2012 Wisconsin Real Estate and Economic Outlook Conference

Building A Housing Policy That Works.

This year’s Economic Outlook Conference will be held on June 1st, 2012 at the Fluno Center in Madison, WI. With budget battles looming and the presidential election already in full swing, 2012 is sure to have monumental implications for housing policy. Unfortunately, developing and advancing bipartisan solutions to fix the nation’s ongoing housing challenges have proven difficult in today’s highly polarized political environment. But housing is not only a basic human need—it is also a critical element of our economy. Now more than ever is the time to take a fresh look at this issue.

This conference will present varied perspectives and analysis on current issues while stimulating ideas on how to spur the housing market and get the U.S. economy back on track for solid growth. Those involved include experts from the public and private sectors who are involved in government, business, and academia—all of them are on the front lines of housing market research, policy, and practice.

Featured speakers for the event include:

Karl “Chip” Case: Chip is the Co-Founder of the S&P/Case-Shiller Home Price Index and Professor Emeritus of Economics at Wellesley College. He is author or co author of five books, and is renowned for his contributions to the economics of housing and public policy.

Lawrence Yun: Lawrence Yun is the Chief Economist & Senior Vice President of Research for the National Association of Realtors®. He has been listed among the top 10 economic forecasters in the country, and has been named among the 100 Most Influential Real Estate Leaders.

Please click here for the conference agenda and more information. To attend, you can register online here.

Housing-Urban-Labor-Macro (HULM) conference explores causes and consequences of the housing crisis

The University of Wisconsin-Madison has long been known as a leader in research, including cutting-edge explorations of housing and economic issues conducted by the UW-Madison real estate faculty. Compelling real-life problems challenge these leading academics to find unique solutions for improving our urban environment worldwide.

In March, the UW real estate faculty joined their peers in sharing the findings of their research at the sixth Housing-Urban-Labor-Macro (HULM) Conference, held at the Federal Reserve Bank of Boston. This biannual conference was first held in the fall of 2009 and is now well known for facilitating the presentation and discussion of some of the most impressive real estate and urban research conducted by leading academics from around the world.

"We organized the first HULM conference in an effort to create a new venue for the rapidly growing field of real estate research," says Professor and Graaskamp Center Academic Director Morris A. Davis. "Our partnerships with the Federal Reserve Banks in Atlanta, Chicago and St. Louis have helped us widen our audience and bring this research to the people who will benefit the most from it."

The spring 2012 HULM conference was organized by Professor Erwan Quintin, a former senior economist and policy advisor at the Federal Reserve Bank of Dallas. "A unique aspect of this event is the collaboration it fosters between academic researchers who study optimal policy responses to various real estate events and the very people who implement these policy responses," says Quintin. "This includes not only Federal Reserve economists but also researchers from government-sponsored agencies."

As has been the case for most HULM meetings to date, the causes and consequences of the foreclosure boom emerged as the dominant question at the Boston Fed event. Among other presenters, Kyle Herkenhoff discussed the effect of foreclosure delays on the length of unemployment spells, while Paul Willen proposed a new and improved way to measure the effect of foreclosed properties on the value of neighboring homes.

Stijn Van Nieuwerburgh, for his part, argued that the deterioration of underwriting standards is the most likely explanation for the recent boom-bust cycle in home prices. That presentation prompted a very lively debate on what caused this deterioration in the first place. Two possible explanations are a regulatory environment more tolerant of risky mortgages around the turn of the century and the effects of increased demand for the investment grade paper created via mortgage securitization.

Urban economics questions also received their fair share of attention, with several presentations devoted to explaining why observationally similar people tend to earn very different amounts in different cities. Gilles Duranton, for his part, discussed a new approach to measure the speed with which urban costs rise with city size.

At the end of the two-day conference, Quintin says he feels the goals of presentation and collaboration were well met.

"HULM is a unique opportunity for economists around the world who study real estate questions to exchange and debate ideas," Quintin says. "Research ideas are born or become more mature at HULM, new co-authorships are formed, and new policy proposals emerge." Davis echoes this sentiment, saying, "When you have 40 people in a room that are all experts, we are able to learn from listening to what people we don't typically interact with have to say."

The next installment of the conference will take place at the Federal Reserve Bank of Chicago on October 5-6, 2012.

Reporting from MIPIM: Who will "win" in distressed investing in Europe?

Reporting from MIPIM on Wednesday's session on Private Equity: European Distressed Investing

The latest European credit crisis has created an interesting scenario involving apprehensive real estate private equity investors and deleveraging commercial banks. The facts are clear: large European commercial banks will be forced soon to unload billions of dollars of real estate debt from their books due to tightening regulations (Basel, Solvency, etc.) in the near future. There is enormous pent-up demand among investors for these assets, with current fundraising in the tens of billions of dollars.

This would seem to represent a significant opportunity but so far, European banks have been reluctant to shed real estate assets at “fire sale” prices. Will supply loosen up to meet this demand? And what will it take?

In the heat of the crisis, European investors fled to core assets. The investment focus was on gateway cities such as London, Paris, and Frankfurt. Now, many feel core assets in these locations are over-valued, reaching yields as low as 3-4%. So this area does not currently present significant opportunities in Europe.

An interesting side note to this situation is the relative outlook by European vs. U.S. investors. U.S. investors seem to be far more pessimistic on the future of Europe than are European investors. European optimism is based in knowledge of the history of their markets, and confidence in the structures in place to fix the current crisis. So does that mean American investors may miss out on deals on distressed assets?


For more coverage of discussions and developments at MIPIM, check our blog and visit the official MIPIM blog. And follow us on Twitter (@UW_GraaskampCtr) and on Facebook.

What's next for the economy?

The Graaskamp Center publishes a monthly newsletter on issues and events in the real estate industry and UW real estate community. The January 2012 issue includes this look at the year ahead by members of our faculty and executive Board of Advisors.


With 2012 upon us and a presidential election fast approaching, many of us are trying to make sense of economic news and data that alternately points to a potential stabilization and recovery or to a double-dip recession and a global debt crisis. What should the next administration do about to support economic growth? And how will the spill over from the debt crisis in Europe impact the U.S. economy now and in the future?

To get a better idea of what to expect, we asked a panel of Graaskamp Center board members and our own faculty experts to share their insights and wisdom on these important topics.

David Neithercut, President and Chief Executive Officer (CEO) and a Trustee of Equity Residential, assumed the CEO title on January 1, 2006 and has served as President since May of 2005. From January 2004 to May 2005 he served as Executive Vice President of Corporate Strategy, leading the company's Transactions, Portfolio Management, Development, Condominium and Research groups. From 1995 until August 2004, he served as Equity Residential's Chief Financial Officer. In this role he was responsible for all of the company's capital market activities and participated in debt and equity offerings as well as merger and acquisition activity with a combined value in excess of $10 billion. Mr. Neithercut is a member of the Board of Directors of General Growth Properties (NYSE: GGP), a leading owner and operator of shopping malls.

Timothy Riddiough is the E.J. Plesko Chair of Real Estate and Urban Land Economics, Director of the Applied Real Estate Investment Track (AREIT), and Professor of Real Estate at the Wisconsin School of Business. He teaches courses in Real Estate Finance, Real Estate Capital Markets, and Microeconomics and is best known for his research on real options, mortgage pricing and strategy, and land use regulation. Professor Riddiough is best known for his work on credit risk in mortgage lending, mortgage securitization, real options, REIT investment and corporate finance, and land use regulation.

Michael Robb is Executive Vice President for the Real Estate Division of Pacific Life Insurance. He joined Pacific Life in 1976 and after holding a variety of executive positions with the company, Mr. Robb was elevated to his current position of Executive Vice President of Real Estate Investments in January of 1995. He is responsible for managing a real estate portfolio of commercial mortgage loans, commercial mortgage backed securities, unsecured REIT debt, equity real estate, and servicing portfolios of over $19 billion dollars.

David Shulman is Adjunct Professor and Advisor to the Applied Real Estate Investment Track (ARIET) for the Graaskamp Center for Real Estate. He is also Managing Member of David Shulman, LLC. Shulman was formerly a REIT analyst and managing director at Lehman and was employed by Salomon Brothers, Inc. in various capacities. Professor Shulman has been widely quoted in the national media and coined the terms "Goldilocks Economy" and "New Paradigm Economy." In 1990, he won the first annual Graaskamp Award for Excellence in Real Estate Research from the Pension Real Estate Association.


Question: Since becoming President, Barack Obama and his administration have implemented many fiscal/economic programs and initiatives to jumpstart the U.S. economy. In your opinion, what were the actual results of these programs? Have they helped or hurt the economy?

Neithercut: I think that much of what took place at the onset of the financial crisis was necessary to avoid a total collapse of the global financial system. The government did what it needed to do to stop the problem. From that point forward, I think the government's programs have not harmed nor helped but have been totally ineffective and is a pretty clear example of the government impeding the market's ability to right itself.

Riddiough: At the macro level, results have been mixed at best. Let me focus on one of his particular initiatives, as it illustrates what I believe has been Obama's biggest problem with managing the economy. His whole approach to addressing the foreclosure crisis, although well intentioned, has been confusing and inconsistent. Worse, it has been ineffective and has created additional uncertainty in housing and banking markets. Ineffective and inconsistent policies have created additional uncertainty in an already very uncertain economy.

Robb: I have seen no result whatsoever. There is the Canadian shale fracking project "shovel ready" which would create thousands of jobs which he and the environmentalists won't approve. The housing fix or lack thereof is a joke and he still does nothing but blame the Republicans for the mess we are in.

Shulman: The initial stimulus marginally helped, but the whole notion of "timely, temporary and targeted," is very difficult to implement. Moreover too much of the spending represented the accumulated wish list of the House Democrats. Indeed the support for state and local government probably hurt because it delayed the ultimate restructuring that has to take place. The biggest failure is that "reform" is the enemy of economic growth in the short run. As a result the healthcare legislation likely slowed the economy along with all of the uncertainty associated with the energy bill that failed in the Senate.


Question: Given the current state of politics and the economy, what should Obama or the next administration do to improve and stabilize the economy? In other words, where do we go from here, and how do we avoid making the same mistakes in the future? Please outline three or four points that you feel are most pertinent to you as a real estate professional or to the real estate industry in general.

Neithercut: The answer to our problems can be found in economic growth. We can't tax our way out of it and we can't spend our way out of it. Growth is the answer and I think that growth has been hampered by uncertainty on tax policy, etc. Real estate needs growth to prosper--growth in jobs, growth in income and spending, etc. Economic growth is not evil but is the means by which all else is possible. We need to facilitate credit to small business and have a tax policy that is consistent and fairly applied.

Riddiough:This is a hard question to answer because there is a big difference between what should be done in theory and what will actually get done in the current political environment. Given that the U.S. economy does not slip back into another recession, I do not expect that Obama will be able to get much done until after the next election (should he be reelected). I anticipate that only the Fed will execute policy initiatives over the next year in an attempt to improve and stabilize the economy.

Robb: Approve the Canadian shale project. Spend money to retrain factory workers for 21st century job skills. Do away with ALL tax deductions, including mortgage interest , and only keep ones that actually create jobs and finally, go to a 3 or 4 simple tax rate structure, again with virtually no deductions and exempt from taxes anyone making less than $50,000, but force people off the welfare rolls by getting them the under $50,000 jobs. A lot to ask for but would stimulate both individuals and corporations.

Shulman: Policy is trapped because we probably live in world of "Ricardian Equivalence" which means that deficits today mean tax increases and/or program cuts in the future. A new administration should be supportive of domestic energy and the Keystone XL Pipeline should go forward. A real program would include a major infrastucture expansion that would waive or fast track environmental approval and waive the prevailing wage requirements of the Davis-Bacon Act.


Question: Do you think the Europe and United States are headed toward a debt crisis? If so, how will this affect the real estate markets?

Neithercut: Is there anyone who doesn't think that Europe has a debt crisis?!? And we will have one soon if we are not awfully careful. To not learn from the mistakes in western Europe would be criminal. A debt crisis will inhibit growth and that will be very bad for the real estate markets.

Riddiough: There is already a debt crisis, and it has already shut down the CMBS market after that market had reemerged over a year ago. All very bad news. Be aware of the coming crisis in refinancing a mountain of commercial real estate mortgage debt coming due over the next five to six years.

Robb: They are not headed towards a debt crisis; they are IN ONE. Will only hurt real estate if rates go way up-right now, in this artificial low rate environment, it is actually helping commercial real estate.

Shulman: Europe is in a recession. The U.S. will escape its worst effects providing the Euro crisis does not morph into a banking crisis. Obviously a banking crisis would bring back memories of the Lehman crisis in 2008.


The Graaskamp Center's newsletter The Real Estate Connection is published monthly. You can subscribe (via Constant Contact) here.

Discussing causes and consequences of the housing crisis at the Chicago Fed

By Erwan Quintin, Assistant Professor of Real Estate at the Wisconsin School of Business

The Real Estate Department's Housing-Urban-Labor-Macro (HULM) conference took place this weekend at the Federal Reserve Bank of Chicago. The conference, a bi-annual event founded three years ago by my colleague Morris A. Davis, brings together individuals who are pushing the frontier in all aspects of real estate research. It is now recognized in academic circles as one of the premier events in urban and housing finance research.

As one would expect, much of the event focused once again on the causes and consequences of the recent housing crisis. No fewer than three competing explanations were proposed for the run-up of home prices until mid-2006 and their sharp collapse thereafter: the unintended consequences of the toughening of personal bankruptcy statutes in 2005, the role of speculators on the way up and the way down, and plain-old herd behavior. A session -- highlighted by presentations by UW's own Randy Wright and Morris Davis -- discussed the impact of inflation on housing investment and prices. Several papers also took on standard themes in urban research: Why do productivity and wages differs so much across cities? What accounts for patterns of trade across cities? Details and papers are here.

A unique aspect of this event is the collaboration it fosters between academic researchers who study optimal policy responses to various real estate events and the very people who implement these policy responses, including not only Federal Reserve economists but also researchers from government-sponsored agencies (GSA). The next installment of the conference will take place at the Federal Reserve Bank of Boston in March 2012.

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.

Charts of the Week, Mark II: A Quick Look at the Federal Budget, Past, Present and Future

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

Yesterday we started a new feature, "Chart of the Week," with a bellwether chart on housing starts over six decades.

Last night, while watching President Obama, Speaker Boehner, and many others opine on our fiscal situation and the debt ceiling, I was moved to re-consult two charts I've used in class recently.



The first chart shows history: it looks at actual outlays and receipts as a share of GDP, annually, from 1950 to 2010. From this we see we have the largest deficit since WWII, because we've managed to combine the highest spending since WWII (Medicare, Medicaid, two wars, "stimulus,"... with: the lowest revenues, as a share of GDP (thanks to the deepest recession, large tax cuts, and a complex set of tax expenditures that beggar belief).




The second chart is a forecast: it shows CBO projections of what would happen to major elements of the budget if past trends in health costs meet the aging boomers. Like all forecasts, in fact more than most, this is a "what-if;" personally I don't think we'll ever see such an untrammeled increase in national income devoted to Medicare/Medicaid in 40 years, but it does tell us we have work to do to fix it. Note also the scary rise in interest paid is despite very conservative assumptions about interest rates, assumptions that may be blown out of the water very shortly.

Presumably our political leaders on both side of the aisles know about these charts. But you wouldn't know if from their recent statements and (lack of) actions.

Our blog presents a range of viewpoints, and you should know that our faculty have a range of views on exactly how to close these gaps. These are not simple questions.

But there is no disagreement on the basic facts in these two charts.

There are lots of ideas out there about how to tackle the deficit issue. My personal views run more along the lines of the Rivlin-Dominici and Bowles-Simpson plans, because Chart 1 reinforces my own view that both revenue increases and spending cuts will be required within a few years to fix this.

What revenue increases, what spending cuts? There is no shortage of ideas and info out there; I have learned from the Brookings Institution as well as our friend Menzie Chinn's (and James Hamilton's) Econobrowser, one of the best macro blogs.

In fact, this morning I noticed that Menzie has a recent entry presenting a version of our first figure (quarterly, with a slightly shorter time span).

Don't like the plans out there? Build your own! The Congressional Budget Office offers "Reducing the Federal Deficit: Spending and Revenue Options" with details, including good estimates of savings, of over 100 options. Last year I assigned my undergrad class the task of building their own plan from this source; feel free to turn your own plan in to me for grading!

Until recently, I thought we had some time to rein the deficit in, though we faced a version of Zeno's paradox: we have to start sometime. The urgency of this posting was originally because of the looming impact of the Federal debt ceiling. This could have extraordinarily serious effects on the economy and on real estate markets. Bertrand Renaud, my good friend and former World Bank colleague, recently pointed me towards "Mortgage Professor" Jack Guttentag's take on this.

But recent reports from the ratings agencies suggest I was too sanguine about the timing of a credible deficit reduction plan, and that a downgrade could come soon; see

Debt Drama Blocks Out Big Picture on Credit, NYT DealBook, 7/25/11

or

Downgrade Threat Looms, WSJ, 7/26/11 (subs required)

Frankly, I'm worried. Bond markets (and stock and real estate markets) could be facing big hits very fast from a default on U.S. debt, "technical" or not, and a rating agency downgrade would be serious stuff even in the absence of default. You've probably heard the current saying, "If you liked September 2008, you'll LOVE August 2011."

Let's shortcut that prediction. We need to put the heat on Congress and the Administration to get a deal done to preserve the U.S.'s credit standing. Now.

Home-Price Outlook for the Year

The Wall Street Journal today published the results of a survey of economists and housing analysts conducted earlier this month by MacroMarkets. Among those surveyed was Abdullah Yavas, professor of real estate and urban land economics at the Wisconsin School of Business.

The quarterly survey shows how attitudes for a housing recovery have soured: Last June, economists expected prices would gain by 1.3% this year. “The sentiment among our expert panel regarding the U.S. housing market outlook continues to deteriorate,” said Robert Shiller, the Yale University housing economist who co-founded MacroMarkets.

Around one-third of panelists expect home prices to increase in 2011. Bill Cheney, chief economist of John Hancock Financial, and Abdullah Yavas, and professor of real estate at the University of Wisconsin, are calling for a 3% annual gain.

"No Home-Price Recovery This Year," WSJ, 3/22/11

Distressed or distressing investments? MIPIM 2011

Reporting from MIPIM 2011:

Distressed or distressing is the question in investing these days. However, the market's worst fears of massive default did not come true. And the bulk of distressed assets have appreciated enough during the recovery of the last twelve months to remove themselves from the distressed category before any workouts were required. The optimistic view is that the worst is over.

But while things appear better to those in the know, the public at large still does not know where many banks' balance sheets stand. Further, it is very possible that there are more faltering property owners who are trying to keep their status under wraps. The lack of transparency is an impediment in determining whether we are truly in the clear yet.

Roubini on the recovery: the glass is half full AND half empty

The outlook on the global economic recovery is mixed, best described as a glass half full and half empty, at the same time, says Dr. Nouriel Roubini is his keynote address on Thursday at MIPIM.

Here are the pluses, the strong and important factors driving optimism today: Not only have we seen positive growth but accelerated positive growth in the last few months. Risks of default in euro zone and double-dip recession are decreasing. The balance sheets of high-grade companies in the US and Western Europe are strong.

But there are minuses, too, macro uncertainties driving pessimism: mid-east turmoil and its effects on oil prices; problems from public debt and foreign liabilities in the private sector; and significant problems in the U.S. including high unemployment and modest job growth, risk of a double dip in the housing sector, and significant deficits at the state and local levels.



After this and three days of meeting and greeting and listening and learning, how are you feeling about the global recovery? Is your glass half-full or half-empty?

Our coverage of the rest of Thursday's sessions at MIPIM will continue. Plus we'll have the wrap-up keynote presentation by Prof. François Ortalo-Magné on Friday.

Rocky and rolling recovery at MIPIM 2011

Reporting from MIPIM 2011 Day 2:

Recovery from the global financial crisis took hold in early March 2009, when US central bank told the world that they will make sure the financial market would not crash, said economists on Wednesday's keynote panel on economics and the road map to the future.

Interest rates are as low as the can go, and inflation also quite low, meaning that real rates are very low. The natural course of events is a very strong economic upswing that will grow in strength over time (though not stronger than 2010). But increases in interest rates and oil prices are needed in order to slow down the now rapid economic expansion in the westerns world.

Real estate will benefit from the recovery because real estate is generally highly correlated to the broader economy. But real estate investors are still nervous. Real estate was an attractive asset class in the years leading up to the crash, and it still is really, notwithstanding the full impact of Solvency II which remains to be seen.

The sleeping tiger is massive government debt that will have to be addressed with higher taxes and lower spending which have a particularly negative affect on the recovery, already on a "rocky road."


We'll have more from Day 3 at MIPIM a little later today here on the Viewpoint and on Twitter @UW_GraaskampCtr.

Stay connected with the Wisconsin Real Estate Program, long after MIPIM, by connecting with us on Facebook.

MIPIM 2011: Balancing risk, regulation and recovery

Wisconsin Real Estate reporting from MIPIM 2011--on the afternoon session "Toward a Better Investment Marketplace: Reporting, Regulation and Risk" led by IPD (UK) Chairman Rupert Nabarro, addressing one of the official themes of this year's conference Finance: Beyond the Credit Crisis:

Much has been discussed about the role that lax regulation and excessive risk-taking played in the financial crisis of 2008. Today at MIPIM, a distinguished panel of experts continued that discussion with respect to the role of regulation and risk avoidance in the real estate marketplace.

While greater transparency is important, could new regulation hurt a fragile recovery? There was no doubt that new Basel 3 capital requirements and Solvency II regulations will have significant impact on real estate investment. Further complicating matters is overlapping and conflicting EU-level and country-level regulations.

The likelihood exists for markets to overheat again and mistakes to be repeated, but it would seem unlikely for the unique circumstances of 2008 to resurface, with or without new regulation.



Video via MIPIM World. For more coverage from the day's sessions, bookmark our blog and visit MIPIM World.

Fostering collaboration

On March 4th and 5th, Wisconsin Real Estate faculty members Stephen Malpezzi, Tim Riddiough, Morris A. Davis and Erwan Quintin attended the fifth installment of the UW-Fed Housing-Urban-Labor-Macro (HULM) conference at the Federal Reserve Bank of Atlanta.

The conference, a bi-annual event founded three years ago by Morris Davis, brings together individuals who are pushing the frontier in all aspects of real estate research. The first part of the conference focused on the causes and consequences of the recent subprime crisis and on the effects of various policy responses to the crisis. The second part of the conference dealt with cycles in the market for land and structures. Details and papers are here.

A unique aspect of this increasingly successful event is the collaboration it fosters between academic researchers who study optimal policy responses to various real estate events and the very people who implement these policy responses. The latter include not only Federal Reserve economists but also researchers from Government Sponsored Agencies. One of the highlights of this year’s event was an intense debate over the merits of loan modification policies motivated by a unique study of Countrywide’s court-imposed modification program.

The next installment of the conference will take place at the Federal Reserve Bank of Chicago in September.

Photo by Lance McCord via Flickr

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, WisPolitics.com and WisBusiness.com. 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.

2011 Wisconsin Economic Outlook

The cover story to this month's Wisconsin REALTORS Association magazine is Stephen Malpezzi's economic outlook for the state for 2011. The recession, now "officially over", was not felt equally across the country; Wisconsin fared relatively better than some of the "really hard hit" markets in California, Nevada, Florida and others. "The national housing market has stabilized, but remains fragile," notes Malpezzi. "However, there is still potential risk from the defaults and foreclosures that much of the nation continues to experience."

What’s the Outlook for 2010 and Beyond?

The U.S. economy has a lot of inertia built into it; the good news this year is very similar to the good news from last year. GDP is growing, and with any luck, as firms exhaust their ability to squeeze more output from existing resources, employment growth will strengthen. Housing prices in Wisconsin, as elsewhere, have stopped their decline and appear to have stabilized. House prices are back in line with fundamentals, broadly speaking. We have done better than most states, though we’ve certainly had pockets of pain. The bad news is that a significant risk remains of downward overshooting, if we fail to successfully work through the foreclosure problem...We also need to keep a close eye on interest rates, and some of their fundamentals; for the long run, we need to get our fiscal house in order.

Click to read the full article and Malpezzi's recommendation for further reading.

For more from Wisconsin Real Estate faculty and their response to the economic crisis, visit our website.

"The Big Bank Theory"

This is probably one of the hottest video clips watched in central banks around the globe. When asked about it, Abdullah Yavas, our central bank insider and voting member of the Monetary Policy Committee of the Central Bank of the Republic of Turkey, commented "Central banking is about expectations management, and credibility is one of the most crucial assets of a central bank in managing expectations. It takes years to build credibility, and a wrong policy to destroy it."

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
The Big Bank Theory
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MIPIM Asia 2010: Keywords redevelopment and sustainability

Wisconsin Real Estate is participating in MIPIM Asia 2010 this week in Hong Kong. In the first day of the conference, keywords that have already emerged are "redevelopment" and "sustainability."

Asia as a whole offers attractive investment opportunities and returns in a global economy still in recovery. Growing urban areas in China and other countries are ripe for redevelopment to meet the needs of the 21st century with an emphasis on green building techniques and "livability."

China remains the primary magnet for capital in the region with second tier cities commanding more attention as top tier cities heat up. Other markets also attracting interest include Vietnam, Singapore and Tokyo.

The U.S. economy has not been a top topic of conversation so far. However Nobel laureate in economics Professor Joseph Stiglitz is due to deliver a morning keynote address on Thursday on his thoughts on the U.S. and global economies and the outlook for recovery.

Wisconsin Real Estate is at the show conducting a survey of conference participants' investment targets and concerns and their opinions on investment prospects over the next 2-3 years. Results of the survey will be presented by Professor Francois Ortalo-Magne at the wrap-up keynote on Friday along with Nick Axford, CBRE Hong Kong.

Economics and elections

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

One of the goals of my urban economics classes is to demonstrate how we can use economics, and data analysis, to understand a range of events in real estate markets, in cities, and in our society more broadly.

Tomorrow's midterm election provides us with a great set of teachable moments. I'm using the effect the economy can have on the election to illustrate some basic techniques of data analysis, critical thinking, and "storytelling;" and, as always, how "Reading for Life" can help us make sense of the world.

Today, I'd like to share just a few of these points, focusing less on the data analysis techniques and more on some interesting stylized facts and research results (mainly results from other people's research).

While much debate surrounds causes, timing, and attribution, the objective fact is that, by some measures, the economy is in the worst shape since the Depression. The next two figures show how two indicators, growth in GDP per capita and inflation, fared during the terms of the postwar presidents since Truman. (The data go back to 1947 and so the early part of Truman's term is omitted. The data run through Q2 of 2010, so the last few months of the Obama administration are also omitted). Let me start with two indicators that previous research has tied to electoral performance.FIGURE 1. President Obama, so far, has faced a lower growth rate of GDP per capita than any other postwar president. Of course, it's early days, and whatever our partisan leanings, we all hope for better performance in the next two years. Nevertheless, the anemic performance of GDP growth is a challenge for Democrats (who, of course, also control the House and the Senate, at least by the simple definitions of "control.")
FIGURE 2. On the other hand, Obama has held office during a period that's exhibited lower average inflation than we've seen during any other postwar President's term.

Are Presidents responsible for “their” economic averages?
A huge body of research argues the effects of economic policies (taxes, subsidies, deficits, regulations…) and Presidents (and other politicians) do affect these policies. However, the economy has a lot of inertia (lags) built in, and there is a lot of luck involved. (Luck, of course, can be good or bad.) Policies have their lags, too. The economy can react to the perception of future policies and uncertainty in the same. But fair, or not, there is a lot of evidence that election outcomes are affected by the performance of the economy, even over short periods.

Economist Ray Fair (Yale) has published several papers and a book about how to forecast U.S. elections according to the state of the economy. Recently he extended his work from Presidential elections (as in his book) to House elections, in “Presidential and Congressional Vote-Share Equations,” American Journal of Political Science, 53(1), January 2009, pp. 55-72

Ray Fair’s prediction of this week’s Congressional election
Fair’s model has three equations: for the Presidential vote, the “on-term” House vote, and the midterm House vote. The economic variables are derived mainly from growth in GDP per capita and inflation. Other variables include whether there is a Presidential election, and if there’s a war on. Fair’s latest forecast (10/29/10) is that the Democratic share of the House vote will be 49.2%, i.e. a razor-thin Republican majority. He doesn’t forecast Senate results.

What about unemployment?
Fair’s model shows the House vote as closer than most political pundits. The two main economic drivers in his model are GDP per capita growth and inflation. Current low inflation numbers are helping to keep it close. I think the other thing this model misses is our high unemployment and its extraordinary average duration. See the next two figures:


These are even worse than might be expected from our recent growth in GDP; see for example the analysis by the Federal Reserve Bank of San Francisco. High unemployment, and high duration, and how they are now driving foreclosures, are subjects my colleagues and I have discussed elsewhere.

Debate will continue on the efficacy of the policies of the Administration and Congress; between Republicans and Democrats; and the debate that’s always on within the parties.

Despite my PhD in economics, I’d never argue that elections are only about my favorite subject.

But objective data, and past research on elections, show that the state of the economy has an important effect on the electoral fortunes of the party in power. Fairly or not, economic conditions favor the Republicans this time around.


More "Reading for Life"

• Fair, Ray C. Predicting Presidential Elections, and Other Things. Stanford University Press, 2002.
• Gelman, Andrew. Red State, Blue State, Rich State, Poor State. Princeton University Press, 2008.
• Tim Besley's 2002 Lindahl Lecture, Principled Agents.
• William Easterly, Michael Kremerb, Lant Pritch and Lawrence Summers, Good policy or good luck? Country growth performance and temporary shocks. Journal of Monetary Economics, 32(3) December 1993, pp. 459-483.
  

Looking back for signs of trouble

by François Ortalo-Magné, Department Chair, Professor and Robert E. Wangard Chair of Real Estate

Now that the housing boom is over, it is incumbent upon us to look back for signs of trouble to which the market could (and should) have paid attention before it all got too crazy. Monika Piazzesi and Martin Schneider, both at Stanford University, propose evidence from the Michigan Survey of Consumers. The survey asks “Generally speaking, do you think now is a good time or a bad time to buy a house?” A follow-up question asks households the rationale behind their answer. These figures are reproduced (with permission) from their paper.


Allow me to point out the following key features:

• The proportion of households who thought it was a good time to buy peaked way before the end of the boom (2003Q2). The proportion at the peak was not higher than in previous booms.
• The main rationale for the good time to buy was “credit is cheap” but again with a peak in mid 2003 at a level similar to peak levels in past boom.
• What was new this time? From 2003Q2 onward, the popularity of the good time to buy answer started declining but not as fast as in past cycles because of a very unusual increase in households feeling that housing prices would continue to go up, that housing was a good investment.

Piazzesi and Schneider go on to make the point that the proportion of such optimists (called momentum traders) does not need to be high to drive prices to an unsustainably high level.

Lessons for the future should be obvious!

Reference: Piazzesi, Monika, and Martin Schneider, “Momentum Traders in the Housing Market: Survey Evidence and a Search Model,” American Economics Review: Papers & Proceedings, 2009, 99:2, 406-411

MIPIM 2010: Core is king

Wisconsin Real Estate MBAs report from MIPIM 2010:

Panel: A Year of Reckoning—Emerging Trends 2010

The Pricewaterhouse Coopers Emerging Trends in Real Estate (Europe) report 2010 highlights the fact that there is cautious optimism in the real estate market, but we should “expect a long, slow haul.” Two major problems may hinder the pace of the real estate recovery. First, concerns over the overall economy and what will happen when state aid ends. Second is the massive amount of refinancing looming in the next few years, and a concern over how this debt will be dealt with. Core is king--it is better to keep it simple. Minimizing risk is imperative; therefore, investments should focus on these core assets in large and liquid markets.

European cities with the strongest acquisition potential are Munich, Hamburg, Paris, and London, while Moscow, Madrid, Barcelona, and Dublin sit at the bottom. While the possibility for development generally remains off the table, cities with the strongest likelihood for development include Istanbul, Munich, Hamburg, and Warsaw.

For more coverage of MIPIM 2010, visit our partner CREOpoint.com.