped to the White City's great grain elevators, the lumbermills of Marquette and Marrinette, of timber sliding down ice flows and floating down rivers and lakes; we can smell the entrails from the slaughtered cattle and pigs, and imagine how the Chicago River South Branch bubbles with potions not even the Weird Sisters could have imagined.  He established how it became a metropolis by not becoming a new center of the center, but rather the center of the periphery. 

We can see how the city raised living standards--standards that 130 years later we would (rightfully) deem appalling.  His picture of Chicago, warts and all, is far more entralling than Sinclair's picture. 

Couldn't we get him to do Tokyo now?  Mexico City?  How about Los Angeles?  Kevin Starr has written a great history of California, but Cronon's angle would be different.

As I read Bill Cronon's Nature's Metropolis on the development of Chicago's abattoirs, I can't help but think of ....

http://www.amazon.com/Natures-Metropolis-Chicago-Great-West/dp/0393308731

One hand clapping for the Deficit Commission Co-chairs' powerpoint

It is not much of a report, but it emphasizes two things that do matter:

(1) Tax expenditures are about $1.1 trillion, and deficit reduction requires scaling them back.  While there has been gnashing of teeth about a proposed top marginal tax rate of 23 percet, the powerpoint contemplate this only in the context of full elimination of tax expenditures.  This would surely be more efficient--it is also possible that it would be more progressive, as the biggest tax expenditures (exclusion of the employer contributions for health care, exclusion of employer contributions to pension contributions, and the mortgage interest deduction) tend to go to those with higher incomes.  It is an empirical question as to how these things net out, but it is an empirical question worth answering (a similar analytical exercise was done in the middle-1990s, but the world is now different).  If someone can create a tax code that brings in more revenue under static assumptions (i.e., is not projecting revenue based on Voodoo economics), is more progressive, and has lower rates because of the phase out of tax expenditures, I am all for it.  FWIW, as someone who has a California mortgage and pays California state income taxes, this is probably not in my personal self-interest.

(2) I do think we need to do something about the retirement age, but it should somehow be linked to occupation.  I have a cushy job, and there is no reason why I can't keep doing it until I become demented.  But those who do physical labor just wear out, and it is not reasonable to ask a 60 year old lineman (the telephone kind, not the football kind) to "retrain."