Sunday, June 26, 2016

Chip Case, Top Housing Economist and Master Teacher, Passes Away

So in the previous posting I gave you the good news about Michael Brennan, now for the sad news.

Internationally known -- and admired -- economist Karl Case, Emeritus Professor at Wellesley College, known universally as Chip, passed away on Friday, July 15, 2016.  You can find obituaries at the Boston Globe and the Wall Street Journal.  This fall, a memorial event in Chip's honor will be held, at a time and place to be determined.

Among economists, and many others, Chip was probably best known for his housing price index work, much of it with his close friend, Yale's Robert Shiller.  The Case-Shiller home price indexes, now owned and maintained by CoreLogic, and distributed by them and also by Standard and Poor's, are among the most closely followed housing price indexes, and as discussed briefly below, spawned and/or improved several other widely followed price indexes.

In 2012, Wisconsin's James A. Graaskamp Center for Real Estate was honored to have Chip present the keynote address at our annual Wisconsin Real Estate and Economic Outlook Conference (see photo to left).

An Appreciation by Colleagues

In December of 2007, the Lincoln Institute of Land Policy sponsored a conference on "Housing and the Built Environment: Access, Finance, Policy," to honor Chip.  Chip's connections to the Lincoln Institute go back to his PhD dissertation (on Boston's property tax), but he also served Lincoln for many years as a faculty member and board member.

Based on the papers presented at that session, two of Chip's peers, Harvard's Ed Glaeser and the late John Quigley, edited a volume in honor of Chip in 2009; their introduction, and the foreword by Greg Ingram, provide a nice, concise introduction to Chip's research agenda as well as some personal anecdotes.  The individual chapters, while not by Chip, do give you a good overall view of his research interests and touch on some of his many contributions.  You can download Ed and John's introduction, and Greg's foreword, for free at:

Housing Markets and the Economy: Risk, Regulation and Policy; Essays in Honor of Karl E. Case.  Lincoln Institute of Land Policy, 2009.

The individual chapters, not by Professor Case but by a sampling of his friends and admirers, give a taste of his research interests and accomplishments.  Here's the Table of Contents, with links to abstracts and/or working paper versions where available.  (The book also includes a number of short commentaries, including one by yours truly):

Karl E. Case, housing, and the economy / Edward L. Glaeser and John M. Quigley

Derivatives markets for home prices / Robert J. Shiller

Home equity insurance : a pilot project / Andrew Caplin, Will Goetzmann, Eric Hangen, Barry Nalebuff, Elisabeth Prentice, John Rodkin, Tom Skinner, and Matt Spiegel

Spatial variation in the risk of home owning / Todd Sinai

Arbitrage in housing markets / Edward L. Glaeser and Joseph Gyourko

Subprime mortgages : what, where, and to whom? / Chris Mayer and Karen Pence

Government-sponsored enterprises, the Community Reinvestment Act, and home ownership in targeted underserved neighborhoods / Stuart A. Gabriel and Stuart S. Rosenthal

Siting, spillovers, and segregation : a reexamination of the Low-Income Housing Tax Credit program / Ingrid Gould Ellen, Katherine M. O'Regan, and Ioan Voicu

Measuring land use regulations and their effects in the housing market / John M. Quigley, Steven Raphael, and Larry A. Rosenthal

Do real estate agents compete on price? : evidence from seven metropolitan areas / Ann B. Schnare and Robert Kulick

The role of job creation and job destruction dynamics / Nancy E. Wallace and Donald W. Walls

Economics blogger David Warsh, another friend, wrote a really nice personal appreciation of Chip that appeared as a postscript in the 2009 volume, which is also available at Warsh's blog.

Some of Chip Case's Research

The aforementioned Lincoln Institute volume is a good introduction to Chip's interests, and a sign of the esteem in which he was held by colleagues.  But nothing is a substitute for reading, and thinking carefully about, some of Chip's own papers.

Chip has written dozens of papers and articles.  I'll discuss one of my particular favorites at some length; then make shorter comments about a few others.

Measuring Housing Prices, and Housing Market Efficiency

Accurately measuring housing prices is a complicated endeavor.  What is the “price” of housing, anyway?  Every house is more or less unique, in terms of size, quality, associated services, and of course: "location, location, location."  If I pay $1,000/ month rent and you pay $1,200, who’s paying a higher price?  If our units are nearly identical, you do.  If your apartment is 1500 square feet and mine is 500, maybe I do.  But to take another example, if your apartment is in midtown Manhattan and mine is in Madison, maybe I do.  How do we handle many characteristics at once?

Economists have an ever-expanding toolkit for measuring housing prices:  for example, simple medians of sales prices, rents or values; so-called Laspeyres or Paasche or chain price indexes, like the various housing components of the Consumer Price Index; and so-called hedonic models that use regression techniques to control for the aforementioned differences in size, quality, location and so forth.  Finally, thanks in large part to the efforts of Chip Case and Bob Shiller, so-called repeat-sales indexes (RSI) are becoming popular for estimating price changes, if appropriate data are available.

An introduction to the various methods, and some of their pros and cons, can be found in the Primer on U.S. Housing Markets and Housing Policy that Richard Green and myself wrote a decade ago. Here we'll limit ourselves to the RSI of Case and Shiller and others.

Repeat Sales Indexes

Repeat sales indexes are estimated by analyzing data where all units have sold at least twice. Such data allow us to annualize the percentage growth in sales prices over time. These are time-series indexes in their pure form. They do not provide information on the value of individual house characteristics or on price levels. They have the advantage of being based on actual transaction prices, and in principle allow us to sidestep the problem of omitted variable bias. However, units that sell are not necessarily representative of all units. Sometimes it's difficult to tell whether a unit retains the same characteristics across time. For example, remodeling could change a house’s characteristics.

The best way to understand how repeat sales indexes work is to look at an example. The figure shows a graph of 17 properties that sold twice in the Shorewood Hills neighborhood of Madison, Wisconsin, in the late 1980s and early 1990s. Each property is numbered from 1 to 17, and each property appears twice. The Y-axis is the logarithm of the selling price of the unit.  By the property of logarithms, the slope of these lines are approximately the percentage changes in the units' prices between first and second sale.

The repeat sales estimator in effect measures the average slope of the lines in this figure, year by year. In a classic paper, Bailey, Muth, and Nourse (1963) illustrated how to compute this, using regression methods and a larger sample than we show in the figure.

In their now equally classic paper, their 1988 "The Efficiency of the Market for Single-family Homes," Case and Shiller constructed their own version of these price indexes, for Atlanta, Chicago, Dallas and San Francisco, from 1970 to 1986.  In addition to the indexes themselves, Chip and Bob presented what was, at the time, the most sophisticated tests of housing market efficiency.

There are alternative definitions of market efficiency; for our purposes, we'll simply think of it as a market in which there is no systematic trading strategy that can yield excess profits, i.e. beyond the "normal" profit rate for holding an asset of those particular risk characteristics.

Geek alert! Heteroskedasticity discussion below!

The "Ordinary Least Squares" regression technique recommended by Bailey, Muth and Nourse, similar to the technique most of us used in our first year of college statistics, assumes that errors are "homoskedastic," i.e. that the variance of the error term is constant throughout the sample/over time.  But real house prices may increase over time; and nominal house prices (from which the first stage of repeat sales indexes are calculated) certainly increase over time.  This scaling effect means that the variance of the error term will increase over time.  As any econometrics text will demonstrate, OLS in the presence of "heteroskedasticity" is still unbiased and consistent; but estimates will be, "inefficient," not in the finance textbook sense of the term, but in the stat textbook's: yielding the smallest expected sampling error.

Since repeat sales use a limited dataset (properties have to sell twice, at least!) efficiency gains may be useful in measuring price changes; in testing hypotheses regarding the variance of the error term itself (as in tests of market efficiency), they are essential to avoid bias in such tests.  Case and Shiller (1988) shows how to use Generalized Least Squares (GLS) weighted repeat sales estimates that account for increases in variances as the interval between sales increases.

Housing Market Efficiency

After these corrections, Case and Shiller find that “a change in real citywide housing prices in a given year tends to predict a change in the same direction, and one-quarter to one-half as large in magnitude, the following year.”  Like any great paper, theirs answers a few questions and raises others: as they point out, just because there is serial correlation in house price changes, much more than we'd every see in, for example, stock markets, stronger versions of market efficiency are contradicted only if one can effectively and successfully trade on the perceived inefficiencies.

If we see a pattern in stock prices, it's not hard to trade on it: every S&P 500 stock trades thousands of times a day, and all I have to do to trade is to go online or call my broker.  Trading a house is another deal entirely.  Transaction costs are high, and need to be incorporated.

Many other improvements in repeat sales measures have been implemented over time, e.g. adjustments for depreciation, rehabilitation, and the like.  So Chip and Bob's paper was the beginning of a large research agenda carried out by them and by others.  That single paper has been cited over 1700 times; there are tenured academics whose entire corpus of research has not been as widely cited as this one paper.  Other follow up by Chip and Bob has focused on collecting data on actual homeowners' expectations about the future of housing prices, and on bringing important insights from psychology into our economic models.

Housing's Effect on the Aggregate Economy

Let me now skip to a more recent paper.  In 2005, Chip and Bob were joined by John Quigley; they wanted to examine how housing markets affect the overall economy.  Their paper, "Comparing Wealth Effects: The Stock Market versus the Housing Market," has also had a big impact, with some 1400 citations.

Both the international data and the U.S. data show economically meaningful and statistically significant effects of changes in housing wealth on consumption, and hence on GDP. (Recall that in the U.S. consumption is nearly 70 percent of GDP in recent years).  Representative results suggest that for a 10 percent increase in housing wealth, consumption increases by between 0.4 percent and 1.1 percent, depending on data set and model.  Now, this might seem like a modest effect, but remember that housing wealth is a very large stock -- currently estimated at about $30 trillion -- and consumption is a flow, year after year.  Applying those coefficients to a $30 trillion housing stock and an $18 trillion GDP suggests a 10 percent change in housing prices calls forth an annual change in consumption of between $50 and $140 billion; not as large as some previous estimates, but by no means a negligible macroeconomic effect.

Lots more to be done here, too, of course, which is why this paper is so heavily cited.  Some research,such as that by my friends Morris Davis and Michael Palumbo, presents estimates that suggest the wealth effect could be even larger. We'll certainly learn more about this subject in the years ahead, thanks in no small part to Chip's efforts.

Local Public Finance

I've already mentioned that Chip's PhD dissertation was about property taxes; throughout his career he returned to local public finance and expenditure, including education policy.  One of his best known papers in this area, co-authored with Katherine Bradbury and Chris Mayer, is "Property Tax Limits, Local Fiscal Behavior, and Property Values: Evidence from Massachusetts Under Proposition 2 1/2."

In 1978, California famously passed a ballot initiative, Proposition 13, that capped property taxes and instituted a set of complex fiscal rules that, over time, have hamstrung California's schools, as David Figlio has shown.  Slightly less well known are the caps placed on property taxes in Massachusetts, known as Prop 2 1/2.  The name comes from key parameters: the Proposition caps the effective property tax rate at 2.5 percent of assessed value, and limits nominal annual growth in property tax revenues to 2.5 percent, unless residents pass a local referendum allowing a greater increase.

Their research found that Prop 2 1/2 adversely affected local house prices.  Controlling for other effects, house prices performed worse in communities that had slower increases in spending, suggesting that Proposition 2 1/2 led communities to spend ‘too little’ on services. Local governments did not always optimize their spending mix.   Bradbury, Mayer and Case found that increases in school spending increased house prices, ceteris paribus; but the effect of the non-school spending variable was not statistically different from zero.

John M. Quigley Medal

The leading academic organization in our field is the American Real Estate and Urban Economics Association (AREUEA).  By acclamation, in 2014, Chip was chosen as the first recipient of the John M. Quigley Medal for Advancing Real Estate and Urban Economics.  Named for Berkeley's late John Quigley, coincidentally one of Chip's good friends, the medal honors those who "have produced a record of scholarship that opens up new avenues of inquiry, have a demonstrated record of mentorship of young scholars, have supported institutional advances within these fields, or have been particularly effective at dissemination of these fields to public and professional practices."  To read the Quigley Medal precis is to read a brief summary of Chip's career.

Selected Other Honors and Affiliations

At his retirement from Wellesley he held the Katharine Coman and A. Barton Hepburn Professor of Economics at Wellesley College.

Chip was also a Senior Fellow at Harvard's Joint Center for Housing Studies.

Fellow of the Weimer School of Advanced Real Estate Studies of the Homer Hoyt Institute.

Member of the Board of Directors of the Depositors Insurance Fund of Massachusetts.

Academic Advisory Board of the Federal Reserve Bank of Boston.

Allyn Young Teaching Prize, Harvard University.

Founding partner in the real estate research firm of Fiserv Case Shiller Weiss, Inc.

Member of the Board of Directors of the Mortgage Guaranty Insurance Corporation (MGIC).

Three years active service in the U.S. Army.

Chip Case, Master Teacher

Chip taught economics at Wellesley College for 34 years; even after his 2010 retirement, he remained connected to the school and its students.  By all accounts, he was a master teacher, inside the classroom and out.  Over the years Chip and his wife Susan hosted over three dozen international Wellesley students, "offering them a home away from home," as the Globe's obituary noted.  To quote from the Journal's obituary,

“Chip was our most popular draw for alumni,” said Jessica Shlasko, a former student who later became executive director of the college alumnae association. In editing the alumni magazine, “I don’t think there was a single edition without a wedding photo of all these [former] students with Chip,” she said. For reunions, “every single class would call and request him as a speaker.”
Chip's Principles of Economics, a basic text coauthored with Ray C. Fair and Sharon Oster, is in its ninth edition and has been adopted at more than 500 colleges and universities.

More Sides of Chip Case

Chip wasn't satisfied with limiting himself to academic research on housing prices; he wanted to make the market more efficient, and to reduce the risks faced by households that often have the majority of their wealth tied up in a single house in a single market.  That's what led him to join Bob Shiller, and Shiller's former student Allen Weiss, to institutionalize their price indexes -- now owned and maintained by CoreLogic -- and to attempt to create a futures market in housing prices at the Chicago Mercantile Exchange.

For many years, Chip lived with Parkinson's disease.  He was matter-of-fact about it, many of us would say quietly brave.  He didn't talk about it at length, and when he did, it was never to solicit anything on his own behalf, but rather to shine a light on the disease.  He was very supportive of research and treatment of others, for example serving as a member of the Challenge Team of the Michael J. Fox Foundation's Parkinson's Data Challenge.  He was aggressive in taking charge of his own life, traveling widely.  I remember being agog at his portable drugstore and the efforts he made to join a number of us gathered by Gavin Wood at the Royal Melbourne Institute of Technology in Melbourne a few years ago, where he served as our keynoter -- plus he made the 24 hour trip by coach so he could save the conference organizers a substantial sum (and apply a small portion of the savings to some golf!)

Compounding his health problems, several years ago Chip was diagnosed with multiple myeloma, a difficult cancer that attacks the body's immune system and causes cancer cells to accumulate in bone marrow.  Thanks to the hospitality extended to us, and to so many others, by Chip's wonderful wife Susie, Joan and I were able to visit them at their home a few times in the past year.  It was clear his health problems were serious, but they never interfered with a good time at the Case home.

Another of Chip's avocations was his unofficial position as Housing Poet Laureate (certainly since fellow housing economist/poet Steve Mayo's 1999 passing, which called forth one of Chip's best poems.  More readily available is the poem he wrote in honor of friend Bob Shiller's Nobel Prize in Economics -- naturally enough, about housing bubbles.  While Chip was a good poet for a housing economist, he was of course not his household's top poet -- that distinction goes to daughter Kristen Case, published poet and Associate Professor of English at University of Maine at Farmington.

Ironically, my wife and I have just moved to Newton, Mass. a week before Chip's death.  Were Chip still with us, in addition to improving my economics, I know he'd be trying to convert me from my boyhood love of the Philadelphia Phillies, to my new home town's, and his beloved, Boston Red Sox.  Well, I have to say watching David Ortiz smack around young pitchers helps make the case!

Chip was also well known as a country music aficionado.  I am a tyro on country music compared to Chip, but we shared a special fondness for David Allen Coe's rendition of Steve Goodman's "You Never Even Called Me by My Name (a.k.a. The Perfect Country and Western Song.)  I think I'll be playing it more than usual for a while.

Forthcoming Memorial Event

There will be an event honoring Chip at the Wellesley College Field House, Sunday, October 23, 2015, from 2 to 4 pm.

Selected Papers of Karl Case, and References Cited

Bailey, Martin J, Richard F Muth, and Hugh O Nourse. "A Regression Method for Real Estate Price Index Construction." Journal of the American Statistical Association 58, no. 304 (1963): 933-42.
Bradbury, Katharine L, Christopher J Mayer, and Karl E Case. "Property Tax Limits, Local Fiscal Behavior, and Property Values: Evidence from Massachusetts under Proposition 212." Journal of Public Economics 80, no. 2 (2001): 287-311.
Case, Karl E. "The Central Role of Home Prices in the Current Financial Crisis: How Will the Market Clear?". Brookings Papers on Economic Activity 2 (2008): 161-93.
———. "The Real Estate Cycle and the Economy: Consequences of the Massachusetts Boom of 1984-87." Urban Studies 29, no. 2 (1992): 171-83.
———. "The Value of Land in the United States: 1975-2005." In Land Policies and Their Outcomes, edited by Gregory K Ingram and Yu-Hong Hong. 127-47. Cambridge, MA: Lincoln Institute of Land Policy, 2007.
Case, Karl E, Ray C Fair, and Sharon C Oster. Principles of Microeconomics. Pearson, 2011.
Case, Karl E, and Christopher J Mayer. "The Housing Cycle in Eastern Massachusetts: Variations among Cities and Towns." New England Economic Review  (1995): 24-41.
———. "Housing Price Dynamics within a Metropolitan Area." Regional Science and Urban Economics 26, no. 3-4 (1996): 387-407.
Case, Karl E, and John M Quigley. "How Housing  Booms Unwind: Income Effects, Wealth Effects, and Feedbacks through Financial Markets." European Journal of Housing Policy 8, no. 2 (2008): 161-80.
———. "How Housing Busts End: Home Prices, User Cost, and Rigidities During Down Cycles." The Blackwell Companion to the Economics of Housing  (2010): 459-80.
Case, Karl E, John M Quigley, and Robert J Shiller. "Comparing Wealth Effects: The Stock Market Versus the Housing Market." Advances in Macroeconomics 5, no. 1 (2005).
Case, Karl E, and Robert J Shiller. "Decade of Boom and Bust in the Prices of Single Family Homes: Boston and Los Angeles." New England Economic Review  (1994): 40-51.
Case, Karl E, and Robert J Shiller. "The Behavior of Home Buyers in Boom and Post-Boom Markets." New England Economic Review, no. November (1988): 29-46.
———. "The Efficiency of the Market for Single-Family Homes." American Economic Review 79, no. 1 (March 1989): 125-37.
———. "Forecasting Prices and Excess Returns in the Housing Market." Real Estate Economics 18, no. 3 (1990): 253-73.
———. "Is There a Bubble in the Housing Market?" Brookings Papers on Economic Activity, no. 2 (2003): 299-363.
———. "Prices of Single-Family Homes since 1970: New Indexes for Four Cities." New England Economic Review  (September/October 1987): 45-56.
Case, Karl E, Robert J Shiller, and Anne Thompson. "What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets." National Bureau of Economic Research, 2012.
Case, Karl E, Robert J Shiller, and Allan N Weiss. "Index-Based Futures and Options Markets in Real Estate." The Journal of Portfolio Management 19, no. 2 (1993): 83-92.
Davis, Morris A. and Michael G. Palumbo. "A Primer on the Economics and Time Series Econometrics of Wealth Effects." Washington, D.C.: Board of Governors of the Federal Reserve System, 2001.
Figlio, David N. "Did the “Tax Revolt” Reduce School Performance?" Journal of Public Economics 65, no. 3 (1997): 245-69.
Green, Richard K., and Stephen Malpezzi. A Primer on U.S. Housing Markets and Housing Policy. American Real Estate and Urban Economics Association Monograph Series. Washington, D.C.: Urban Institute Press, 2003.
Musgrave, Richard A, Karl E Case, and Herman Leonard. "The Distribution of Fiscal Burdens and Benefits." Public Finance Review 2, no. 3 (1974): 259-311.


Saturday, June 25, 2016

Wisconsin Real Estate: A Century of Tradition, and Innovation

Real estate and urban economics have a long and distinguished tradition at the University of Wisconsin.  We trace our roots back to Richard Ely, a century and a quarter ago; and Wisconsin's real estate program has benefited from many distinguished faculty, students/alumni, and other associates, including the Graaskamp Center's famous Eponym.

I've documented that history, and explained a bit of the context around it, in my teaching note The Wisconsin Program in Real Estate and Urban Land Economics: A Century of Tradition and Innovation.  The paper started as a 4 page teaching note, and, kind of like a weed, just kept growing; it's now about 45 pages.  Internally, we often refer to it as "the T&I paper," for reasons that will be explained below.

In this first blog on the subject, I'll first briefly outline what's in the T&I paper; and then a bit about where it came from, why it's taken its present form.

First and foremost, it's a teaching note, so I begin with some tedious academic stuff about how "urban land economics" fits in with finance and economics and so on.  Next, we discuss "The Wisconsin Idea." Often discussion of the Wisconsin Idea plays off a famous quote that "the walls of the University are the boundaries of the State;" more generally, it's a statement that UW is not simply a collection of ivory tower academics, but that the University is engaged with real world problems and their solution.  That allows us to segue into The Wisconsin Tradition in Real Estate; which we view as first and foremost a set of values that stem from and elaborate on the Wisconsin Idea.  These values -- including, just to give a few examples, ethical dealing, a holistic approach to real estate, and a passion for our business -- are sufficiently important to rate their own blog post, maybe several, sometime in the next week or two.

After very brief discussion of some of these values, the teaching note discusses some of the people who have developed and espoused these values at UW.  The focus is on four key real estate educators that were critical in developing the Wisconsin Tradition, namely Richard T. Ely; Richard Ratcliff; Richard Andrews; and of course Jim Graaskamp.

Chronologically, Ely started real estate and land economics at Wisconsin (and, to a large extent, in universities generally as the T&I paper explains); Ratcliff and Andrews came later.  By the late 1980s, Graaskamp was the dominant force in the program, but in poor health -- he had contracted polio in high school, and the virus left him a quadriplegic, albeit an amazingly active and effective individual.  In 1988, Graaskamp passed away after a sudden decline.

The paper then describes the post-Graaskamp era.  After Graaskamp, it was an open question as to whether the program would continue; but with the support of students, alums, and key UW faculty and administrators, the University and School of Business decided to rebuild.  In 1989, Kerry Vandell was hired to spearhead the next stage; in the following year Kerry recruited myself, Jim Shilling, and Richard Green to join Senior Lecturer Rod Matthews to rebuild a Wisconsin program still reeling from Graaskamp's untimely death.

Real estate is in no small part a "people business," and so is real estate research and education; the T&I paper then provide biographies of some of the other key Wisconsin Real Estate faculty members, including all the current faculty and staff.  The paper also outlines the four key institutions of Wisconsin Real Estate, namely the Department, the Graaskamp Center, the Real Estate Club, and the Wisconsin Real Estate Alumni Association.  Related institutions -- including of course the University, and the Wisconsin School of Business -- are also described.

Universities, and their programs, have three overarching missions: research, teaching, and outreach/service.  Well functioning programs, in real estate as elsewhere, tend to be those in which these missions are complementary and integrated, rather than independent silos.  A good part of the T&I paper discusses each of these missions, and how they are integrated.

Today’s Innovation is Tomorrow’s Tradition

Why a title of "Tradition and Innovation," why do we refer to it as the T&I paper?  In recognition of the fact that we have a tradition today because we were innovative in the past.  Ely’s vision of a true real estate curriculum, the land market and valuation research of Ratcliff and Andrews, Graaskamp’s innovations in teaching and analytic methods are the bedrock of our program’s success.  Graaskamp himself famously summarized the original innovation in the real estate “market:”  

Someone rolled a rock to the entrance of a cave and created an enclosed space for his family – a warmer, more defensible shelter, distinct from the surrounding environment.  This can be called the first real estate development.  Since then, real estate activity has evolved and taken many forms to meet the needs of man and his society.  Once based on need and custom, real estate is now based on social economics and statute.

In future posts, we'll have more to say about the specifics of the Wisconsin Tradition, and our Innovations, including discussion of Graaskamp Center Executive Director Michael Brennan's championing of the Wisconsin Innovator Award. Stay tuned!

An update to T&I is coming!

The current version of the T&I paper, link above, is dated December 2015, before my recent change in status to Professor Emeritus.  I plan to do a major revision to this paper sometime in the next year, after the University has recruited my successor.

Friday, June 17, 2016

 Chart(s) of the Week: Housing Starts

    "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 re-start a new feature, a popular category in the old Wisconsin Real Estate Viewpoint, namely the Chart (or charts!) of the Week.

The roughly 3,000 students I've taught over my career, and many 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.

As noted in the previous post, 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! I never get tired of this chart.  Fascinating stuff:

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. This first chart has three lines: the red line shows private housing starts; the green line shows public housing starts; and the blue line shows manufactured housing shipments. All three are in thousands of units started (or shipped). 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.

In the past few years starts are getting back up a bit short of the million units range, still a bit below what we might expect from an average healthy market.  We'll take another look at this below, with a second chart that makes a rough demographic adjustment.

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 shipments 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 shipments 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.  Recently they are back up around 70K, but still shipments are a bit anemic.

Now, about that simple demographic adjustment.  When we are looking at the number of housing starts over more than a century, we might also want to make at least a rough adjustment for the fact that we are a much more populous country now than then.  In 1890 the U.S. had a population of about 63 million, in about 13 million households; now we have about 325 million in about 117 million households.  The next figure shows how private starts (the bulk of the supply) looks once we've normalized by the number of households:

It's no surprise that starts look a little different when we examine this simple transformation.  (A recurring theme of this blog will be the value of simple transformations of data: any series worth charting is worth charting several times!)

The dotted line is a regression line through all the points; roughly, a century or so ago starts averaged a bit over 20 per 1,000 households, each year; in recent years that average has dropped off below 20 per 1,000.  While starts are back up in the past few years, they are still at a very low level of around 9 starts per 1,000 households, perhaps half of recent averages.

This series actually splices older historical data to the "modern" starts data that you can readily find at Census or FRED.  (I've got a data source note below).  A lot of "modern" economic data begin in 1947, when national income accounting really took hold as a routine core activity of the Federal Government. (More on that history in a future post).  The monthly housing starts series that Census and FRED present begins in 1959.  Notice if you had started in 1947, or in 1959, you'd see a much faster decline in the trend -- and, if (as you shouldn't!) one used this trend to forecast, you'd expect starts to turn negative (!) sometime in the next several decades.  Not a sensible forecast!

Econometricians have a battery of tests to see if data are likely really "mean reverting," or revert to a trend (think of a trend as a moving mean!); or if they follow some other pattern, like a "random walk."  I haven't done the formal tests  here, but we don't need formal tests to see that we shouldn't put too much on trend reversion as a great forecasting tool for housing starts.  I put the regression line in just as a simple benchmark.

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.

Data note

Postwar starts are easy to find at Census; where did the early data come from?  I obtained them some time ago from Historical Statistics of the United States. This masterful work was originally published in (I think 2) editions by Census, and was later taken over by Cambridge University Press and put online. I checked the online version:

Cambridge online Historical Statistics in turn cites:

U.S. Bureau of the Census, Housing Construction Statistics: 1889 to 1964 (1966).

Thursday, June 16, 2016

Some things I'm working on now, and over this coming year


My first few posts seem to be all about "me, me, me...?"  Don't worry, we'll get to other, more interesting stuff, in a few posts!


Urban form around the world

On the research front, I'm working on "Understanding Intra-urban Location: The Spatial Distribution of Population in 57 World Cities" with my friend Alain Bertaud.  B&M present a unique database of measures of population density patterns from 57 cities in 32 different countries, collected over more than two decades.  After some discussion of selected cases, we use these data to test some predictions of the standard model of intraurban location, and to explain apparent departures from that model.

Several key predictions of the so-called ‘standard urban model’ of William Alonso, Ed Mills and Richard Muth are confirmed; cities everywhere decentralize as their populations grow, their incomes rise, and transport costs fall, as the standard model predicts.  But we also show that the way the market for land and real estate is organized and regulated has profound effects on urban form.  This has potentially powerful implications for the value of the real estate capital stock, and for transportation systems.


A broad look at housing in the United States 

In 2003, Richard Green and I published A Primer on U.S. Housing Markets and Housing Policy.  Despite having one of the ugliest book covers of all time (G&M were not consulted!), it was a raging success, selling many dozens of copies; the last time I checked #1,867,979 in sales at Amazon.  Be the first to review it there!  But we did get nice reviews in high profile spots like Journal of the American Planning Association, and Regional Science and Urban Economics, and around 190 citations in Google Scholar (pretty decent, actually!)  But our real distinction was a great blurb from the late John Quigley, one of the greatest urban economists we've known:  "...a compact readable introduction to the economics of housing, accessible to all, yet rigorous and judicious.  The book is an excellent illustration of the way economists think about markets and government policy."

Apparently, there have been some new developments in housing markets since 2003; who knew?  So Richard and I are working on a Second Edition, with colleague Paul Carrillo.  We'll have new material on the 2000s era boom and bust in housing prices, the interactions between housing and the aggregate economy, and recent developments in the housing of lower income Americans.


Housing and recent macroeconomic events

I'm currently making final revisions to a short paper on a big topic: "Residential Real Estate In the U.S. Financial Crisis, the Great Recession, and their Aftermath," which will appear in a special issue of the Taiwan Economic Review on housing, edited by Nan-Kuang Chen and Charles Ka Yui Leung.  In my class lectures on the crisis, I have a few slides listing 91 (!) putative causes of the housing boom and bust, the associated Great Financial Crisis, the Great Recession of 2007-9, and the disappointingly weak recovery that's followed.  So to boil things down, at the risk of over-simplifying, this paper focuses on the housing boom-bust, with particular attention to supply-side constraints in housing markets; and the role of increasing leverage.


Housing in China

I've been undertaking some new work on China's housing supply with Lingxiao Li. We examine housing prices in 35 large cities over the past decade-and-a-half; we're not the first to examine these data, or to try to recover supply elasticities from the same.  Our main innovation is to construct measures of natural and regulatory constraint; such measures have been demonstrably important in explaining housing markets in both the U.S., where we have a lot of variation across cities/metro areas; and also across countries.  Support from the Lincoln Institute of Land Policy was instrumental in allowing us to collect this data, and present our first results as a working paper to that fine institution.  Like all such measures, our "regulatory indexes" are imperfect, but we are currently refining our measures and looking to glean what we can from more recent data on the ups and downs in China's housing markets.  Stay tuned!


African urban development and housing

The world is a complicated place, and no continent more so than Africa.  Many Americans have an over-simplified and often inaccurate view of the most rapidly urbanizing region in the world, if they have a view at all.  Two decades ago I took the opportunity to expand my own modest experience in Ghana, Kenya and Nigeria by teaming up with Iowa's Jay Sa-Aadu to pull together data from around the continent and write a review entitled "What Have African Housing Policies Wrought?" (Real Estate Economics, 1996).  But a lot has happened in Africa over the past two decades, to put it mildly!

So now Jay and I have embarked on an update and extension of that paper, provisionally entitled "Housing and Urban Development in Africa: Lessons Learned, Lessons Not Learned," with our colleague Moussa Diop.  Drawing on several decades of research we review lessons learned about housing markets and policies that are relevant for many countries in Africa today.  Our goal is not only to highlight lessons learned from previous research and practice; but also lessons forgotten.  We present a research agenda that might fill remaining gaps in our understanding of African housing markets and policy, some of which might be quite applicable to other regions as well.


More to come, on these and other topics

This blog post is a bit of a tease -- I've listed five of my current projects, with very little detail, on the specifics of the projects, including much of the findings.  Fear not -- future posts will explore these and other projects, and results, in much more detail.

Wednesday, June 15, 2016

Welcome to Steve Malpezzi's Real Estate and Urban Development Viewpoint


About me, about this blog

I'm Professor Emeritus of Real Estate and Urban Land Economics, late of the James A. Graaskamp Center for Real Estate in the Wisconsin School of Business, at the University of Wisconsin-Madison.

This blog focuses on cities, real estate markets (especially housing, but we'll discuss nonresidential real estate too!), economic development, data analysis and presentation, environmental issues, and a host of related subjects.  Business and public policy issues are a big part of the discussion.  I'm an economist by training, but I've got a little political science background too, and in fact I'll squeeze in a little psychology, geography, and other social sciences from time to time.

I'm starting this blog up as I begin the next phase of my career.  As an Emeritus, I've retired from the day-to-day activities of the University (no more committee meetings!), but I'm far from quitting!

This is not my first foray into blogging.  Along with a number of Graaskamp Center colleagues, several years ago I was a frequent contributor to Wisconsin Real Estate Viewpoint.  That blog has been inactive for a while, for reasons that are totally uninteresting to most readers; though I think there are some interesting posts that still repay reading today.  From time to time I'll point a few of those out, refresh some others.  But mostly, we'll be very forward looking.

So, for now, welcome!