The Wisconsin Idea Meets Barcelona (Part III)

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

After the plenary I described in my previous posts, we had a well-received session entitled “Cities and Housing – Closing the Urban Housing Gap,” chaired by the World Bank’s Ellen Hamilton.  The focus of the session was on developing and emerging markets.

As countries grow and urbanize, the efficient and equitable production and delivery of housing and its associated infrastructure are key elements of successful urbanization.  In the aggregate, housing typically comprises something on the order of half a country’s tangible capital stock, a fifth to a third of gross fixed capital formation, and 10 to 30 percent of consumption.  Housing often leads the business cycle, and is often one of the main channels of monetary policy.  It is intimately tied to the development of (and sometimes to serious problems in) a country’s financial markets.

From a social perspective, housing is the most widely held form of wealth in most societies; and through this channel and through the operation of rental markets, housing is an important determinant of the distribution of welfare as well as its average level.  Furthermore, housing is a good that is characterized by important external costs and benefits, i.e. costs and benefits that are not “internalized” or paid directly/received by individual market participants, so it is not surprising that all governments intervene in some fashion in housing through various taxes, subsidies, regulations, and sometimes direct public provision.  But the efficacy of these interventions varies widely.

Three exciting papers were presented by younger researchers.  Basab Dasgupta told us about the connections between housing, location, and transport in South Africa, in light of recent government housing initiatives in “Shelter from the Storm – But Disconnected from Jobs,” co-authored with my friend Somik Lall.  Sohail Ahmad presented new housing demand estimates from Bangladesh that gave us a closer look at households’ actual consumption, and commented on that country’s housing policies in light of those facts.  Ashna Mathema took a look at similar issues in Rwanda; and Kate Owens (a young colleague who is taking time out from international consulting to do a PhD at our Big 10 rival Michigan) examined these issues in Dar-es-Salaam, Tanzania.  These latter papers seemed consistent with long-ago work by myself and the late Steve Mayo, that found budget shares for housing decreasing within cities as household incomes rose, but increasing in the very long run across cities as some grew and developed.

Two other papers were presented by greyer heads, my good friend and coauthor Alain Bertaud, and myself.  Alain is one of the world’s leading urban planners – I would say the leading planner – and in some future post we’ll discuss our joint work more fully.  In this presentation, Alain discussed the effective supply of land and, ultimately, real estate floorspace, in today’s cities.  There are two main channels for increasing the effective supply of land and floorspace; one is to improve the transportation system (shortening travel times increases the effective range of a city’s land market), and the other is to reform how urban regulations affect the translation of land area into floorspace.  Figure 1 illustrates the latter, with case study data from Ahmedabad.

For every 100 square meters of land that’s developed, 26 square meters ends up in the market for housing or other real estate; and given these 26 square meters, up to 44 square meters of floorspace may be delivered.  (In the informal or “slum” sector, another 4 square meters of land yields 7 square meters of floorspace).  Improving the effective yield of floorspace can be accomplished in several ways, for example by reducing the substantial fraction of newly developed land kept in government hands, mostly held as vacant; and by improving the yield of floorspace per unit of land submitted to market forces, for example by reforming Floor Area Ratio (FAR) regulations and so on.

Given the “externalities” argument and the fact that most governments intervene heavily in the housing market (including our own!) the purpose of my own paper was to discuss how to design interventions that work – and how to avoid interventions that do not work – based on experience in a range of countries, and on applied research.  The goal is to provide some directions for housing policies and programs that have proven to be effective – both equitable as well as efficient.

Want a few examples?  Here is a taste:

Nothing good will happen in housing markets without secure property rights; but don’t fall into the trap, as some have recently, of believing that simply granting titles to slum dwellers will be a sufficient solution.  There’s a lot to be done, such as improved registration procedures and information systems, and setting up a modern legal framework that’s truly relevant to low cost housing.

Improving infrastructure is another key area.  In many developing country cities, the supply of basic water and sanitation is even more critical than transportation improvements.  But we can’t simply import the water system of New York or London’s waste treatment solutions; appropriate water and sanitation solutions depend critically on income levels and willingness-to-pay of recipients; on population densities; and often on climactic and soil conditions as well.

A well-functioning housing finance system competes for funds on equal terms with other investments, whether through deposit-based or capital markets-based models of resource mobilization (or some combination of the two).   Directed credit models have proved inefficient, inequitable, and unsustainable.  In particular, forcing housing finance institutions to lend at consistently negative or highly subsidized interest rates proven problematic; deeply subsidized state lenders have created financial problems in countries both rich and poor.

Cities need to regulate development and land use, but in a contextual and appropriate manner.  Most cities (including again many in our own country) need to undertake an exercise “regulatory triage:” separate regulations into (1) those whose benefits clearly exceed costs, and strengthen and enforce them; (2) those whose costs clearly exceed benefits, and remove or reform them; and (3) a middle category of those for whom the net cost-benefit is too imprecisely known to be confident of the need for change.  In many if not most cities, an initial focus on (1) and (2) will keep regulators busy for some time, and will yield significant returns.

Those are just four of a few dozen recommendations elaborated upon in the paper; if you are interested in housing or real estate markets, whether in developing or emerging markets, or here in the U.S., you might find it interesting; download the paper here.

Well, we’ll be wrapping up soon.  I’ll write one more blog post, coming soon, that will discuss a few more findings from our Barcelona meeting; and I’ll discuss some of the next steps that will be taken by the sponsors and participants.

The Wisconsin Idea meets Barcelona (Part II)

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

In addition to the Barcelona Mayor’s official opening statement, the opening session included some very thoughtful remarks by Deputy Mayor Antoni Vives, who discussed some of the challenges faced by cities – increasing their productivity and that of their labor forces, facilitating the sharing of knowledge and ideas, and doing so in a sustainable fashion.

The World Bank’s Abha Joshi-Gahni introduced our Rethinking Cities book forthcoming at the end of this year.  She noted it was a time to think hard and fast, since the best UN forecasts suggest the world will add about 1.7 billion to its cities between now and 2030.

Among the many points reviewed by Harvard’s Ed Glaeser (see previous post), let me touch on one I particularly like to share with students, based on one of my favorite papers.  Fifty years ago, Professor Benjamin Chinitz wrote a classic study, Contrasts in Agglomeration: New York and Pittsburgh.  A short version [located here] was published in the American Economic Review.

This brief and deceptively simple paper suggests that one reason Pittsburgh went into a long slow decline, while New York had ups and downs but ultimately reinvented itself, was the difference in structures of their local economies.  A century ago, Pittsburgh was dominated by the steel industry, with large-scale plants and huge vertically integrated firms like U.S. Steel, a combine that included Andrew Carnegie’s 19^th century mills.  (My father and other family members mined some of the coal that fueled these mills).  New York’s major industry was the textile industry, which was much more an agglomeration of many small and medium sized firms, that were much more entrepreneurial and networked.

After World War II both Pittsburgh’s steel industry and New York’s garment industry slowed, and ultimately declined.  The accompanying figure shows (in log form) the population of both Pittsburgh and New York (cities, not the metro areas!) back to the first few Censuses two centuries ago.  You’ll notice that New York was always larger than Pittsburgh; no surprise there.  For more or less the 19^th century, both grew at very fast rates (the slope of a log chart is roughly the growth rate of the original data).  But notice that although New York’s population slowed its growth after the War, it still grew, with just a decade or two of some decline.  New York City’s 2010 population of about 8.2 million is its highest ever.  Pittsburgh, on the other hand, went into a steep decline; its city population peaked at about 670,000 in 1950, and it’s around 305,000 today.

Chinitz argued, and provided data to support, the notion that no small part of the contrast between the two cities is that the more diversified and entrepreneurial New York did a much better job of reinventing itself; the “company men” of U.S. Steel floundered.

I find Chinitz’s analysis very thought provoking though, as he himself admits, incomplete. Virtually all of the older eastern central cities had some period of declining population, or at least relative declines, simply due to the demand for larger homes and lower transport costs that fueled postwar suburbanization; New York City was and is so physically large that in a crude sense some of the outer boroughs are partly their own suburbs.

Nevertheless, I think this difference mattered, a lot, especially in the 60s through perhaps the 1990s.  But as has also been noticed, Pittsburgh has undergone a limited rebirth, led by two first-rate research universities (the University of Pittsburgh and Carnegie-Mellon University) and a university-connected thriving health care industry that serves the region and beyond.

None of this is to downplay the problems Pittsburgh continues to face; many of the health care jobs pay much less, in real terms, than the old steel jobs.  A lot of the city’s basic infrastructure is in dire need of repair and reconstruction, and the city’s fiscal position is precarious, due in no small part to sharp practices in their pension accounting.

But to end on a high note, if we ever needed to pick a “dream team” from any time or place to play one of the great Packers teams, either from recent decades or the 1960s; as a Pennsylvania native of a certain age, might I offer the services of the 1975 Pittsburgh Steelers?

The Wisconsin Idea meets Barcelona (Part I)

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

Greetings from Barcelona, Spain’s Chicago (“Second City”), Catalonia’s capital, an economic engine of the country and the region (currently sputtering a bit, as you’ll know), probably best known to many Wisconsinites as the home to Gaudi’s still-evolving masterpiece, the Church of the Sagrada Família, but also more architecture, history and culture than I can begin to address today.

I’m here for the 6th Urban Research and Knowledge Symposium, Rethinking Cities: Framing the Future, jointly organized by the World Bank and the city of Barcelona.  There are hundreds of researchers, activists, mayors and other city officials here – even a few business people, though it’s focused primarily on public policy issues.  For your first look at the conference, go to http://www.rethinkingcities.org/

Many readers of this blog will have had a look at the “Tradition and Innovation” paper that explores our real estate program over the past century – if you haven’t the Fall 2012 edition is available here.  One of the themes of that paper is the importance of the Wisconsin Idea, usually traced back to President Charles Van Hise around 1904, but more fully developed and first named “The Wisconsin Idea” in a 1912 book of that title by the founder of Wisconsin’s Legislative Reference Bureau, Charles McCarthy.  In honor of the centennial of that publication, the University has organized a website

http://wisconsinidea.wisc.edu/

Be sure to click on the “The Wisconsin Idea Globally.”  It’s been a long time since we’ve taken the limiting part of the phrase “the walls of the University are the boundaries of the state” literally – we’ve long gone national and global; and if you ask my basketball buddies in the astronomy department, they’ll tell you we’ve gone beyond global!

There’s another aspect of the Wisconsin Idea that is worth discussing – that the Idea is not a lecture, but a conversation.  Ideas, especially good ones, are a two-way street.  I’m presenting a paper and contributing to this conference in other ways, but, it’s just like class – I’m learning a ton while I’m at it.  During my early morning downtime I’ll send a little taste of the conference.

The conference was opened by World Bank and city officials, most notably the Mayor of Barcelona, the Honorable Xavier Trias.  This was followed by a plenary session that launched a forthcoming book, Rethinking Cities: A Roadmap Towards Better Urbanization for Development, edited by Edward Glaeser and Abha Joshi-Ghani, to be published by the World Bank.  I’ve contributed a chapter on housing markets and policy, about which more later.  The session comprised an overview by the book’s editors, Ed and Abha, and commentary by mayors and other officials from Harare, Seoul, London and of course Barcelona.  Ed’s presentation was especially substantive, as you’d expect from the author of one of my 2012 Dynamic Dozen, Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier.  Ed gave a great overview, rich in the history as well as the economics of cities, touching on inter alia the ways in which cities facilitate trade, make capital and labor more productive, and help us address some of our most urgent environmental problems.

Program Update from Professor Steve Malpezzi

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

Students are filtering back, and we’re gearing up for another rocking academic year.  The streets are filled with students and their friends and parents, and vans and trailers full of the necessities of another year in Madison.

Do you miss the reading lists and syllabi you used to receive each September?  Well, you can get a head start at your lifelong-learning ‘semester’ by reading through the little list here at our blog where I posted the latest Top 12 “Reading for Life” entries.  (Comments welcome!)  But I’m writing today mainly to bring you some news. 

Last year, after several turns as Department Chair, and two years as Academic Director of the Graaskamp Center, I turned the Center directorship into the more-than-capable hands of Morris Davis.  I was planning to spend more time on teaching and research.  But (great!) events intervened, and I stepped in as Department Chair once again last fall, when François Ortalo-Magné became our new Dean. 

I’m very excited about the directions François is taking our School.  School-wide initiatives that he’s spearheading focus on increasing the impact of our research on business and public policy; providing a transformational student experience through innovations in the way we teach; and providing faculty, staff, students and all of us with a “Great Platform for Great Work.”  During the coming year you will learn more about these initiatives both through our blog but also the WSB’s website.

Today I’m writing to tell you more about another positive change.  Recently Dean Ortalo-Magné made it official:  my colleagues and I are very pleased that Professor Abdullah Yavas has accepted the chairmanship of the Department of Real Estate and Urban Land Economics.

Professor Yavas is well known among real estate academics as one of the most innovative and productive researchers in our field; several years ago we were very excited to lure him to Madison from Penn State, where he was a stalwart member of their fine faculty for 17 years.   As many readers of this blog already know, Abdullah is also a faculty member of deep experience across a number of other dimensions, including administration; he’s one of only two real estate academics I know who’s served as president of a university!
I know readers of this blog will join François and me, and the rest of our faculty, in congratulating Abdullah, and thanking him for taking on this important responsibility.  Check out Abdullah’s bio, if you have not already done so.

I must make a personal clarification as well.  The LAST time I stepped down as Department Chair (!), I received a number of messages wishing me well in retirement.  Retirement?  Let me be very clear, I am NOT retiring.

I will be doing whatever I can, as so many others will, to support our School and in particular our Real Estate Program’s management team of Abdullah and Center Academic Director Morris Davis, and of course our Graaskamp Center Executive Director Mike Brennan, in the coming year and beyond.  I’ll be expanding my teaching responsibilities, helping the School with the new Business Analytics initiative (including but not limited to improving our students’ Excel skills), and working to focus the efforts of Real Estate and other parts of the School and UW on some important economic development issues.   Forthcoming blog posts will fill you in on some new Graaskamp Center initiatives on economic development, with an initial focus on the Midwest.

This year, in addition to teaching urban economics, I’m excited to be teaming up with Mike Hershberger to teach valuation, and with Erwan Quintin to revive our housing economics class (last taught in 2002!)  As we bring these courses online this fall, we’ll be looking to make good use of the resources François and donors including real estate alum Milo Pinkerton are bringing to the teaching innovation initiatives that François mentions in the attachment.

We have plenty of other news to share, notably the fact that our newest faculty member, Assistant Professor Jaime Luque, is now on campus and preparing his first courses, in urban economics and real estate finance.  You’ve probably already read about Jaime. In the ensuing months, you’ll be hearing much more from Abdullah and Morris, and Mike, and our other faculty and staff, about the state of our Program and our industry.  At the School level, you’ll hear from François and his management team.  Rest assured that you’ll continue to hear from me, too.  After nine years of administrative responsibilities I’m looking forward to a little more time for teaching and research, but I will continue to be actively involved in all aspects of the Graaskamp Center and our real estate Program.  Especially writing more postings for Wisconsin Real Estate Viewpoint!

Reading for Life: The 2012 Dynamic Dozen!

by Stephen Malpezzi, Department Chair, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

Sorry, I couldn’t do a Top Ten. Had to be at least a dozen. Then it turned into a baker’s
dozen. Here they are in reverse alphabetical order. (Why? So I had a reason to put our
blog as #1!)

13. Anderson, Max and Peter Escher. The MBA Oath: Setting a Higher Standard for Business Leaders. Penguin Books, 2010.
Perhaps I was inspired to choose this one because as I write, the news of the day includes Hungary’s president Pal Schmitt resigning because he apparently plagiarized large sections of his PhD dissertation; Yahoo CEO Scott Thompson has just stepped down after only four months on the job because he misrepresented his academic credentials on his resume; Wal‐Mart’s in hot water over possible violations of the Foreign Corrupt Practices Act in obtaining real estate permissions in Mexico (and an ensuing possible cover‐up); and then there’s the plethora of ethical issues connected to the Great Financial Crisis, before, during and after. Anderson and Escher are among the leaders of a movement to have MBA students adopt a sort of Hippocratic Oath for business. You might find the oath idea itself speaks to you, or not; but either way this little book, written by MBA students, frames some very timely isues, and provides a useful guide to additional reading and reflection.

12. Brooks, David. The Social Animal. Random House, 2011.
Brooks is best known as a conservative political commentator, but is also an intellectual omnivore. His increasing interest in what modern psychology can teach us about economic and life decisions parallels my own. In an apparent homage to Rousseau’s Emile, he follows the life paths of two fictional characters, Harold and Erica, to illustrate. Whether you find this particular device effective or distracting (or both?), it’s a fluid introduction. (See also Kahneman’s book, below).

11. Chinn, Menzie D. and Jeffrey A. Frieden. Lost Decades: The Making of America's Debt Crisis and the Long Recovery. WW Norton & Co Inc., 2011.
Debt?? We’re in debt??? Who knew? Well, we all know it, but why have we run up such a debt in (relative to World Wars) peacetime? Here’s a scholarly but well‐written overview of the problem, its sources (often misunderstood!) and some solutions.

10. Cowen, Tyler. The Great Stagnation: How America Ate All the Low‐Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Get Better. Amazon, 2011.
An interesting short monograph on the economy and its future. Also of interest, an early example of a book published electronically (though now after its success, it’s also available in a paper version).

9. Eichengreen, Barry J. Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. Oxford University Press, 2011.
The U.S. has a number of strengths; one of those is that the dollar happens to be the world’s reserve currency. Will it be so indefinitely? I remember this was a hot issue during my student days in the 70s. It’s back. Eichengreen is perhaps our leading scholar of international monetary history.

8. French, K. R., M. N. Baily, et al. The Squam Lake Report: Fixing the Financial System. Princeton University Press, 2010.
Gives lie to the canard that economists can never agree on anything. Fifteen top financial scholars, of varying political and academic backgrounds, provide a remarkably sharp and concise set of recommendations for fixing our financial system.

7. Glaeser, Edward. Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier. Penguin, 2011.
A fine overview of the place of cities in the economy and society, well‐written by Harvard’s top urban economist. A few glitches – e.g. his data on densities in some developing country cities is off the mark – but I think he gets all the big stuff right. And it’s a much better read than your typical urban economics textbook.

6. Haskins, Ron and Isabel Sawhill. Creating an Opportunity Society. Washington, D.C., Brookings Institution, 2009.
Everyone knows that income inequality has been rising in the U.S., but until I read the literature surveyed and the data presented in this book, I was unaware just how much our vaunted individual economic mobility had eroded. By some meaningful measures the U.S. is now less mobile than many European countries (something that rarely makes the news). Haskins and Sawhill give a careful reading of the evidence, and some very sensible prescriptions to help the U.S. get its mobility mojo back.

5. Kahneman, Daniel. Thinking, Fast and Slow. Farrar, Straus and Giroux, 2011.
Models of rational choice are the bread and butter of economists, myself included. But not even I walk down the supermarket aisle plugging everything into my personal translog utility function. Psychologist Kahneman won a Nobel Prize for his work bringing psychology into the study of economics (“behavioral economics”). This is a very readable introduction to how the brain goes back and forth between intuitive thinking (“System 1” or “fast thinking”) and more analytic, rational thinking (“System 2,” “slow thinking”). We need both. The book Malcolm Gladwell probably meant to write when he wrote Blink.

4. Malpezzi, Stephen. A Primer on Real Estate and the Aggregate Economy: Know Your Macro Indicators. James A. Graaskamp Center for Real Estate. 2011.
OK, a little self-promotion here. But I think it’s a very handy and practical introduction to tracking the U.S. economy’s basic macro data.

3. Mann, Thomas E. and Norman J. Ornstein. It's Even Worse than It Looks: How the American Constitutional System Collided with the New Politics of Extremism. Basic Books, 2012.
You’ve figured out by now that solving our deficit problems, financial crises, and many other issues are not going so well, more because of politics than because we don’t know what to do. Mann and Ornstein have revised and extended their 2008 book The Broken Branch to document how we arrived at this point. Especially controversial because, while giving plenty of “credit” to the Democrats, they claim that the Republicans are much more responsible for the current environment; and this from Ornstein, a well‐known conservative scholar at the American Enterprise Institute. (Other recent books, including Tom Coburn’s Debt Bomb, spread the blame around more evenly). Whether in the end you share Mann and Ornstein’s views or not, you’ll learn from the detailed discussion of the details behind our political impasses. A good sifting‐and‐winnowing candidate.

2. U.S. Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, U.S. Government Printing Office, 2011.
Three reports in one – the majority report and two minority reports. Well written, lots of details, and – free! At least the pdf version.

1. Of course, the Wisconsin Real Estate Viewpoint! Read it. Know it. Live it.


For previous other recommendations from Steve's Reading for Life list, click here.

Innovator award recipient Michael Ashner shares career insights with students

As part of our Meet Our Current Students series, first-year real estate MBA student Jordan Denzer reports on the fall presentation of our Innovator Award.


Michael Ashner, Chairman and CEO of Winthrop Realty Trust received the Real Estate Club's Innovator Award at its first official meeting of the Fall 2011 semester on September 23rd at the Pyle Center. Truly an innovator in the real estate industry, Ashner was chosen for the award for founding the first ever group of tender offers for publically traded real estate companies.

Serving as the Chairman and Chief Executive Officer of Winthrop Realty Trust since 2004, Ashner's company acquired over $12 billion of real estate, including 85,000 apartment units, 50 million square feet of office, retail, and industrial assets and 1,000 hotel rooms. Ashner also served as the Chairman and Chief Executive Officer of Winthrop Realty Partners, L.P., a vertically integrated property management firm, since 1996. Winthrop Realty Partners has managed more than 500 limited partnerships, of which in excess of 50 were publicly reporting with over 100,000 investors, as well as five publicly traded REITs.

Graaskamp Center Executive Director Michael Brennan began the evening's discussion by citing Alexis de Tocqueville's statement, "we bear the mark of our origins" and asked Ashner to discuss his roots and his career progression to where he is today. Ashner began by saying that after he received his undergraduate degree in philosophy from Cornell, he quickly "realized a need to eat and to have shelter," so he decided to pursue his JD at the University of Miami.

Ashner initially worked as an attorney in corporate securities, where he learned about REITs and real estate syndication. This experience eventually led him to leave the legal professional and become a buyer of failing real estate syndications. He quickly learned how to value real estate and the nature of how markets ebb and flow. Ashner said he does not believe in efficient-market theory, "Value investing is a proposition in which the investor is betting against the generally held beliefs of other investors, as indicated by their actions in the market. If you think where you are is correct, and you've done the valuation, then make the bet."

He also discussed the difficulties in the valuation effort, stating that valuations will always be wrong because no one can accurately forecast value. Despite all number crunching and scenario analyses, "if a butterfly burps in China, then your Argus evaluation is going to be wrong."

Ashner's candor and insight was both captivating and instructional for students and staff alike. The Real Estate Club thoroughly enjoyed his visit and we are proud to have been able to present him with the Innovator Award.

The Innovator Series Award was conceived from the paper entitled "The Wisconsin Program in Real Estate and Urban Land Economics: A Century of Tradition and Innovation," written by Stephen Malpezzi, Chair of the Real Estate Department. The paper's central theme is that a rich history cannot be established without continually implementing innovation. Previous recipients of the award include Nicholas Billotti of Turner Construction, Laurence Geller of Strategic Hotels and Resorts, David Brain of Entertainment Properties Trust and Hersch Klaff of Klaff Realty.

Jordan Denzer is a first-year MBA student in the James A. Graaskamp Center for Real Estate. Jordan arrived in Madison from Dallas, where he previously worked in the benefits administration field for CONEXIS. He obtained his BBA in International Business from Stephen F. Austin State University.

Remembrance for Mason Carpenter

by Stephen Malpezzi, Department Chair, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

We in the Real Estate Program join the rest of the UW community, his family, and many others, in mourning the passing of our friend and colleague Professor Mason Carpenter.

As many readers of this posting know, Mason was Weikel Professor of Leadership in our school’s Management Department. Academically, Mason a prolific scholar, one of those unusual individuals who publishes both in the top research journals in his field like the Academy of Management Journal, and who simultaneously write the textbooks that interpret that latest research for students and the business community. A master teacher, Mason’s enthusiasm for his subject was evident to his friends on the faculty as well as to the many students he touched.

A true believer in a boundary-free UW and “lifetime learning,” Mason liked to open up his teaching beyond the classroom to anyone who would take a little time; the second best way to remember him is to have a look at some of his teaching materials that he thoughtfully posted here and here.

Here you’ll find a wealth of practical and experiential material, on topics like how to build a more productive network, effective mentoring, and deeper ways of thinking about diversity. Those of us who teach will find material on how to be a better teacher. Mason was a great producer and collector of multimedia; the websites will connect you to many of his own lectures on YouTube as well as lessons from clips from Dr. Strangelove, Glengarry Glen Ross, and of course The Onion.

So, what’s the best way to remember Mason Carpenter? I can think of no better way to honor Mason’s love of learning than to consider contributing to his children’s education. A fund for the future educational expenses of his sons Zachary (13) and Wesley (9) has been established. Donations may be directed to the Carpenter Family Fund, M&I Bank, 7447 University Ave., Middleton, WI 53562.

"The Calculator"

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

In the midst of all the to-ing and fro-ing over Hewlett Packer's boardroom issues, it's nice that yesterday's FT contained a paean to the HP 12-C, on the iconic financial calculator's 30th anniversary. (Handheld device that remains a must-have, Financial Times, 9/22/11)

Sherlock Holmes used to refer to Irene Adler as simply "The Woman."

Readers of a certain age -- who cut their teeth, as I did, on their trusty K&E slide rule, and punching cards in the middle of the night for a mainframe -- will understand why for thousands, the 12-C is still "The Calculator." It's a modest little gadget, roughly the size of a larger smartphone, but it gave us hand-held power and reliability that used to require signing up to a computer services bureau.

I'm an Excel freak now, and rarely turn my calculator on in anger. But for quite a while, anything important in Excel was also checked using my HP 12-C.

One morning a decade ago, I found that I had dropped my beloved 12-C under my equally beloved La-Z-Boy the previous evening; and some heavy rocking had put a deep curve in the case. To my astonishment, when I turned the deformed unit on, except for a switch to European notation (which wouldn't turn off), everything else continued to work. My trusty 12-C gave two more years of service, before the battery died and the twisted case made it impossible to change the battery.

With regret, I replaced it with a HP 17-BII. Why? Because many students couldn't follow my examples while using Reverse Polish Notation. (If you know what RPN is, you also know that to know RPN is to love it).

The 17-B can switch from RPN to "regular" algebraic logic, so I can help students one minute and go back to RPN the next.

But it's not the same. I'll bet HP's beleaguered stock gets a little pop this month from a few thousand of us giving into our nostalgia and buying another 12C.

Chart(s) of the Week: Housing Starts Redux

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

A few weeks ago, when I inaugurated Chart of the Week, we looked at U.S. housing starts using annual data from 1890 to 2010. There is usually more than one way to design a chart, especially for such a key data series. I promised then to do a follow-up with more about starts, and here we are. We’ll use this opportunity to highlight three important elements of charting data: (1) re-expression; (2) periodicity; and (3) seasonal adjustment.

First, re-expression. Two friends -- Nino Pedrelli and Ann Danner -- asked how the key chart would look if we made an adjustment for the changing size of the U.S. population. In 1890, US population was about 63 million; and with average household size of about five, we had about 13 million resident households. Today's population stands at about 310 million, or with a household size of 2.6, about 118 million households.

Let's look at the simple transformation of our annual housing data we presented two weeks ago. (Take a look at that chart first, to refresh your memory.)

Today’s first chart simply divides the annual number of total housing starts by the number of households in the U.S., represented by the thick blue line and the first y-axis. In the starts chart from our first posting, prewar housing starts of half a million to a million didn’t look terribly impressive compared to the postwar starts ranging between 1-2 million and above (until recently). But compared to the number of households, in today’s chart, we see that the 20s were a real boom and bust.


Part of the reason for the relatively high rate of starts many decades ago was higher population growth. Today’s Figure 1 also shows the annual rate of population growth, using the red line and the second y-axis. Pre-Depression U.S. population growth usually ran at 1½ to 2% per year, quite a bit higher than today's 1%. (Note also the decline in population growth during the Depression, and the big one-time shifts in resident population associated with movements to and from overseas during the World Wars). Other factors, not addressed directly in the chart, include changes in the rate of depreciation of typical units, rising incomes and concomitant demand for larger and better units, geographic mobility, and the fact that average household size was declining more rapidly a century ago than it’s declining today.

Next let’s look at the issues of periodicity and seasonal adjustment. Many basic real estate and economic indicators come with varying “time signatures,” e.g. annual, quarterly, monthly and so on. We looked at annual starts before partly because annual data are available for the longest time span, back to 1890. Monthly housing starts data for the U.S. are available after 1959. These are available both as seasonally adjusted, and unadjusted.

Figure 2 presents both these monthly series starting in 1987. We start in 1987 instead of 1959 here simply to allow the reader to see patterns within years more clearly.


Seasonal adjustment arises because when we look at one month (or quarter) of data and compare it to the previous period, we often wish to somehow account for regular and fairly predictable changes in certain months or quarters. For example, weather affects construction – more new houses are started in May than in January for obvious reasons (at least in Wisconsin).

Many time series, then come two ways – seasonally adjusted (often expressed at annual rates), or not seasonally adjusted. The seasonal pattern in Figure 2 is obvious, with unadjusted starts spiking in April or May of most years, hitting low points in December and January.


Figure 3 presents the seasonally adjusted data all the way back to 1959; and our final chart combines all three elements by presenting monthly housing starts per 1000 population.


Two key results are evident from Figure 4. First, we see a declining trend in starts per capita over the last 50 years; this trend remains even if we omit the last few years of data. Second, even after accounting for this trend, recent housing starts are the lowest that we've observed per capita since collection of the monthly data began in 1959.

Are interest rates low enough to get the housing market moving again?

Yesterday, Madison's Channel 3000 News interviewed Professor Stephen Malpezzi on the outlook on the housing market given historically low mortgage interest rates. (Homebuyers Take Advantage Of Low Mortgage Rates, Aug 19, 2011 - video embedded below)

While the added incentive will likely pickup the housing market, experts don't expect it to be enough to pull the U.S. out of its slump."Getting employment back up is going to have a lot to do with getting that housing market problem healed and getting us back on track," said Steve Malpezzi, a business professor at the University of Wisconsin-Madison.

Professor Morris A. Davis was interviewed on Wisconsin Public Radio on Monday (Mortgage Rates Drop, But Getting a Good Rate Can Be Tough, Aug 15, 2011 + audio): while mortgage rates have reached record lows,

Morris Davis, Associate Professor in the Department of Real Estate at UW-Madison's School of Business, says there's a catch, "It's harder to get a mortgage than it used to be. Underwriting standards are much more strict than they were just a few years ago."

However, (from Channel 3000)

What Malpezzi does caution against right now is flipping a home. He said home values are still fluctuating and could even dip, so it would be difficult to buy a home, fix it up and sell it for a profit within a couple of years.

Comments on the economy

It's been an active few days and weeks for economic developments around the world, and everyone wants to know what it all means. Experts on all sides have been weighing in.

Paul Krugman's Sunday column "Credibility, Chutzpah and Debt" has generated a lot of buzz in the media and blogosphere. Associate Professor and Graaskamp Center Academic Director Morris A. Davis says he agrees with about two-thirds of the article.

[And] Neither do market participants ... Treasury yields fell today! So the decline in stocks is about risk or a revision on future growth expectations. (I don't agree with Krugman's assessments that our budget problems are so painlessly fixed).

Davis also notes that the S&P is down nearly 17% in the past 2 weeks which may signal the start of Europe's (2nd) financial crisis and wonders if the big European banks are insolvent.

The housing market continues to depress the U.S. economy ("Why the housing market is still dragging down the recovery," Washington Post, 8/9/11)

A weak housing market can have other adverse effects, too. Some 28 percent of homeowners with a mortgage owe more than their property is worth. That’s bad for obvious reasons—those homeowners are more likely to default and be foreclosed on—but it can also hurt economic output, if it prevents people from moving to take jobs. “A homeowner who is underwater might hesitate to take an opportunity in a different location, because they’d have to move and write their bank a check at closing,” says Morris Davis, an associate professor of real estate and urban land economics at the Wisconsin School of Business—though, he cautions, this effect still isn’t entirely visible in the data.

Beyond wondering about the big picture, the next question people are asking is what does it mean for consumers? See "Downgrade on US debt could translate into higher interest rates on credit cards and mortgages" from yesterday's Washington Post.

And just like a lower consumer credit score implies that a borrower is a less reliable, a lower credit rating for government bonds implies there is more risk involved in lending money to the government.

Prices for U.S. government debt rose in the first few hours of trading on Monday, a sign of increased demand despite the downgrade. But it is unclear what will happen in the long term, because of the unprecedented nature of the lower rating and the decisions by Moody’s and Fitch to keep their highest ratings for now.


S&P’s downgrade may have several implications for homeowners.

For starters, early Monday S&P downgraded the credit ratings of mortgage giants Fannie Mae and Freddie Mac, which are both backed by the U.S. government. That could mean higher mortgage rates for new borrowers.

Variable rate mortgages and home equity loans could become more expensive as well.

The high failure rate for adjustable rate mortgages during the housing meltdown means that today the number of new home loans with adjustable rates is minimal — less than 5 percent of the market, according to Stephen Malpezzi, an economics professor at the University of Wisconsin Business School who follows the housing market.

But Malpezzi still has concerns. Consumers should be aware--even in the best of times, but especially now--of the terms of their financial contracts like mortgages and credit cards. "An amazing number of people don't even know if they have an ARM or a fixed rate," said Malpezzi.

Start with these questions from the Associated Press's article "How to learn if the US downgrade could affect you"

Do you have a fixed-rate mortgage or an adjustable-rate mortgage? What might cause your interest rate to change? How often could it adjust? And what about your credit cards? Do they have a fixed or variable rate?

Research shows many people can't answer these questions.

Consumers need to check the fine print of mortgage documents and credit card agreements.

Here are some questions to ask as you try to assess whether your loans could be affected by the market turmoil:

• Can my interest rate increase?
• What benchmark or index is my loan or card tied to?
• How much might my monthly payments increase?
• How many times per year can my rate adjust?

Davis does see a glimmer in the unemployment figures.

...unemployment rates among professionals remain much lower than the overall unemployment rate. The nation's jobless rate was 9.1% overall in July but 4.7% for management, professional and related occupations, according to the Bureau of Labor Statistics.

That relatively strong job market for professionals bodes well for developers building upscale apartments, said Morris Davis, University of Wisconsin-Madison associate professor of real estate.