Wednesday, January 26, 2011

WBA 2011 Economic Forecast: Business Fundamentals

Recently the Wisconsin Bankers Association organized its 2011 Economic Forecast Luncheon (listen to audio), held at Madison’s Monona Terrace. Graaskamp Center Academic Director Stephen Malpezzi attended as the guest of our friend Kurt Bauer, WBA president and CEO. (Kurt and his colleagues are also sponsors of our annual Wisconsin Real Estate and Economic Outlook conference, along with the Wisconsin REALTORS Association, WHEDA, and the Wisconsin Department of Commerce; mark your calendars now for June 9, 2011.)

The conference was opened with brief remarks by Jeff Mayers, and The main program comprised a speech by Wisconsin’s new governor Scott Walker, and a keynote address by the president of the Federal Reserve Board of Minneapolis Narayana Kocherlakota.

The theme of Governor Walker’s remarks was “Wisconsin is open for business.” He outlined a series of planned initiatives in taxation, incentives, and regulatory relief, as well as a reorganization of the Wisconsin Department of Commerce. The governor’s call for subjecting regulations to a cost-benefit analysis is consistent with a long strand of research at the University of Wisconsin, from James Graaskamp’s analysis of the proper role of the “infrastructure producer’s group” (aka “government”) in his classic ULI monograph “Fundamentals of Real Estate Development” to Malpezzi's research on land use and development regulations ["House Prices, Externalities and Regulation in U.S. Metropolitan Areas." Journal of Housing Research. 1996], rent controls, and their public interventions. A Wisconsin economics PhD, Timothy Bartik, has written one of the deepest and richest analyses of these interventions “Who Benefits from State and Local Development Policies?” (a Reading for Life “Top Twelve”!).

Dr. Kocherlakota’s talk was framed by one of our favorite real estate movies: It’s a Wonderful Life. But instead of asking how Bedford Falls would have fared without George Bailey and his eponymous Building & Loan, Kocherlakota asked how the economy would have fared over the past three years without the extraordinary actions taken by the Federal Reserve, and are continuing in “QE2” (Quantitative Easing II).

Kocherlakota pointed to the key role played by volatility in land and real estate markets in the economic events of the past decade. He didn’t provide references in his talk but, in his academic papers on the subject (and in post-speech conversations), he cites our own Morris Davis as his source on land price data and analysis.

We have a lot of evidence—back through the 80s—that volatility in housing/land prices is driven in part (but in important ways) by the things that affect the supply of real estate product—regulatory constraint and natural geography. See Malpezzi's paper with Susan Wachter, The Role of Speculation in Real Estate Cycles, for example.

The role asset prices, especially housing, play in the recent economic and financial crisis has reopened the question of whether central banks should continue to make policy based primarily on prices as measured by the Consumer Price Index and similar price measures; or whether they should also consider the prices of assets, like housing and stocks. In response to a question from Malpezzi during Q&A, Kocherlakota said that the Fed should not use asset prices to fix monetary policy. Instead asset prices should be an element in designing regulatory oversight of financial institutions.

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