If required down-payments are too low, we get the nonsense of the past several years. I am reasonably sure zero is too low. If required down-payments are too high, we, among other things, perpetuate wealth disparities (i.e., the only people who get credit are those that don't need it). I am reasonably sure that 25 percent is too high.
What is both socially optimal and just? We need to try to figure this out, but it would involve knowing the correct social loss function and then minimizing it. Social welfare functions are very, very tricky businesses.
Thursday, August 26, 2010
Tuesday, August 24, 2010
In praise of Lawrence Yun
As Robbie Whelen notes in the Wall Street Journal, it could not have been fun to be Lawrence Yun, the National Association of Realtors chief economist, today. As Whelen notes, he must "toe the line between housing industry economist and housing industry motivational speaker."
I think Lawrence does this well--he is clearly on the side of the people who pay him, but he also takes his positions honestly. I assume that he had something to do with NAR's decision not to advocate for an extension of the home buying tax credit. More important, he is in charge of the data that NAR puts out, and bad days like today essentially prove that the data are credible (full disclosure: I, along with Orawin Velz and Kevin Thorpe, helped design the methods by which the Existing Home Sales data are produced, but I have nothing to do with the monthly estimates that NAR puts out). I am guessing that one or two members of NAR wish he would fudge the data, but he does not.
I think Lawrence does this well--he is clearly on the side of the people who pay him, but he also takes his positions honestly. I assume that he had something to do with NAR's decision not to advocate for an extension of the home buying tax credit. More important, he is in charge of the data that NAR puts out, and bad days like today essentially prove that the data are credible (full disclosure: I, along with Orawin Velz and Kevin Thorpe, helped design the methods by which the Existing Home Sales data are produced, but I have nothing to do with the monthly estimates that NAR puts out). I am guessing that one or two members of NAR wish he would fudge the data, but he does not.
No more goosing with tax credits please.
The July Existing Home Sales number of 3.8 million units was abysmal--it was 1980s bad. I am guessing that a lot is it is that July gave back the tax credit driven boost of spring. If we look at average sales for the year, it is 5.1 million, which is pretty much normal. March, April, May and June were above normal, but all of that "strength" was given back in July. Credits just pull sales forward--they don't change the underlying dynamic, and they add to the deficit.
Sunday, August 22, 2010
Is housing the best way for low-income people to build wealth?
I was thrilled to be invited to the Future of Housing Finance conference held at the Treasury Department and co-sponsored by HUD this week. It was particularly nice to be seated next to Self-Help's Martin Eakes, whom I have admired for some time. Like Elizabeth Warren, Eakes long ago had insights into sub-prime lending that I wish more of us had taken seriously.
At the conference, Martin worried about a conversation that emphasized the need for robust underwriting standards for the mortgage market going forward. The three most important standards are loan-to-value ratio, payment-to-income ratio, and credit history. As Martin pointed out, African-Americans have less wealth available for down-payment than others (even after controlling for income), and have lower FICO scores than others, and therefore will be denied access to credit at a greater rate than others if underwriting standards are tough and uniform. Because much of the reason that African-Americans lack wealth is because they have been systematically stripped of wealth for many generations, policies that reduce access to credit disproportionately for African-Americans violate fairness.
The events of the past six or seven years show that loose underwriting does nobody any favors, either. Foreclosures are terrible things for the families who experience them and for the communities that have large numbers of them. The whole point of underwriting is to prevent default and foreclosure, and the unpleasant fact is that downpayment and FICO are predictors of likelihood of default.
In the era where almost all mortgages were self-amortizing, housing allowed families to build wealth because mortgages were a form of forced saving. Those who got a 20 year mortgage in 1960 owned their house free and clear in 1980; households gained wealth not because housing was such a great investment, but because they built equity, month after month. Housing was a particularly attractive way for those of modest means to save, because they could live in the very piggy bank they were building. In principle, however, these households could have rented and taken the difference between a mortgage payment and a rental payment and put it in another investment (a small business or the stock market). But we know that in the absence of nudges, people tend to save less.
Perhaps, then, the government could come at the savings issue more directly by giving low-income people a nudge toward saving. Suppose it developed a 401(k) type plan that matched the savings of those with below-median incomes at 2 to 1. This would encourage savings that then could be used for a down payment or a host of other investments (say a Vanguard index fund). This would cost taxpayers money, but perhaps less than mortgage programs built on thin underwriting standards. At the same time, getting people into the habit of savings could produce other social benefits as well. I am not sure such a plan is practical, but I think we do need to think about how we can help people who have been denied wealth for generations how to start accumulating assets without relying entirely on the housing finance system to do it.
At the conference, Martin worried about a conversation that emphasized the need for robust underwriting standards for the mortgage market going forward. The three most important standards are loan-to-value ratio, payment-to-income ratio, and credit history. As Martin pointed out, African-Americans have less wealth available for down-payment than others (even after controlling for income), and have lower FICO scores than others, and therefore will be denied access to credit at a greater rate than others if underwriting standards are tough and uniform. Because much of the reason that African-Americans lack wealth is because they have been systematically stripped of wealth for many generations, policies that reduce access to credit disproportionately for African-Americans violate fairness.
The events of the past six or seven years show that loose underwriting does nobody any favors, either. Foreclosures are terrible things for the families who experience them and for the communities that have large numbers of them. The whole point of underwriting is to prevent default and foreclosure, and the unpleasant fact is that downpayment and FICO are predictors of likelihood of default.
In the era where almost all mortgages were self-amortizing, housing allowed families to build wealth because mortgages were a form of forced saving. Those who got a 20 year mortgage in 1960 owned their house free and clear in 1980; households gained wealth not because housing was such a great investment, but because they built equity, month after month. Housing was a particularly attractive way for those of modest means to save, because they could live in the very piggy bank they were building. In principle, however, these households could have rented and taken the difference between a mortgage payment and a rental payment and put it in another investment (a small business or the stock market). But we know that in the absence of nudges, people tend to save less.
Perhaps, then, the government could come at the savings issue more directly by giving low-income people a nudge toward saving. Suppose it developed a 401(k) type plan that matched the savings of those with below-median incomes at 2 to 1. This would encourage savings that then could be used for a down payment or a host of other investments (say a Vanguard index fund). This would cost taxpayers money, but perhaps less than mortgage programs built on thin underwriting standards. At the same time, getting people into the habit of savings could produce other social benefits as well. I am not sure such a plan is practical, but I think we do need to think about how we can help people who have been denied wealth for generations how to start accumulating assets without relying entirely on the housing finance system to do it.
Friday, August 20, 2010
Rankings
The US News rankings of colleges came out the other day, and I will confess that I enjoyed the fact that we at USC moved slightly ahead of UCLA and were just one spot behind Berkeley. We also tied with Carnegie-Mellon.
I also enjoyed this piece by Colin Driver in the Atlantic on what it is like to run a place (Reed College) that refused to participate in the rankings: he finds it liberating, particularly after being the law school dean at Penn, where he had to fill out a survey rating every other law school in the country.
I have reservations enough about the US News college rankings, but the professional schools rankings are something else altogether--they are based heavily on reputation. When I was Associate Dean for Graduate Programs at GW, I had to fill out a survey rating every MBA program in the country. Of course, I was completely clueless about the vast majority of them (University of Utah? Could be great, could be awful, I just don't know). More important, I think it is hard to really know about a program unless you have worked in it for awhile. I do think I understand the strengths and weaknesses of Wisconsin, GW and USC, but that is about it. I probably can tell you whether a place is strong at research in my fields of interest, but that is about it.
I also enjoyed this piece by Colin Driver in the Atlantic on what it is like to run a place (Reed College) that refused to participate in the rankings: he finds it liberating, particularly after being the law school dean at Penn, where he had to fill out a survey rating every other law school in the country.
I have reservations enough about the US News college rankings, but the professional schools rankings are something else altogether--they are based heavily on reputation. When I was Associate Dean for Graduate Programs at GW, I had to fill out a survey rating every MBA program in the country. Of course, I was completely clueless about the vast majority of them (University of Utah? Could be great, could be awful, I just don't know). More important, I think it is hard to really know about a program unless you have worked in it for awhile. I do think I understand the strengths and weaknesses of Wisconsin, GW and USC, but that is about it. I probably can tell you whether a place is strong at research in my fields of interest, but that is about it.
Bill Gross' big idea
At Tuesday's conference on the Future of Housing Finance, Bill Gross suggested that anyone who was current on a Fannie/Freddie loan should automatically be refinanced to the current mortgage interest rate of about 4.5 percent. This should happen instantaneously, without underwriting.
I am trying to see the downside of this. It reduces the probability of default, because it reduces the present value of the loan balance and payments. It only rewards those who pay their mortgages on time. And as Bill Gross pointed out, it would amount to an enormous stimulus (what he didn't point out is that the stimulus would be at least partly funded by foreign holders of MBS).
I am trying to see the downside of this. It reduces the probability of default, because it reduces the present value of the loan balance and payments. It only rewards those who pay their mortgages on time. And as Bill Gross pointed out, it would amount to an enormous stimulus (what he didn't point out is that the stimulus would be at least partly funded by foreign holders of MBS).
Monday, August 16, 2010
Where should transit $$$ be spent?
I flew to Washington today for the big conference on the future of housing finance in the US. When I arrived at Dulles, I checked to see how long I would have to wait to catch the Washington Flyer bus to the Falls Church West Metro stop. It was five minutes, so I took it. It costs $10, and takes about 15-20 minutes from Dulles to the Metro.
Once I got to West Falls Church, I waited less than two minutes to catch an Orange Line train into town, so all seemed to be well, until not just one, but two trains broke down in front of us. It took about 45 minutes to get from Falls Church West to Foggy Bottom, a distance of perhaps eight miles. At that point, I left the Metro and caught a cab to my hotel in Dupont Circle.
Metro needs to spend money on maintaining and replacing cars and tracks in its current system; instead it is spending money on extending service to Dulles. There is a dedicated roadway to Dulles that makes bus travel fast and easy. The only problem is that the buses depart every 30 minutes; if they left the airport every ten minutes, they would be an attractive method of connecting to the rail system; such service would also be far less expensive than building heavy rail out to the airport.
The savings, then, could go to keeping curing the deferred maintenance of the current system. Alas, politicians don't seem to think that maintenance wins votes.
Once I got to West Falls Church, I waited less than two minutes to catch an Orange Line train into town, so all seemed to be well, until not just one, but two trains broke down in front of us. It took about 45 minutes to get from Falls Church West to Foggy Bottom, a distance of perhaps eight miles. At that point, I left the Metro and caught a cab to my hotel in Dupont Circle.
Metro needs to spend money on maintaining and replacing cars and tracks in its current system; instead it is spending money on extending service to Dulles. There is a dedicated roadway to Dulles that makes bus travel fast and easy. The only problem is that the buses depart every 30 minutes; if they left the airport every ten minutes, they would be an attractive method of connecting to the rail system; such service would also be far less expensive than building heavy rail out to the airport.
The savings, then, could go to keeping curing the deferred maintenance of the current system. Alas, politicians don't seem to think that maintenance wins votes.
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