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.

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.

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.

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

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

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

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

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

However, (from Channel 3000)

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

Comments on the economy

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

Research shows many people can't answer these questions.

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

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

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

Davis does see a glimmer in the unemployment figures.

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

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

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!

"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!

Local concerns over housing prices affected by national outlook (video)

UW Real Estate Professor Morris A. Davis was interviewed yesterday for a story on local concerns about trends in housing prices. Here is the video (via Channel 3000):

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

New MBA student welcome from our new Academic Director of the Real Estate MBA Program

Morris A. Davis, Associate Professor, Real Estate and Urban Land Economics at Wisconsin, is taking on a new role this year as the Academic Director for the Real Estate MBA Program. He met the new class of 2012 MBA students during orientation and shared these thoughts on their partnership with the Wisconsin Real Estate Tradition.

Welcome Class of 2012!

Here is my brief story: I was born in Philadelphia -- a long time ago. I graduated from the University of Pennsylvania in 1993 with a degree in economics and stayed on at Penn to get my Ph.D., also in economics. I completed my studies in 1998 and took a job at the Federal Reserve Board in Washington, DC. After a brief sojourn to work for a small high-tech company in Reston, VA, I returned to the Fed in 2002 to take a position as Alan Greenspan’s housing analyst. I then left the Fed (again) in 2006 to join the Real Estate Department here at UW.

When the Real Estate group first approached me about the possibility of becoming a faculty member, I was honored to be considered. For two reasons. First, it is widely known among academics that the faculty here are the best in the world. Second, the study of real estate essentially started at Wisconsin. James Graaskamp is a name we know and admire, for the right reasons, but much of our current culture begins with Richard Ely. Ely started real estate studies at Wisconsin. Most importantly, Ely shaped our current value system. He would not back away from what he believed in – discovery and integrity – even in the face of long odds, in perhaps the best known episode of his life, being accused of “sedition” that could have lead to his dismissal from the university. Ely’s tenacity and greatness are inspirational.

Given this background, I view my new position as having two complementary objectives. First, I – rather we – must prepare you for the next step in your career ladder. Second, we must prepare you to be alums, and to assume and contribute to the tradition of Wisconsin Real Estate.

There’s a lot of thought that goes into these preparations. We must make sure you have a coherent course load that teaches you the basics of business while offering in-depth study of all facets of real estate theory and practice. We must provide you opportunities to study global business practices and to network with local and global business leaders. And we have to help you decide what the next stage of your career looks like, and help you plan to get there.

We must also teach the basics of what it means to be an alum of the Graaskamp Center. Respect. Honesty. Integrity. Values. Leadership. We did not become great because some otherwise forgettable people lucked into a few good deals. Our greatness comes from our history of outstanding human capital. Wisconsin Real Estate alumni are great men and women. I’ve met them, and they are leaders. They deserve and command respect in their business dealings because of their innovation in the field, their savvy in their deal-making and partnerships, and their integrity and their treatment of others in their business and personal lives.

So, we want to immerse you and your class in the basics of leadership, starting with dressing professionally inside Grainger Hall and on any Real Estate functions. Well-dressed men and women have an edge in any business situation. They are more likely to be treated with respect by their peers and are more likely to speak with thought. Even in 2010, the old adage that “the clothes make the man” rings true.

Next is something I learned from my experiences in business: carry yourself and speak professionally and with respect at all times. Most importantly this includes
respecting the thoughts and opinions of those who disagree with you. Look to your own business experiences–in law, health care, finance, or development. Who were the individuals who got promoted? How did they act? In my experience, leaders in successful organizations lead everyone, not just the people they like. They may not agree with everyone, but they always respect the thoughts and ideas of others around them. Talk with our alumni, and you’ll see they follow this rule. It is part of our tradition.

The final guideline is to act like a leader. If something bothers you, do not simply complain. Work with your peers and with Center staff and faculty to solve problems and create opportunities. In the business world, employees who complain get fired. People who identify problems and then work to solve them get promoted.

Think of today as the fresh start to your new career. What do you want that career to be? How do you want to represent yourself? I know what I expect from you. At the end of your two years here, I want to be able to call up any of our alumni, friends, or contacts on your behalf and be able to truthfully say that you are now qualified to maintain the Graaskamp Center tradition of excellence, integrity, leadership, and values.

I look forward to working with you.

UPDATE: You can view the new partnership agreement with the Wisconsin Real Estate MBA Class of 2012 here.

Speaking the facts at the Wisconsin Real Estate and Economic Outlook Conference June 4th

Our annual conference on Wisconsin real estate and the economy is coming up on Friday June 4th. The theme is "Navigating the Credit Crunch: What's Ahead for Wisconsin?"--a must for housing and real estate professionals, government and non-profit professionals, builders and developers, housing finance professionals and anyone interested in community development. You can review the agenda and register online at our website at bus.wisc.edu/whc2010.

Today we talked with Associate Professor Morris Davis, former Federal Reserve economist now at now UW-Madison real estate and urban land economics, about the conference keynote speaker David Altig, director of research at the Federal Reserve Bank of Atlanta.

"David is a great economist, highly regarded as one of the best economists in the Fed.

He will likely talk about what the recovery will look like, how quickly the Fed will tighten monetary policy (the so-called "exit strategy") and about what's going on in Europe.

He and his colleagues write a great blog: Macroblog, which if you aren't already reading, you should. David speaks the facts as best we know them and communicates them without a lot of "gobbledygook."

He'll tell people the way things are, the way he sees it. He's a really good guy!"

Don't miss David and the rest of the amazing lineup of speakers at this year's conference. Register by Thursday May 27th at www.bus.wisc.edu/whc2010.

Morris A. Davis awarded tenure

We are pleased to announce that Morris A. Davis was voted tenure at the Wisconsin School of Business. Davis, who has been a faculty member in the Department of Real Estate and Urban Land Economics since 2006, is a prolific researcher. His research provides critical new insights into the interaction between housing markets and the macroeconomy. He is also already known and respected for inventing a methodology to compute land prices. Read more in our May newsletter.

Congratulations, Morris!

What we need is an overhaul

by Morris A. Davis, Assistant Professor of Real Estate at the Wisconsin School of Business

Check this out. I'm not a fan of Krugman's but he is right on the mark here.

Obama's economic team is just awful. It needs an overhaul. The new team should:

(a) shift center-left with respect to Wall Street. The team should (i) break up the existing big banks--wipe out the equity, fire all top management, and boards of directors, and turn control to debt holders--and (ii) re-enact Glass Steagall.

The largest banks are all zombie banks. They are all in survival mode now, which is why they aren't lending (except when directly encouraged by the government). They are trying to stockpile cash to survive the upcoming massive losses on commercial and jumbo mortgages.

(b) shift center-right with respect to taxes and job growth (i.e. less talk about stimulus, more temporary targeted tax cuts for firms and employers to stimulate job growth--yes, it works if done properly).

The Housing Hangover: How Bad Will It Be?

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

According to the National Association of Realtors (NAR) sales of existing homes in the U.S. tumbled by 17% in December, the largest monthly decline since the Association began reporting this measure in 1968. Drops of this magnitude usually come with a simple explanation. In this case, we are witnessing the home buyer tax credit hangover that economists have been anticipating for months.

The home buyer tax credit program gives buyers who haven’t purchased a home in at least three years and who meet certain income criteria a tax credit equal to 10% of the purchase price of their new home, up to $8,000. The program was originally set to expire on November 30th, but was extended in early November in both time and scope. The program’s intent was to give potential homebuyers incentives to purchase homes now; and, to some extent, to bring new buyers into the market. The fact that home sales rose at a healthy pace in the second half of 2009 and are now falling is evidence that the program “worked.” The NAR’s report also contains more direct evidence that many first-time homebuyers accelerated their purchases to secure the credit: they accounted for 43% of purchases in December, down from 51% in November.

At first glance, it may seem surprising that sales tumbled while the median home price rose by 1.5%. However, this result is a false positive which is essentially the hangover effect at work. Until last November, the credit was limited to first-time home buyers whose income was below $75,000 for singles, and $125,000 for households. Households who meet those criteria tend to buy cheaper homes. When they left the sample of home buyers in December, median prices mechanically rose.

Most people would agree that the program had the desired effect: it has moved home purchases forward. One could argue that the goal of all stimulus plans (fiscal and monetary stimulus, accelerated depreciation schemes, etc.) is to cause a spending shift. The goal is to borrow from a presumably stronger future to support flagging activity today. All stimulus plans, therefore, are bound to come with a hangover. The hope is that the hangover does not overwhelm the initial gains. (For a more detailed discussion the hangover effect, click here.)

How bad will the hangover be in housing markets? Over the next few months, home sales will benefit from the extending the housing credit program to a broader set of buyers until April 30, 2010. However, the same set of questions will arise in May. As is the case with all stimulus programs, the timing of the withdrawal is critical. If economic conditions have improved sufficiently by May, and a recovery is under way, the losses associated with the credit expiration will have limited effects. If, on the other hand, markets remain dependent on policy support, then a relapse is certainly possible.

Take, for instance, the foreclosure crisis. Foreclosure rates have tripled since mid-2006. Without policy support, however, things may have been worse. One incentive for households who experience financial difficulties to hold on to their home is the prospect of selling their home at a good price in the future. (For more information on this topic, click here.) If it becomes clear in May that selling prospects have suddenly worsened, the hangover could come with yet another foreclosure spike.

As they say in policy circles these days, we need an exit strategy. I would like to recommend the “Wisconsin Foreclosure and Unemployment Relief" program, or WI-FUR, a plan developed by my faculty colleagues Morris A. Davis, Stephen Malpezzi, and François Ortalo-Magné.