Tuesday, July 26, 2011

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


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.

Monday, July 25, 2011

Chart(s) of the Week

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

"Knowledge that is not quantifiable is of a meager and uninteresting kind."
Lord Kelvin

"Any figure that looks interesting is probably wrong."
Sir Claus Mosley, Presidential Address to the Royal Statistical Society

Today we start a new feature, the Chart (or charts!) of the Week.

My students and colleagues can confirm that I'm a numbers freak. I also like to provide students and colleagues with my constructive -- some might say annoying -- suggestions for improving their data presentation.

Recently I've been spending some time working on a new edition of A Primer on U.S. Housing Markets and Housing Policy, coauthored with my friend Richard Green (also impresario of Richard's Urban Blog). For the second edition, we're pleased that Paul Carrillo joins us as the third coauthor.

What better place to start than updating the iconic chart of U.S. housing starts back to 1890! To quote my fellow chart-freak H. Ross Perot, "I find this fascinatin'."

Imagine jumping into the TARDIS and returning to look at these data in, say, 1960. Analysts of the time could have quite reasonably thought of the postwar boom up to a level approximating 1-2 million starts per year as a temporary phenomenon, while the country caught up to the backlog from the 30s and 40s. It would have been a farsighted thinker indeed who would have foreseen how broad postwar increases in income, changes in building technology (think Levittowns and other innovations in development and construction) as well as the expansion of the availability of housing finance, along with the baby boom and other demographics would have lead to the higher, if very volatile, levels of housing starts for another five decades.

Let's dig a little deeper. Chart 1 has three lines: the red line shows private housing starts; the green line shows public housing starts; and the blue line shows manufactured housing placements. All three are in thousands of units started (or placed). We'll focus mostly on private starts at first.

Around the turn of the century -- pardon me, I'm an old person, around the turn of two centuries ago, 1900 -- housing starts were bumping along at around 300,000 units per year; around 1905 they bumped up to around 500K per year. Students of The Panic of 1907 will be interested to find that this financial crisis had minimal impact on housing starts, maybe partly because at the time few households took out mortgages, and those were usually for perhaps a third of the purchase price. Housing starts did start to fall a few years before the U.S. entered WWI; and the 1918 trough in starts, 118K, remains the record low for the 120 years of data we examine.

Post WWI, starts boomed, hitting a quite substantial peak of 937K in 1925. They started to slide well in advance of the stock market crash of 1929, and fell further during the early years of the Great Depression, bottoming at 134K in 1932. Slowly they climbed back during the rest of the 1930s. GDP and unemployment data from that period are subject to larger-than-usual errors, but taking data in hand at face value, after declining by perhaps 30 percent between 1930 and 1933, with a concomitant rise in unemployment to perhaps 36 percent (!), overall GDP clawed back half that loss from 1934 to 1937, while unemployment fell to maybe 20 percent. The economy then took a second hit in the double dip of 1938, with a 4 percent decline in GDP and a return to rising unemployment. Things began to get better the following year, but with continued weakness in employment (Sound familiar? Well, it was, but much worse!)

During the war years, 1941 to 1945, GDP rocketed up by perhaps 70 percent, and unemployment fell to under 2 percent, while housing starts plummeted, as the nation shifted production from housing and consumption goods into military necessities as the U.S. economy became, in President Roosevelt's words, "the arsenal of democracy." Starts hit a trough of 142K in 1944. Then bounced back a bit in 1945 (the war ended in August), and shot up to an unprecedented 2.3 million in 1950.

After that boom, we settled down, but to a much higher plateau of around 1.5M units per year in the 50s and 60s, with substantial swings: peak-to-trough, housing starts varied by a factor of 2 to 1 or sometimes a little more! Housing, as our friend Richard Green has documented more carefully, became the leading edge of many business cycles. (Follow the Leader: How Changes in Residential and Non‐residential Investment Predict Changes in GDP, Real Estate Economics, 1997). Private starts hit their all-time high in 1972, with 2.4 million units underway.

U.S. housing starts took a big hit during the post-S&L boom recession at the start of the 90s; starts hit a low point of about a million in 1991. They then started a long, fairly steady climb back to a peak of 2.1M in 2005. They started to fall in advance of the 2007 Great Recession, plummeting to below 600K in 2009 and 2010. Ouch! These are the lowest levels of housing starts since 1945.

What about public housing starts? These have always been a small part of the market, albeit one that is an important concern of HUD, taxpayers, and of course the families that live in those units. Public housing starts rose during the later years of the Great Depression, maxing out at 87K in 1941. Along with other housing starts, they collapsed during WWII, bouncing back to 71K in 1951, bumping around at 50K or less for most of the 60s and some of the 70s. They declined to nearly nothing in the 70s as the U.S. shifted from "supply side" subsidies to "demand side" housing subsidies, with the creation of Section 8 Certificates, the precursor to today's housing vouchers. You can read more about those policy shifts in the Primer. We haven't built any public housing to speak of in over three decades, but of course we still have a stock that requires management. All in, public housing itself peaked at under 2 million units three decades ago, and now stands at about a million units, or roughly 1 percent of the U.S. housing stock.

Manufactured housing as an industry came into its own in the 60s, peaking at 576,000 placements in 1972 (the same year as the peak year in housing starts; all in, about 3 million units started). For much of the next two decades placements bumped along near 200K, not at all negligible; they hit their second peak of 354K in 1998, then slid; the slide accelerated with the collapse of the housing market in the Great Recession, to a low of around 50K in 2010.

Quite a story, and still not all there is to say about housing starts. In future posts we'll examine monthly data, talk about seasonal adjustment, and relate starts to some basic demographics and other determinants. But for now, contemplate 120 years of housing starts.

What will the next decade, and century, bring?

Thursday, July 14, 2011

A few observations on the evolution of our Program and School

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

We've had two significant changes in the staffing and organization of the Wisconsin School of Business and our real estate program in the past few weeks. On July 1, Associate Professor Morris Davis took the reins as Academic Director of the Graaskamp Center, implementing a succession plan that we've had in place for some time. A very short description of the Graaskamp Center's main functions are to provide a home for the MBA program in real estate, and to implement the Wisconsin Idea by connecting our program more deeply to the worlds of business practice and policy outside the University. Morris' movement into this position is a natural evolution after he so successfully took on leadership of the MBA program last year; now he adds the outreach functions to his portfolio. With the support of the faculty, Center staff, Executive Director Michael Brennan, and the rest of the UW real estate community, Professor Davis is well placed to move the Center to the next stage of its evolution. Morris' deep and probing approach to the study of real estate, and his enthusiasm and out-of-the-box thinking, augur well for our future.

Our second change is even more significant, as on September 1 our esteemed Department Chair François Ortalo-Magné becomes the Albert O. Nicholas Dean of the Wisconsin School of Business, succeeding our program's good friend Mike Knetter. During his tenure as Department Chair, François has worked tirelessly and effectively to move our program and the School ahead, in ways large and small. Most of you know at least the outlines of the Global Real Estate Masters (GREM), our innovative partnership with HEC, INCAE and Hong Kong University of Science and Technology to offer dual degrees to students from those top schools, in the process exposing our MBAs and undergraduates to repeated cohorts of future fellow global leaders in real estate. Perhaps fewer people outside Madison know about many of the other innovations François has pioneered in the "blocking and tackling" of the program, e.g. our marketing, financial stewardship, and curriculum. François has shown repeatedly that he is one of those rare leaders who excel at both the development of innovative strategies and their careful execution.
Right now, the highest priority for our real estate program has to be moving ahead in concert with the Wisconsin School of Business, and I am completely confident François is the right person to build on the contributions of Mike Knetter, (interim dean) Joan Schmit and other leaders of our School.

Naturally, we will have some other changes to announce in the weeks and months ahead as we adjust the roles of faculty and staff in response to these exciting developments. For now, let me simply congratulate Morris and François on their new roles, and convey my own enthusiasm about the possibilities these changes open up for the Graaskamp Center, the entire Wisconsin Real Estate Program, and the Wisconsin School of Business. I have had, and continue to enjoy, the privilege of working with Morris and François and our other faculty and staff, and so many of you who embody those attributes and values that make the Wisconsin Tradition what it is today: intellectual rigor, an ethical approach to our business, great enthusiasm for our students, "continual and fearless sifting and winnowing." I know you will join me in supporting Morris and François in their new roles. On Wisconsin!

Congratulations Dean Ortalo-Magné

Please join us in welcoming Wisconsin Real Estate's own François Ortalo-Magné as the new dean of the Wisconsin School of Business. The announcement came on Friday July 8. Ortalo-Magné, Robert E. Wangard Professor and chair of the Real Estate and Urban Land Economics Department at the University of Wisconsin-Madison, will begin his new role as the Albert O. Nicholas Dean of the Wisconsin School of Business on September 1. Visit the school's website for the full announcement and more information. Here are a few quotes from the official announcement:

“I am convinced the Wisconsin School of Business is capable of greatness. And we do not have a choice,” says Ortalo-Magné. “We must respond to the globalization of higher education and the revolution in information technologies. I am excited about the opportunity to lead our school, building on our values and the strength of our specializations, renewing and reinventing how we partner with the world and colleagues around campus.”

“François has the intellectual energy and ambition to help the School of Business reach new levels,” says UW-Madison Chancellor Biddy Martin. “I am impressed by his work on the international front and am confident that he will consolidate and enhance the gains made under Mike Knetter’s leadership."

The Financial Times carried news of the announcement on Monday, "Wisconsin-Madison appoints Ortalo-Magné as next dean."

And the Milwaukee Journal Sentinel ran a profile, "UW-Madison names new business school dean," including comments from Bill Malkasian, president of the Wisconsin Realtors Association.

"He sees no boundaries. He certainly understands the world. ...He brings a global perspective."

Congratulations to François and on Wisconsin!

UPDATED 7.15.11

BusinessWeek reported today "Wisconsin Gets a New B-School Dean." Read the article here.

UW's Daily Cardinal also writes ("Ortalo-Magné named B-School dean") that Ortalo-Magné:

intends to strengthen leadership within the business school, continue to learn about how the school functions, and build relationships with other business school deans.

Ortalo-Magné said it is imperative for the business school to respond to worldwide changes in information technologies and higher education, and he looks forward to helping it do so.

Photo: Valerie Caviness