I try to find a relationship between the after tax cost of a mortgage and house prices, and can't.

Some years ago, I wrote a paper with Pat Hendershott and Dennis Capozza looking at the impact of tax policy on house prices.  We ran the following regressions using a panel of cities across three census years:

Rent/Price = alpha + Beta1*ATCC + Beta2*NPT + Beta3*E[g] + e

where Rent/Price was the average rent to average housing price for an MSA, ATCC was the after tax cost of capital, NPT is the net average property tax rate after deductions, E[g] is expected house price growth net of depreciation, and e is an error term.  This is just the user cost model: Beta1 and Beta2 should equal one (and they did) and Beta3 should equal -1 (and it didn't, but we never got a decent measure of expected house price growth, and so it is not surprising that it didn't work).  Our results implied that removing tax advantages for housing would push rents up or drive prices down, or, most likely, both.

I have been redoing this exercise using American Community Survey Data from 2006-2010.  I get the following scatter plot, where each dot is an MSA at a different time:

The x -axis, the after tax cost of capital, is a function of two things: the mortgage rate for each period, and the effective rate at which mortgage interest is deducted (which is taken from the NBER TAXSIM model, Table 2).  Do you see a relationship between the after tax cost of capital and house price to income ratios? I don't.  Here is a regression with MSA and year fixed effects:

Fixed-effects (within) regression               Number of obs      =      1275

Group variable: msa                             Number of groups   =       255

R-sq:  within  = 0.4535                         Obs per group: min =         5

       between = 0.1258                                        avg =       5.0

       overall = 0.1387                                        max =         5

                                                F(6,1014)          =    140.25

corr(u_i, Xb)  = -0.6549                        Prob > F           =    0.0000

   rvratio1 |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]

-------------+----------------------------------------------------------------

       atcc1 |   .1972777   .1165485     1.69   0.091    -.0314262    .4259817

     ptrate1 |   3.075967   .1451177    21.20   0.000     2.791202    3.360733

The coefficient on the after tax cost of capital is much smaller than one, and is not different from zero at the 95 percent confidence level.  But even if we take this coefficient at face value, it suggests that capitalization effects now are about 1/5 of what they were when Pat, Dennis and I wrote our paper.  I am curious about feedback (I should also note that the coefficient floats around depending on specification, and sometimes has the wrong sign).

Sherman Maisel on how Fannie Mae "left" the government in 1968

Go to 3:55

Southwest CEO Gary Kelly understands price elasticity

I am at the ULI conference in Denver, and reading the local magazine, which features an interview with Gary Kelly. His quote on why Southwest doesn't charge for baggage: "it takes the loss of one customer to offset about ten bag fees."

I enjoy it when an executive talks about demand curves.

A gentle rebuke to Paul Krugman--she was referring to Oakland, not Los Angeles

Tomorrow I am teaching a book I admire--Paul Krugman's Development, Geography and Economic Theory.  The book contains three Olin Lectures that are beautifully written, accessible and insightful.  But on page 58, he quotes Gertrude Stein as having said that Los Angeles had "no there there."  

She actually was referring to her home town.  Specifically, she wrote:

What was the use of my having come from Oakland it was not natural to have come from there yes write about it if I like or anything if I like but not there, there is no there there.

I am not sure Oakland deserves the insult either, but still, LA gets enough abuse as it is.

Rub ́en Herna ́ndez-Murillo, Andra C. Ghent, and Michael T. Owyang show that the Community Reinvestment Act did not induce subprime lending.

They look at lending originations and loan performance on either side of the CRA thresholds.  If CRA encouraged subprime lending, one should see a discontinuity at the thresholds, but there is none.

These are originations for 2-28 subprime loans.  Under CRA, lenders received credit for originating and funding loans in census tracts whose median incomes were below 80 percent of area median income.  If the CRA was inducing lending, we should see a jump in lending to the left of the 80 percent cut-off--there isn't (either visually or econometrically).  They find the same result when looking at pricing and default.   

Was Paul Ryan a math major?

Ryan says it is too complicated to explain his budget numbers. Imaginary numbers are indeed complex.

The final installment of the Oswald-Green debate on home-owning in The Economist

It is here.