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.

Reporting from MIPIM: Cautious optimism

The Graaskamp Center was very glad for the opportunity to contribute to MIPIM's official blog. Prof. Erwan Quintin, along with Wisconsin School of Business Dean François Ortalo-Magné, led the delegation of Wisconsin Real Estate MBA students who attended the international event. He summarized his perspective and his outlook on the week's activities in this post.

As seems to be the case every year, strong themes clearly emerged at MIPIM. First and foremost, participants are looking for signs that the crisis days are over and that investors are once again willing to accept some exposure to real estate beyond the safest, core markets. Investors also want to know which opportunistic markets will benefit the most from the recovery, if and when it comes. And they want to know what lessons, if any, the industry has learned from the crisis experience.

The broad sentiment at MIPIM this year is probably best described as “cautious optimism.” As bearish as they sound about their own markets, European investors appear remarkably bullish about U.S. prospects.

He also offered this:

A near consensus also emerged among institutional investors that the basic investment model in real estate must change in the wake of the recent financial crisis. Capital losses of historic magnitude have prompted large investors to question past practices, demand significant changes in how they interact with partners and fund managers. Investors are demanding more control over how their capital gets deployed, more transparency, and are working harder to align incentives throughout the intermediation chain. A new and improved real estate fund model should result from this phenomenon.

To continue reading Prof. Quintin's outlook, visit the MIPIMWorld blog.

Wisconsin also contributed these posts:

• A Political Perspective on the Euro Crisis: Students and faculty from the Wisconsin School of Business are attending MIPIM 2012 this week. Bashar Elayyan reports on his experiences and takeaways from Day 3.
• MIPIM: The Students’ View: The Wisconsin School of Business gears up to cover MIPIM 2012.

For more of Wisconsin's Reporting from MIPIM here on the Wisconsin Real Estate Viewpoint, click on the "MIPIM" tag.

Reporting from MIPIM: Optimism with a new vocabulary

Reporting from MIPIM: Final thoughts on the wrap-up keynote presentation to end MIPIM 2012 from one of our students:


Here we are, the final day of MIPIM. It seems that the champagne-and-caviar yacht parties have finally taken a toll on the attendees. The crowds have thinned out, my fellow Badger students and I are exhausted but ready to attend the pièce de résistance, the keynote speech by our rock star dean François Ortalo-Magné.

We had spent the previous day conducting a survey measuring the general sentiment of MIPIM attendees. Those findings coupled with the information we've been hearing and sharing during our daily debriefs, we are looking forward to the culmination of this great effort.

We met at the Le Corbusier hall, named after the famed early 20th century French architect Charles-Edouard Jeanneret. François was joined on stage by Mark Roberts from RREEF Real Estate. Mark presented raw global economic data and projections specific to the real estate sector. The graphs clearly indicate and support the idea that core holdings are a safe haven for those funds that are constantly on the hunt for high yields which is a rarity during challenging economic times.

François then amplified the buzz words we've been hearing all week which are "transparency," "alignment" and "like mindedness" of investors; this type of vocabulary seems to be a new phenomenon here at MIPM. However, they are concepts that make sense in the context of increased joint ventures which are the most secure frameworks for investors where both risk and reward are shared equally. François also highlighted the prominence and importance of sustainability and green design and mentioned the Qatari initiative as a model to be emulated. He echoed the importance of core assets in a portfolio but also suggested the premise that "core periphery assets" are a viable alternative class to hold.

Finally, the data that we compiled was presented, drum roll! It seems that the majority of attendees are more optimistic about the future. There is also little variance of sentiment data from 2011. The majority appear to be open to the idea that non-core assets are a legitimate option. Investors are split down the middle on the question regarding debt markets and whether the current state constitutes an opportunity rather than an impediment.

Today our MIPIM immersion ends, and we pass the torch to the future Graaskamp Center students. My advice to you is to enjoy and exploit every minute of your time here, it is truly a once in a lifetime experience. The day has ended; I take my last stroll on the Boulevard de la Croisette as the sun sets. As if on cue I hear the music of Edith Piaf playing in the background to bid me a proper French farewell. I’m leaving Cannes with a heavy heart because it is so easy to fall in love with the romanticism of this city. Au revoir, Cannes, au revoir. I promise to come back to see you again.

Bashar Elayyan is a first-year MBA student in the James A. Graaskamp Center for Real Estate. As an architect based in Chicago, he was involved in the design and execution of numerous complex large scale projects in the U.S., Mideast and Chinese markets. His career aspirations lie within the domains of REIT management or real estate finance and investment banking.

Reporting from MIPIM: Final wrap-up keynote presentation

Prof. François Ortalo-Magné, Albert O. Nicholas Dean of the Wisconsin School of Business, presented the findings of a survey of participants at MIPIM 2012. He and Mark Roberts, Global Head of Research at RREEF, discussed the major themes and takeaways from the week in Cannes.

For more visit, the MIPIM World blog.

Reporting from MIPIM: A "perfect storm" for investment in the U.S.?

Reporting from MIPIM:

The U.S. is poised at a "perfect storm" of factors aligned to drive investment in the country. Factors including the US dollar which remains the world's default currency, the continued appetite of U.S. businesses for new opportunities and American consumers' continued reign as the top worldwide consumers of goods and services.

On Tuesday afternoon, presenters from the Association of Foreign Investors in Real Estate (AFIRE), CBRE, the Paramount Group and Metzler Real Estate spoke on what many analysts foresee as an influx of investment capital coming into the U.S. over the next five years. This confluence of factors points to the U.S. as a safe haven.

Primary points from the discussion included the continued dominance (some would say stranglehold?) that the U.S. has as an investment destination and as the best option for capital appreciation. U.S. cities make up three out of the top four cities for global investment: New York, London, Washington DC and Sao Paolo. Additionally, total U.S. transaction volume has reached its 2004 volume, there are downward sloping unemployment numbers in the US, the return on real estate is 500 basis points over that of bonds, and foreign investors and pension funds are currently buying U.S. REITs: More elements of a "perfect storm," even in the face of anticipated uncertainty in market confidence from November's U.S. presidential election.


For more on investment trends for 2012, read more about the survey conducted annually by the Graaskamp Center of members of AFIRE: New York, DC and Then...Sao Paulo? The 5 Top Cities for Investors

And for more coverage of discussions and developments at MIPIM, check our blog and visit the official MIPIM blog.

David Shulman Guest Lectures

On Thursday, February 2nd, Tim Riddiough’s Real Estate Equity Investment class held a special lunchtime session that featured David Shulman as our lecturer. Shulman is currently an adjunct professor and advisor to the Applied Real Estate Investment Track (AREIT) here at the Wisconsin School of Business. His experience can be found in detail on the faculty page for the Graaskamp center, but to sum it up he was a wealth of knowledge from his experiences as Managing Director and Head REIT analyst at Lehman Brothers, as well as his role as both Director of Real Estate Research and Chief Equity Strategist at Salomon Brothers. He was the recipient of the first annual Graaskamp Award for Excellence in Real Estate Research from the Pension Real Estate Association, and has been an invaluable resource for Wisconsin Real Estate students.

As the real estate students begin the endeavor into understanding the world of REIT investment, professor Riddiough felt it would be in our benefit to get a macroeconomic overview from someone as well-informed as Shulman. His main talking points included GDP, employment, inflation, interest rates, and deficits.

First, he gave us a little tip on collecting economic data: “Fred is your friend”. By “Fred” he is referring to Federal Reserve Economic Data which can be accessed at www.stlouisfed.org/fred. I have already found this website to be extremely useful when completing “top-down” analysis for the demand drivers of certain asset classes.

His presentation consisted of a series of graphs that he pulled from FRED. First topic at hand was the ever-looming unemployment issue in the United States. According to Shulman, while there has been drop growth in the recent months, it isn’t enough to make up for the horrendous unemployment rate. He feels that several years of 250,000 jobs/mo growth is necessary to fully recover from the recession. His presentation, keep in mind, was just a day before it was announced that January 2012 say an increase in nearly 250,000 jobs which dropped unemployment to 8.3%, so perhaps we are making the first steps towards this goal.

Amongst other topics, one thing that Shulman spent a bit of time discussing is his “Paradox of Thrift” theory regarding low interest rates. The decision to keep interest rates low is a part of the expansionary monetary policy establish by Bernanke as a means to increase spending and spark economic growth. Americans can save money on their monthly mortgage payments by refinancing their homes, and lenders can afford to loan money at low rates while still earning a decent spread over the risk free rate. It is also helpful for commercial real estate, as underfunded pension funds and other institutional investors are now looking to put money into core commercial assets to produce a higher yield than their previous bond investment strategy. However, Shulman argues that, while there is an upside to this type of monetary policy, there is also a negative aspect that shouldn’t be ignored. More specifically, the effect on the current and prospective retirees, those whose retirement plan never contemplated 2% 10-year notes and who are subject to underfunded pension plans, now have a much stronger reason to save and lower their spending.

As far as a quick synopsis on each commercial sector, Shulman had the following to add:

Multifamily: Currently experiencing a boom related to the collapse in the home ownership rate and the changing psychology regarding single-family home ownership. Even for those who have previously owned a home, and even with record low mortgage rates, renting may currently be a better option financially for several Americans, and rental apartments are benefitting.

Office: Suffering from the lackluster job market. The suburban office market has also been heavily impacted by the drop in home ownership, since a high volume of the buildings are occupied by financial service companies tied to housing (banks, brokers, title companies).

Retail: E-commerce is certainly having its impact on big box retailers. As Shulman put it “Best Buy is basically acting as a showroom for the things people end up buying on Amazon”. Also, a bifurcation in customers is developing noticeably; that is, customers are beginning to trend more to either the high end or low end of retail shopping, and middle group players such as Sears and JCPenney are hurting.

Industrial: Demand is slowly recovering from the massive inventory liquidation that took place during the recession. Imports have been rising steadily, which is a good sign as much of what is held in storage is imported goods. The upcoming plan to widen the Panama Canal, scheduled for 2014, will negatively impact West Coast ports that serve as a ship-to-rail link for Asian exporters.

These topics only brush the surface of the knowledge that Shulman was able to share with us during his 90 minute lecture, which included ample time for Q&A with the room. As an AREIT candidate, I very much look forward to having the opportunity to work with David more in the future and utilizing him as a guide to mastering REIT investment theory and practice.

Andrew Toby is a first-year MBA student in the James A. Graaskamp Center for Real Estate. A CPA from California, Andrew hopes to utilize both his accounting background and the knowledge gained in the MBA program to pursue a career in private equity investments in real estate.

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.

UW-Madison delegation finds optimism and opportunities in Asia

“Cautious optimism” is the economic outlook from Asia, according to a survey conducted at MIPIM Asia last week by the Wisconsin School of Business in cooperation with HKUST Business School.

“The strong sense of optimism that we’ve seen in the last two years in Asia has been justified,” says François Ortalo-Magné, Albert O. Nicholas Dean of the Wisconsin School of Business, who presented the survey findings at the annual real estate and investment conference in Hong Kong, which is attended by 1,800 senior real estate executives, retailers, government officials and city administrators from 41 countries. This is the third annual investor survey led by Ortalo-Magné at this conference.

An obvious reflection of this optimism is the fact that more than half of the participants surveyed at the conference reported improved or at least the same level of business activity in the current quarter compared to the same quarter last year.

“China is the unavoidable market because of the scale and the performance of the economy,” says Ortalo-Magné.

Ortalo-Magné’s visit is part of the University of Wisconsin–Madison’s broader efforts at deepening relationships with government, business and education leaders in China. He accompanied Gilles Bousquet, dean of the Division of International Studies and vice provost for globalization, and Laurie Dennis, associate director of the Wisconsin China Initiative (WCI), to meetings in Hong Kong and Shanghai.

“The sense that I get each time I visit Asia is that the center of gravity in the world is moving here,” says Ortalo-Magné. Last November, he accompanied former UW–Madison Chancellor Biddy Martin and her delegation on a trip to Asia intended to strengthen academic relationships in the region and promote collaborative economic development.

Bousquet adds, “We are seeking to create a unique UW presence that is consistent with the Wisconsin Idea and highlights the strengths of our world-class university, matched to the needs in China.”

UW–Madison already has a variety of connections with many of the top Chinese universities, including the Hong Kong University of Science and Technology (HKUST).

HKUST Business School is among three of the world’s leading business schools (along with HEC Paris and INCAE-Costa Rica) in a ground-breaking partnership with the Wisconsin School of Business to offer the Global Real Estate Master (GREM) degree program. Joe Walsh, director of the program, joined Ortalo-Magné for part of his Asia trip.

“There is strong demand for high-level education in real estate in Asia,” says Walsh.

Ortalo-Magné and Walsh are working to expand the GREM program, which combines graduate-level instruction in economics, finance, and business administration at one of the partner schools with training in the principles of international real estate during a capstone semester at Wisconsin. They met with university officials, local real estate industry leaders and prospective students.

While in Hong Kong, Ortalo-Magné also addressed the American Chamber of Commerce and met officials with the Royal Institution of Chartered Surveyors (RICS), a prominent worldwide organization for professionals in property, land, construction and related environmental issues. Wisconsin’s BBA and MBA real estate degree programs have been accredited by RICS.

“When I hear this time referred to as the ‘Decade of the Pacific,’ it reinforces to me how much smaller our world is getting and in turn how important it is to have a global awareness in all we do,” says Ortalo-Magné.

-- by Kris Hammargren

What opportunities are being sought out by Asian, European, and American investors? MIPIM Asia 2011

That was the question this morning for the panel at the wrap-up keynote at MIPIM Asia 2011. Discussion was led by Dean François Ortalo-Magné, with Yue Tang, attorney with Jun He Law Offices (China), and Dr. Megan Walters, head of research for Asia Pacific capital markets with Jones Lang LaSalle (Singapore).

Ortalo-Magné presented the results of the annual survey of conference participants, conducted by the Wisconsin School of Business in cooperation with HKUST Business School. The survey saw a justification of the optimistic outlook in Asia as reported at last year's conference, with more than half of participants reporting improved or at least the same level of business activity in the current quarter compared to the same quarter last year. "Cautious optimism" was a keyword for the future with two-thirds say they are more or as optimistic about the outlook than they were a year ago.

From Reed Midem:

The expert panel also noted increasing investment opportunities for international companies targeting mainland China as legislation seeks to open up the market to a diverse range of development companies.

Watch Part 1 of the wrap-up here. Visit mipimworld on youtube for Part 2-4.



Edited to add:

Open publication - Free publishing - More china

MIPIM Asia: Macroeconomic outlook and implications

Wisconsin School of Business Dean François Ortalo-Magné is in Hong Kong this week for the annual real estate property and investment conference MIPIM Asia. He facilitated the opening keynote session today with Robert Ciemniak, global head of Thomson Reuters Real Estate Markets, and Yiping Huang, professor of economics at the China Center for Economic Research at Peking University. On Thursday, Dean Ortalo-Magné will deliver the wrap-up presentation "Where do Asian, European and American investors see opportunities in Asia today?"

Visit live.mipimworld.com for the full conference schedule and more highlights





His visit to Asia is also part of the University of Wisconsin–Madison's efforts to develop stronger ties with China. The dean will join Gilles Bousquet, dean of the Division of International Studies and vice provost for globalization, and Laurie Dennis, associate director of the Wisconsin China Initiative, for meetings in Hong Kong and Shanghai.

Also participating in MIPIM Asia is real estate faculty member Joe Walsh who also leads Wisconsin's Global Real Estate Master (GREM) program, an intensive graduate-level program which is partnered with three of the world's top business schools: HEC Paris, Hong Kong UST, and INCAE. While in Hong Kong, he is meeting local real estate industry leaders and prospective students. The Global Real Estate Master (GREM), which graduated its inaugural class in 2011, is a unique two-phase program that combines high-level instruction in economics, finance, and real estate finance at one of the partner schools with training in the principles of international real estate during a capstone semester at Wisconsin. The program is now accepting applications for the 2013 semester.

Mortgage REITs: too hot to touch?

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

At a time where a wall of cash is sitting on the sidelines looking for yield, mortgage REITs have garnered a lot of attention. The recipe is simple: 1) borrow short term at rates currently near 0% and invest in mortgages or mortgage-backed securities, 2) lever highly, and voila, dividend yields close to or in excess of 20%.

The catch behind these lofty yields, of course and as always, is risk. Minor changes in the spread between mortgage rates and short rates can cause yields and market valuations to fluctuate wildly. The past few weeks are evidence of that, as the Motley Fool explains here.

At this juncture, a mortgage REIT play is a bet that the yield curve will continue to slope sufficiently up for sufficiently long. The Fed has promised to keep the short-end down until 2013 but, at the same time, has announced its intentions to bring the long-end down. Its ability to deliver on both objectives will define mortgage REIT returns over the next few quarters. As the Motley Fool writes, REITs can take steps to mitigate their exposure to yield curve inflections, choose their preferred location on the yield/risk menu, and in the process target investors with different tolerances for risk.

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.

"Sifting and winnowing" at the Wisconsin Real Estate & Economic Outlook Conference

On Thursday, June 9, the Graaskamp Center held our annual service conference for the state, the Wisconsin Real Estate and Economic Outlook Conference. Academic Director Stephen Malpezzi delivered the following opening remarks:

I'm very proud to be associated with this conference. I want to thank all the speakers and presenters, and especially all of you in the audience, for making this conference a success.

The Wisconsin Idea tells us that the University needs to be connected to real problems and issues faced by Wisconsinites as well as those beyond our physical borders, in the rest of the nation and indeed around the globe. It is our basic job description. As I look over the agenda I think we've put together a meeting that does meet the test of the Wisconsin Idea.

Two years ago we changed the name of our annual conference from the Wisconsin Housing Conference to the Wisconsin Real Estate and Economic Outlook Conference, to recognize the deep connections among housing, other kinds of real estate, and the economy in general.

Over the next few years, as Morris Davis provides the academic leadership for the Graaskamp Center and Mike Brennan leads our connection to the industry, I'll be spending part of my time to strengthen the focus of the Graaskamp Center on economic development.

Details will follow in the months ahead. Today I want to simply bring this effort, and indeed this conference, back to the touchstone of "sifting and winnowing" that is part of our inheritance from our intellectual and institutional forbearers, beginning with Richard Ely. Most of you have heard the phrase, and many of you have seen the plaque atop Bascom Hill, from a century ago:

Whatever may be the limitations which trammel inquiry elsewhere, we believe that the Great State University of Wisconsin should ever encourage that continual and fearless sifting and winnowing by which alone the truth can be found. Taken from a report of the Board of Regents. 1894 [slide of the plaque projected]

As many of you know, this quotation, famous on campus and off, came out of a fierce debate about (of all things) unionization, in 1894. In brief, Ely supported unionization, and some of the Regents did not. They never, to my knowledge, reached agreement on the specific issue, but they did, in the end, establish a firm principle that at Wisconsin, people had a right to speak on different sides of important issues; a right to be heard; and that we owe those with whom we disagree, as well as those with whom we agree, a duty to listen.

To be clear, "sifting and winnowing," doesn't mean that every idea is equal; but rather that ideas should be heard, and examined on their merits, rigorously, rather than reflexively. As Daniel Moynihan famously put it some years ago, everyone is entitled to their own opinion, but not their own facts. Sifting and winnowing helps us establish the facts, and helps us form opinions that are grounded in those facts as well as our values.

Now, in light of the principle of sifting and winnowing, today we aim to have some constructive conversations about housing, real estate, and our state's economic development.

I'm a professor, and I do research on these subjects. But economic development is not simply an abstraction, or merely an academic subject. It touches all of our lives, and our children's lives. Economic development is not just about economics, not just how much stuff we can produce or buy. It's also about how well housed we are, whether we're educated to reach our full potential, how well we attend to our health. It even touches on our basic security, and at the national and global level, questions of war and peace.

The key to understanding economic development is to start by understanding there is no key to economic development. There is no silver bullet. Economic development is complicated.

Unfortunately we live in a world where simple solutions get the headlines. All too often, we talk past each other, cherry picking research and arguments that support our preconceived notions, and ignoring research that challenges our preconceptions. Psychologists call this confirmation bias, and it's a very powerful part of human nature. We're all subject to it. We have to fight it, every day. The best way to fight confirmation bias is to hold to rigorous standards of evidence, and hold your own opinions to the same standard to which you hold others.

For example, if you're a Republican, or a fiscal conservative of whatever persuasion, you might think state tax cuts are a silver bullet. It's important that you know about the substantial body of research that tells us simple tax differences between states explain virtually none of the variation in state economic performance.

To pick another example, if you're a Democrat, or someone who worries about providing enough resources to schools, you might think that more dollars to our schools, perhaps for smaller class sizes, are a silver bullet. It's important that you know that of a number of careful studies done on this issue, so far I've only found one that finds statistically significant relationships between class size and performance, and that only in a few grades. Most careful studies are unable to find a simple relationship.

I can list another dozen silver bullets that aren't really silver. School vouchers, charter schools, passenger rail, spending on roads, less regulation of business, more regulation of business.

It gets even more complicated here. None of these is a silver bullet. None, by itself, are magic beans that take us up the stalk to Economic Development Nirvana. Yet each of these ideas contains some germ of truth, or at least can help us think harder and better about what kinds of things are likely to work, and in what combination. Tax cuts can help if we find ways to preserve essential services while reducing taxes. As a society, we haven't had that conversation yet. Some charter schools, and some public schools, do work as advertised; we need to make sure we figure out why, and replicate and encourage them. As a society, we haven't had that conversation yet. It's not about how much regulation we have so much as what kind of regulation, how we make regulations and taxes and other government interventions smarter. As a society, we haven't had that conversation yet.

Recognizing that some of the best ideas will come from people with whom you disagree, is an important step towards making these true conversations, productive conversations. We need, as Ely and the 1894 Board of Regents taught us, to sift and winnow. Fight your confirmation bias; help me see mine, but in a constructive way. Don't paint yourself, or others, into corners. Determine the facts, and what works, without regard to ideology; and then act on it.

This is why we are here today. Join us in a day of sifting, of winnowing, of learning. Let's move these conversations forward today. Listen, as well as talk. Do recognize that, if we're honest and careful about it, sometimes we'll initially be uncomfortable with what we find. Challenge yourself as well as others. Let's move the conversation ahead, not only today, but over succeeding weeks and months and years. Let's get Wisconsin's economy, and our people, moving FORWARD.

On Wisconsin!

Postscript: Several conference participants and colleagues have asked for more details on Malpezzi's claims that research rarely supports "silver bullet" approaches to economic development. In the next several weeks we'll post some details and references, and seek comments and further conversation.

The Progressive online has begun the conversation, with a commentary on Malpezzi's introductory remarks, and his own brief reply, at Progressive.org.

More "sifting and winnowing" to come!

Register before June 1st

Tomorrow is the registration deadline for the 2011 Wisconsin Real Estate and Economic Outlook Conference.

The theme for 2011 is: New Partnerships: Government and Real Estate
When: Thursday June 9, 2011
Fluno Center for Executive Education, Madison, WI

With an exciting roster of panelists and keynote speakers including Governor Scott Walker, U.S. Rep. Paul Ryan, and UW Foundation President Michael Knetter plus Patricia McCoy from the Consumer Financial Protection Bureau, a capacity crowd is expected. Reserve your spot now, click here to register.

Panel discussions will address:
The New Regulatory Realities: What Can You Expect?
The Budget and Financial Reforms: What's on the Horizon?
Financial Reforms and Affordable Housing: What Works

For the full agenda, visit the conference website.