Who Moves? Not Old People? (reposted from my Forbes blog)

A meme is out there that baby boomers, having raised their children, are ready to downsize.  (See here).  Some scholars, such as Arthur Nelson at Utah, say that as the population ages, there could be a mass sell-off of houses which will lead to a collapse in house prices.

One of our Ph.D. students here at USC, Hyojung Lee, and I are redoing a paper I did with Patric Hendershott about 17 years ago on the impact of age on the demand for housing.  Back then, Pat and I found that the effect of age was pretty minimal.  But times have changed, and so Hyojung and I decided it would be worth redoing the exercise using current data–the 2006-2010 American Community Survey.  We decided to look at moving behavior over the entire five years, and in 2006 and 2010 individually, since 2006 was a boom year for housing and 2010 was a bust year.

After controlling for marital status, income, educational levels, race and ethnicity, and geography, we estimated the impact of age on the propensity to have moved in the previous year.  The results are summarized in the graph below (for those who want to know, these are the coefficients from a linear probability model):

As you can see, basically the propensity to move peaks in the early 20s, and then declines to about age 50-55, and then stays pretty flat for the remainder of life (although in 2010 the very oldest seem to have a slightly greater propensity to move).

Some other findings: those never married are most likely to move, while those widowed are least likely to move (after controlling for age).  This implies that the typical elderly person is even less like to move than is implied by the graph above.  Asians are the racial/ethnic group most likely to move–non-hispanic whites, hispanics and African-Americans have similar propensities.  Mobility increases with educational attainment.  Higher income people move less than low income people.

We are doing a lot more work with this data as we prepare it for a paper, but in the meantime, our findings suggest that a mass sell-off (which means mass moving) arising from aging is unlikely.

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House Prices in Southern California need to Rest now (reposted from Forbes).

From my Forbes blog:

DataQuick today reported that house prices in Southern California have risen 28 percent from the last year.  A year ago, people who were buying houses in this part of the world were getting a good deal.  Now, the deal is so-so.

Take a look at the table below (it is something I constructed for my class on mortgages and mortgage backed securities).  The numbers on the vertical axis (.03,.05,.05..)are cost of capital numbers–the financing costs of owning a house.  Generally speaking, the cost of capital for owning a house is the mortgage rate plus one percent, which reflects that the cost of the equity in the house (the down-payment) is higher than the cost of the mortgage.  The numbers across the horizontal axis (10, 15,20…) are rent-to-price ratios.  Suppose you can own a condo for $360,000; the rent on the same unit is $1500 per month or $18,000 per year.  The price to rent ratio is then 20.

In the example given here, we are looking at a household that pays a federal marginal tax rate of 25 percent, a state marginal tax rate of 7.9 percent, faces closing costs of 3 percent, annual maintenance cost of 2.5 percent, a property tax rate of one percent, a Realtor commission of 5 percent, and expects to hold the property for five years (feel free to email me at richarkg@usc.edu if you wish to put your own assumptions in the spreadsheet that produced the numbers listed below).

As it happens, I have been looking at costs and rents in Westwood, a neighborhood just west of Beverly Hills and on the other side of the 405 from Brentwood.  Rents on 2 bedroom units run around $28 per year per square foot; prices are around $650 per square foot, so the price to rent ratio is around 23.  With current mortgage rates at 4.5 percent, the cost of capital is 5.5 percent.  So lets look at the cells that are bolded: a price to rent ratio of 23 and a cost of capital of 5.5 lies in the middle of them.  The numbers in the cell is the amount of appreciation that is required each year that one holds a property for renting and owning to break even with each other.

So right now, for owning to be a better financial deal than renting, prices must rise around 4 percent each year.  Is this feasible in the long run for Los Angeles?  Yes, because over the long term, prices in LA tend to rise by about the rate of inflation plus one percent, so if we think 3 percent steady state inflation is in our future, we should be fine.  But will it rise much more than inflation plus one percent for a long time?  I doubt it.  And of course, CPI growth is less than two percent right now.  House prices are about where fundamentals say they should be, but it is time for increases to slow down.

				Price to Rent Ratio
		10	15	20	25	30
	0.03	-0.031	0.003	0.020	0.030	0.036
	0.04	-0.024	0.010	0.027	0.037	0.044
	0.05	-0.017	0.017	0.034	0.044	0.051
Cost of Capital	0.06	-0.009	0.024	0.041	0.051	0.058
	0.07	-0.002	0.031	0.048	0.058	0.065
	0.08	0.005	0.039	0.055	0.066	0.072
	0.09	0.012	0.046	0.063	0.073	0.079
	0.1	0.019	0.053	0.070	0.080	0.087

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The Internet is Truly Awesome (Leonard Bernstein Mahler edition).

David Denby wrote a nice piece in the New Yorker a little over a year ago about this ten most "perfect" orchestra recordings of all time.  Coming in at Number 5 was Leonard Bernstein's Mahler 7 (the second time through) with the New York Philharmonic. (FWIW, I know seven of his choices, and love them all).

If one looks it up on the NY Phil's website, one finds a link to Lenny's marked up score of the piece, allowing us to see, among other things, directions from the composer he really wanted to make sure got  emphasis.  As such, the internet allows us to see how Leonard Bernstein went about thinking about one of the great, quirky pieces of all time, at any time we wish.

This is truly awesome.

John Roberts is supposed to be a smart man.

But he makes a specious argument.  He says that because in the presence of Voting Rights Acts, there is no disparity in voter turn-out, there is no need for a Voting Rights Act.  Huh?

Are models that assume linear utility useful?

I just saw a paper on how the desire of households to match with particular houses could explain housing market dynamics--in particular why house prices are more volatile than incomes.

Performing such an exercise is very difficult, and requires simplifying assumptions.  One of the most important simplifying assumptions in the paper is that utility is linear--that people value their last unit of consumption just as much as their first.  This assumption is clearly wrong--we know that marginal utility diminishes in consumption.  Yet the assumption was necessary to make the model tractable.

So do we know more about the world because of the model or not?  I really don't know.

If in 1987 you bought the average house in the average place...

…you have about broken even relative to the consumer price index. The Case-Shiller National Index for March 1987 was 62.03; for March 2013, it was 136.70.  The Consumer Price Index in March 1987 was 112.7; in March 2013 it was 232.77.  So the Case-Shiller Index has risen by  120.4 percent in 26 years; the CPI has risen by 106.5 percent.  So in inflation adjusted terms, the average house in the average place has risen by 13 percent over the past 26 years, or a little less than half of one percent per year.

[At the suggestion of Austin Kelly, I looked to see what would happen if I used the unit-weighted FHFA index instead of the value-weighted Case-Shiller index.  I found that based on FHFA, real house prices rose by 11 percent since 1991 (the first year for which data are available), or a little less than .5 percent per year.  So even though the index is different, the result is the same.]

Reposted from Forbes.

Could someone explain the market failure that protecting car dealerships solves?

The Wall Street Journal has a good story today about how car dealerships are (successfully) lobbying legislatures to ban Tesla Motors from marketing their cars directly to consumers.  GOP legislators, who get the willies about regulation that actually solves real problems, are on board with supporting protectionist policies for auto dealerships.

Does anyone really think that the industrial organization of the automobile retail industry works well?  My family buys a car every five years or so, and our experience is that no one tries to exploit asymmetric information like auto dealers.  I have lots of reasons to believe that our experiences are not unique.

What amazes me is that even in the age of the internet, when one can use sites like Edmunds to figure out what to pay for a car, dealers start out by assuming that the consumer is stupid, hope they get an absurdly marked up price, and only get reasonable when they find out their customer actually knows something.

Elon Musk is a visionary in many ways.  With the Tesla, he might make two important contributions--he might free  from petroleum, and he might free us from car dealers.