Wednesday, August 24, 2016

A Digression on (Brutalist) Architecture

I haven't ever had the opportunity to study architecture in a serious way.  But given my interests in housing, real estate, and urban development, it's not surprising I like to pick up a little knowledge about architecture here and there.

My interest is also derived partly from my family's business in tile, terrazzo and marble.  I was once, for brief periods, a productive member of society.  Though my father might have told you, not too terribly productive.

From time to time, in my urban economics and other courses, I like to take short digressions into architecture.  Real estate students sometimes come to the field with pre-existing interest in the design of the built environment; but undergrads in particular often find themselves choosing the major after taking a good intro class or hanging out with the Real Estate Club, and architecture is completely new to them. At the other extreme, some of our MBA students are practicing architects, some of whom have helped me learn a bit about the subject.  (Those former students are not responsible for my opinions or errors!)  Over time, everyone who works in real estate develops some kind of interest in architecture.  As an aside, UW-Madison has no architecture school or department; we sometimes collaborate with friends at UW-Milwaukee architecture.

My interest was piqued today by an article in the New York Times, a little puff piece on the architect Dominque Perrault.  The article itself wasn't terribly interesting, except this quote caught my eye:  "I follow, which is a website that focuses on the preservation of 20th-century brutalism architecture."   Well!

The website Perrault referred to, as you'll see if you follow the link, is devoted to the preservation of architecture in Eastern and Central Europe dating from the communist era.  My interest -- a negative interest, I admit up front -- comes from a little work I've done, and a lot more done by colleagues, that makes me suspicious of the idea that a lot of communist era Brutalist architecture needs to be preserved.  If some of it is to be preserved, the twin challenges are to choose buildings judiciously, and to preserve them in a way that doesn't impose large costs on those who depend on a well-functioning stock of real estate.

Along these lines, shame on me for visiting Budapest and not taking the time to check out Memento Park, where socialist-realist statuary and other reminders of the communist era are there for perusal, and our edification.  (Thanks to my friend Alain Bertaud for the head's up about this park!)  Of course, it's easier to collect a bunch of statues and other art in a park than to round up a bunch of buildings.  Nevertheless, it's an idea...

But the real reason I react so strongly to socialist modernism/brutalism in architecture is that I spent 26 years next door to the most ironically named building of all time, UW-Madison's Humanities Building.  Designed by Chicago architect Harry Weese and completed in 1969, a decade ago it was renamed the George L. Mosse Humanities building in honor of a long-time UW history professor.

 Not only did I have to look at it, from time to time I've had to teach in it.  To paraphrase Dr Who, it's worse on the inside.

Interestingly, student lore from at least the 90s on has it that the built in in-accessibility was because the university wanted a "riot-proof" building.

So I have had to explain to generations of students how to riot.  (We have to teach so much stuff outside the syllabus these days!)

Specifically, students don't mass outside the building and charge it.  Such a charge is what Weese's design brilliantly impedes, as this slide shows:

You are students.  You are allowed inside.  The way to organize a building takeover is to enter in small groups. Then meet at the preordained spot at the agreed upon time.  Announce that you have taken over the building in the name of ______, and present your list of non-negotiable demands.

Which today would probably revolve around forcing professors to allow smartphone and laptop use in class. (If you don't know why many of us wrestle with banning them, you haven't taught much lately.)

Brutalism is an offshoot of modernist architecture.  Early modernists like Ludwig Mies van der Rohe eschewed adornment but used a lot of glass curtain walls, giving some of their work a lightness that the brutalists reacted against, preferring a heavy, monumental look.  The term is usually traced to Le Corbusier's use of raw concrete (béton brut, en français).

Wither Humanities?   (I'm talking about the building, not the field of study!) As UW re-develops the campus, several 60s era buildings, including Humanities, are slated to come down.  Not because of aesthetics, or even because they are functional failures -- Humanities has insufficient HVAC, classrooms where students can't all see the blackboard, and don't even ask about the inability to bring IT into a class.  Rather, the 60s era buildings were built on the cheap.  Their foundations are crumbling, the HVAC can't be maintained, and roofs are collapsing.  Given budget issues faced at UW, I'm not sure of the timetable, but Humanities is slated to come down; so here's a hot debate about this, with a number of preservationists arguing that UW students and faculty should just suck it up.  Of course as an economist, with limited aesthetic sense, my opinions should be appropriately discounted.  But my dim opinion of Humanities is shared by at least a few more knowledgeable colleagues, including architectural writer Brent Brolin.  Brent suggests that buildings worthy of preservation would be either the best of what was built in the past; or in some cases, examples of historic and significant townscapes.  Humanities fits neither criterion.

Of course I've had other run-ins with dysfunctional modernist buildings nominally temples to "functionalism."  I spent many years in Washington, and my fellow urban economist Tony Yezer (long ago, my PhD advisor at GWU), reminds me not to forget HUD's headquarters building, where I've spent some hours in interesting meetings; and other hours lost, trying to find the interesting meetings:

Here's the Robert C. Weaver building, above.  Designed by Marcel Breuer, it was completed in 1968.  It's part of the L'Enfant Plaza complex, itself worth a blog entry someday.

No need to fly back to Madison or take a train to DC to get my Brutalist fix.  Now that I live in the Boston area, I just hop on the D train to go straight to Boston's City Hall.  Gerhardt Kallman and Michael McKinnell have a lot to answer for:

Obviously I don't warm up easily to most Brutalist architecture, or some other Modernist buildings.  But the best Modernist architecure can be positively inspiring.  Edward Durrell Stone's Aon Building (Chicago), for example, or I.M. Pei's Hancock Tower (Boston), to give just two examples.  I can even name one Brutalist example by Weese that works well, in my opinion: the DC metro stations.    Weese designed the honeycombed vaults using "raw" concrete, and to my eye the results are functional, appropriate to the environment, and even beautiful.

There's much we could learn about the economics of architectural design.  One model for studies of the value of good design is a classic paper by Kerry Vandell and Jonathan Lane, "The Economics of Architecture and Urban Design," published in Real Estate Economics in 1989 (vol. 17, no. 2, pp. 235-60.)  A good addition to your "Reading for Life" list.

Thursday, August 18, 2016

Housing in the Great Financial Crisis, the Great Recession, and their Aftermath

In case you just woke up from a long nap in the Kaatskills, circa 2007-9 the U.S. (and much of the rest of the world) experienced a severe financial crisis, and the worst recession since the 1930s.

Since those events, the U.S. has been in a long, but by all accounts, disappointingly slow economic expansion:

The Great Financial Crisis and the Great Recession are events economists and others will study and argue about for decades.  There is already a huge literature on these events, some of which I'll explore in a future "Reading for Life" post.  Recently, I abandoned prudence to add my own current thoughts regarding these events.

I wrote the paper Residential Real Estate In the U.S. Financial Crisis, the Great Recession, and their Aftermath, at the invitation of Charles Leung and Nan-Kuang Chen for a special issue of Taiwan Economic Review

What caused the crisis?  Like the Great Depression and other such watershed events, it is unlikely that there will ever by a simple, tidy set of agreed-upon explanations.  In my own class notes on the crisis, I present four slides listing 91 potential “causes,” some proximate and some deeper; some economic, some financial, some political, some sociological, some psychological.  Examples, in no particular order, and without endorsing or ranking any particular “cause” here: the rise of subprime lending, “too-big-to-fail” financial institutions, financial deregulation, poor underwriting practices, risky mortgage designs (e.g. option ARMs), the Community Reinvestment Act, perverse incentives in Fannie Mae and Freddie Mac (“Government Sponsored Enterprises”), perverse incentives among private investors, myopic expectations, adaptive expectations, a global savings glut, political resistance to appropriate financial policies, non-recourse mortgages, a widening distribution of income, financial economists who failed to understand the operation of housing markets, housing economists who failed to understand the risks building up among counterparties in ever-more complex housing based derivatives, fraud by lenders, fraud by borrowers… and so on.

Jazz master Miles Davis famously said “It’s not the note you play, it’s the notes you don’t play.” In this paper I focus on two causes:  increased leverage, and a boom and bust (some dare call it a bubble) in house prices.

The figure above shows one of many charts we could present demonstrating that individual borrowers increased leverage substantially in the run-up to the crisis.  Other data and research are presented that examine at the level of individual institutions (e.g. the investment banks that levered up 30 to 1 and even higher, meaning that even a 3 or 4 percent decline in their assets could drive them into insolvency; and the increases in systemic risk associated with ever more counter-party risk, and less transparency.

Asthe figure above shows, from 1975 to 1995, average U.S. prices grew at about 0.4 percent per annum (inflation adjusted). During the boom, 1996 through 2006, real prices grew by about 7 percent per annum.  But “every housing boom is followed by something else that starts with the letter ‘B,’” as long run analyses have repeatedly demonstrated.  The second recurring theme of the paper is the role played by housing prices in the crisis; and the reasons we saw such an unusual and unsustainable boom in the early 2000s.

Why focus on those two, house prices and leverage?  Whatever your current beliefs about many potential causes of the U.S. crisis – subprime, mistakes in securitization, Wall Street, the GSEs, fraud, macro policy mistakes, and on and on… suppose that as in a classical Greek play, some deus ex machina had imposed the following conditions: (a) all mortgagors were required to retain significant equity in their houses, while all mortgagees were required to limit their own institutional leverage; and (b) that house prices followed time paths qualitatively similar to the 1970s, 80s and early 90s, i.e. with moderate growth and volatility.  On the face of it, how could we have generated the 2007-9 crisis without high leverage and volatile housing prices?  Moderate leverage and stable underlying asset markets can help protect the financial system and the aggregate economy, even when we make mistakes in other government and private actions and policies.

What Are Those Millennials Up To?

I'm not trying to cause a big s-s-sensation
I'm just talkin' 'bout my g-g-g-generation
Pete Townshend

Everybody's talking about Millennials, Millennials, Millennials...  including me.

From time to time I write some short pieces for the Wisconsin Realtors Association.

For example, for several years I've been writing a short outlook piece for the January issues of the Wisconsin Real Estate Magazine.

Want to see my sage thoughts -- and at least a few howlers?  ("It's tough to make predictions, especially about the future," said noted econometrician and philosopher Lawrence Peter Berra.)

2010 Economic Outlook

2011 Economic Outlook

2012 Deja Vu All Over Again

2013 A Healing Market, Some Risks Remain

2014 Moving from "Meh" to "Wha?"

2015 Searching for Warren G. Harding

2016 In Fed Do We Trust?

Now WRA is starting a new feature, to appear several times per year, called "Insights."  Mike Theo of the WRA, Jim Wood of Wood Communications Group, and I recently prepared the first Insight feature, What REALTORS® Should Know About Millennials.

The largest population cohort ever is hitting the housing market – by the Census Bureau’s count, 83 million Millennials.  How will this play out? Millennials have or are about to reach prime first time homebuyer age.  So far this cohort’s home-buying, and other housing market activity, has been below par, by several past norms.  But there’s some evidence it may be catch-up time, as we explore in this Insight feature.