Friday, May 25, 2012

Reading for Life: The 2012 Dynamic Dozen!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, May 23, 2012

In memoriam, John Quigley

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

Photo by Genevieve Shiffrar, © UC RegentsRecently we received the sad news that Berkeley’s Professor John Michael Quigley passed away on May 12, 2012.  John was a professor of economics, public policy, and real estate at the University of California-Berkeley.   Information about Professor Quigley’s life and work can be found at Berkeley’s Goldman School of Public Policy.

You’ll find other postings at the American Real Estate and Urban Economics Association, the Regional Science Association, and by some of his former students and other colleagues, such as Nils Kok, and  Matt Kahn.

By the time I get this written and posted, there will doubtless be more tributes and postings, around the world.  Let me take the liberty of adding to these, with a few of my own remembrances.

I first encountered Professor Quigley through his research; later, we connected through our mutual friend the late Steve Mayo.  I was honored to count John as a friend, but he was also a professional and scholarly inspiration to me, and to many, many others.  Professor Quigley was an active researcher and teacher for over four decades; a long career by some standards, but he left those of us who knew him, and his work, wishing we could have had a fifth, if not a sixth.

In the history of the allied fields of urban economics, real estate economics and finance, after the original generation of William Alonso, Richard Muth, Edwin Mills and John Kain, John Quigley shaped our field like no one else.  The breadth of his contributions, in urban, housing, public finance, finance, and many other fields, is breathtaking.

I’m not alone in that judgment, and those of us that hold it can easily show that it’s not simply sentiment for a passed friend.  Many colleagues share my high opinion of John Quigley, and have said so, unbidden, for years, long before his illness.  Several years ago, for fun, I asked six PhD students to write down the name of the person who, according to their study, all-in, made the greatest contributions to our field.  (I told them they couldn’t name anyone from Wisconsin, but of course that was to save face :-). 

Five wrote “Quigley.” Well, it wasn’t all six, but I’m not going to stretch the truth for the sake of the story!

John wrote many books and articles, about 200 if you include his reviews and shorter policy pieces (which, if you read a few, you will!).  But the most amazing thing about his work wasn’t the quantity, so much as the consistent quality.  I can’t begin to do his corpus justice, but let me touch on just a few of my personal favorites.

I started my career in 1977, analyzing housing markets at the Urban Institute.  One of my “bibles” that I constantly consulted, both for specific results and, more importantly, as a clear model of how to undertake rigorous scholarship in my new field, was John’s 1975 book with his former major professor John Kain, Housing Markets and Racial Discrimination.  Written several years after the racial strife of the late 60s, it’s a masterpiece of data collection, analysis, and clear and careful thinking.

John’s 1997 Presidential Address to the American Real Estate and Urban Economics Association, “Urban Diversity and Economic Growth,” still stands as one of the clearest expositions of the reasons why cities exist, and why they are so important.

Much of my policy work is focused on how the housing market works (or, sometimes, doesn’t) for low-income citizens.  But the first paper I refer anyone new to the subject isn’t one of my own – it’s Quigley’s superb paper “Is Housing Affordable?  Why Isn’t It More Affordable?,” written with Steven Raphael.

I’ve been very focused in recent years on supply side issues, particularly regulation.  John did some of the early work, and lately some of the best.  See, for example, his paper with Nils Kok and Paavo Monkkonen, “Geography, Regulation and the Value of Land.”

Understanding housing market dynamics is a major part of today’s research agenda; see, for example, some of the recent HULM programs put together by my colleagues Morris A. Davis and Erwan Quintin.  But John was an “early adopter” of the dynamic view, as you’ll see, for example, in a 1979 paper with his friend Ric Hanushek, “The Dynamics of the Housing Market: A Stock-Adjustment Model of Housing Consumption.”

Mortgage securities, especially residential, contain some features that make them very challenging to analyze, compared to many other fixed income products; in particular, analyzing them correctly requires an understanding of both prepayment risk and default risk, and their interaction.  Quigley and his former student Professor Yongheng Deng developed the competing risk model that is now a standard for studying MBS; see their paper “Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options.”

Professor Quigley and his good friend Chip Case and the noted financial economist Bob Shiller were among the first economists to warn of the risks inherent in the housing market boom of the late 90s and early 2000s, as in their prescient 2003 “Is There a Bubble in the Housing Markets?

A later look, produced just as the boom ended, predicted much of the macroeconomic pain we’ve experienced as a consequence; see Case and Quigley’s “How Housing Booms Unwind: Income Effects, Wealth Effects, and Feedbacks through Financial Markets.”

John was always looking for new and interesting problems to work on, and in recent years he turned his attention to the intersection between environmental issues and real estate.  One of several papers we could point to in this new area is his work with Piet Eicholtz and Nils Kok, “Doing Well by Doing Good?  Green Office Buildings.”

Despite the length of this note, we’ve hardly scratched the surface of John’s research.  He wrote many additional papers on the topics above, and worked on many other problems, including transportation, public finance, alternative methods of price index construction, labor markets, and the economics of crime.

Most of the papers I’ve cited above happen to focus on the U.S., but John worked with friends from around the world, writing a number of fine papers about Europe (especially but not limited to Sweden with friends including Peter Englund and the late Bengt Turner) and a number of papers about Asia.  He was long a stalwart promoter of global real estate research and education; he long championed the international activities of the American Real Estate and Urban Economics Association.

John had legions of PhD students, and terrific ones at that.  I would think that he’s had more impact through students than anyone in our field since his own mentor John Kain, and of course Edwin Mills. 

One of the reasons I so enjoyed spending time with John was that in addition to his research, I admired and learned from his values.  John was truly rigorous -- not the faux rigor of somebody who makes a problem complicated just for the sake of showing off some technical trick, but somebody who follows Einstein’s dictum, “Everything should be as simple as possible.  But not more so.”  John was a great mentor and teacher, certainly to his former “official” students, but even to those who, like me, were his students despite never having taken a class from him.  He didn’t care about your academic “pedigree” or your rank or institution; he cared about what new ideas you brought to the table and the quality of your work.  He was scrupulous about studying the literature in a new problem and was always generous in his recognition of the credit due to others.

Must I add the obvious, that another reason many of us loved his company is that he was so much fun to be around?  For all these reasons, we’ll miss John deeply.

Photo by Genevieve Shiffrar, © UC Regents, used with permission

Thursday, May 17, 2012

2012 End of Year MBA Video Blog

Graaskamp Center for Real Estate project assistants Andrew Toby and Jordan Denzer penned their final blogs of the year by interviewing their classmates regarding their first year at the University of Wisconsin-Madison.

Tuesday, May 15, 2012

Reserve your spot at the Real Estate and Economic Outlook Conference

There are a few spots left at the 2012 Wisconsin Real Estate and Economic Outlook Conference at Madison's Fluno Center on June 1st. The conference will feature exciting keynote presentations from
  • Karl “Chip” Case, Co-Founder of the S&P/Case-Shiller Home Price Index and Professor Emeritus of Economics at Wellesley College
  • Curt Culver, Chairman and Chief Executive Officer of the MGIC Investment Corporation
  • Morris A. Davis, Associate Professor and Academic Director for the Graaskamp Center for Real Estate
  • Lawrence Yun, Chief Economist & Senior Vice President of Research for the National Association of Realtors®
2012 will be a pivotal year for the housing industry. 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 and consider these and other critical questions:

What policies should the current or the next administration implement to design a healthy, responsible, functioning, and efficient housing market?
What are the key lessons from past housing programs and policies such as HAMP and HAFA? How can we apply those lessons to future policy prescriptions?
What are the best solutions for addressing the massive inventories of vacant properties due to foreclosures?
Will the recent $26 billion multi-state mortgage settlement against big banks help struggling homeowners?   What are the potential outcomes of GSE reform?What are the right roles for lenders, capital markets, regulators, insurers, servicers, governmental entities, and consumers to play?
What options will Americans of modest means have in regard to their housing needs?

Register now and join the discussion. Registration deadline is Monday May 21.

Friday, May 11, 2012

U.S. Housing Policy is Ineffective and Expensive

by Morris A. Davis, Associate Professor of Real Estate at the Wisconsin School of Business and Academic Director of the Graaskamp Center

For decades U.S. housing policy has focused on promoting homeownership. But has the policy worked? Is it a worthwhile policy goal? And what does it cost U.S. taxpayers?  My analysis, published by the Cato Institute, looks at these important questions.

The federal government touts the benefits of homeownership and uses two major policy instruments to encourage Americans to buy rather than rent a home. The tax code subsidizes the cost of homeownership through the mortgage interest tax deduction. In addition, the federal government reduces the cost of mortgage interest by insuring the principal on mortgages purchased by the Federal Housing Authority and by guaranteeing the debt of government-sponsored enterprises Fannie Mae and Freddie Mac.

The stated goal of these government interventions is to enable more Americans buy a home. But that goal has not been achieved.  The homeownership rate has been roughly constant since 1970.  Federal policy has been ineffective because the mortgage interest tax deduction is a subsidy to people with above-median incomes.  These people should have no trouble buying a home.  The presence of Fannie Mae and Freddie Mac has not boosted homeownership rates because Fannie Mae and Freddie Mac have had a trivial impact on mortgage rates, and in general mortgage rates appear to be only loosely connected to homeownership.

Should the federal government actively try to encourage homeownership? According to the U.S. Department of Housing and Urban Development, homeownership benefits families by offering greater financial security and more stable living environments, and benefits the overall population by helping to generate stronger communities and economic growth. My analysis calls these points into question. For example, for many people housing is not necessarily the right way to build wealth because it is a risky asset.  As many homeowners have experienced recently, house prices can fall quite significantly.  Furthermore, while homeownership is correlated with neighborhood stability, it has been difficult to establish that homeownership causes stability. Finally, international data show that homeownership does not lead to higher standards of living. Some relatively poor countries like Greece and Mexico have higher rates of homeownership than the U.S. while some relatively wealthy countries such as Denmark and Switzerland have lower rates. The overall correlation of homeownership rates and standards of living is just about zero.

Finally, my analysis found that U.S. policies aimed at making homeownership more affordable are, in addition to being ineffective and of questionable worth, tremendously expensive.

I estimate that the net present value of the cost of these two federal housing policies is around $2.5 trillion. Given the hefty price tag and weak justification, is the promotion of homeownership a desirable public policy goal? It is time to reconsider.

Thursday, May 10, 2012

UW honors outstanding entrepreneurs

Congratulations to Jon Hammes, chairman and CEO of Hammes Company and Graaskamp Center board member, as one of seven UW-Madison alumni and faculty honored for their entrepreneurial achievements. The awards ceremony took place on Wednesday, April 25 at the Wisconsin Institutes for Discovery.

Interim Chancellor David Ward explains:

"We have created this prize to honor talented and creative alumni and faculty who have had great success as entrepreneurs, who have been instrumental in creating jobs and who offer models for our students. These alumni and faculty have inspired us, and they serve our students by mentoring them and shaping their aspirations."

Click to read more about the honorees.

Wednesday, May 9, 2012

UW Real Estate Club Celebrates with New Home Owners, UW Chapter of Habitat for Humanity of Dane County

On the afternoon of May 4, Real Estate Club members came full circle on a volunteer project when they attended a house blessing ceremony for a local Madison family.  During the academic year, the UW Real Estate Club volunteered for two half-day build events for the UW-Madison Chapter of Habitat for Humanity of Dane County.  The ceremony was to congratulate the Vang-Cheng Family on their new home (to be completely finished in June 2012).

Volunteering for the Habitat for Humanity organization is a good match for the interests and passions of real estate club members. The club members who worked on the Habitat house really valued the opportunity to support a local family, and to work side-by-side at the construction site with them on their new home. As noted by the Habitat organizers, the Vang-Cheng Family has been one of the hardest working families the UW chapter has seen in recent years. They dedicated 100+ volunteer building hours over the necessary volunteer requirement for Habitat families. Their dream for a spacious home where they can raise their 5 children has come true, and they expressed their sincere gratitude during the ceremony.
The UW Habitat chapter has received a national award from Habitat International for its innovative programs. To learn more about the UW-Madison Habitat for Humanity Campus Chapter, visit their website. From the UW Real Estate Club, we want to wish the Vang-Cheng family a very happy homecoming!