Saturday, 31 October 2009

Spanish house prices - lower than thought

For a while, the Spanish housing market seemed like Wile E. Coyote -- running over the edge of a cliff, and staying miraculously suspended up in the air until he looks down. While the Spanish boom in prices was bigger than in the US or Ireland, prices have fallen less than 10% according to the official statistics (which nobody believes - too much black money changes hands at the notary office). Because the market is so intransparent, figuring out what people actually pay is not for the timid. A valuation company in Spain, Tecnocasa, tried to take the bull by the horns, so to speak. Their report finds that the smallish price declines are partly the result of unmeasured quality changes. Put another way -- prices have come down much more than we think. It's just that people bought an awful lot of really terrible homes at the height of the boom. Today, the same people buy something much nicer. The compositional shift - towards more high-quality homes, with luxury amenties like an elevator - is not properly captured in statistics on sale prices. As you can see from the table, once you adjust for price, Barcelona housing is down over 20% instead of the unadjusted 14% (yoy). Not all figures are equally believable; I am hard-pushed to find a decline of 51% in Valencia credible. Be that as it may, I find the economics quite interesting -- the more desperate people were at the height of the boom, the more rubbish they bought. If the quality gradient is steep, then compositional shift will lead to illusory house price stability.
Do I believe it? Only partly. Housing in Barcelona still costs more per square meter than in Manhattan. If you compare like with like (Village=Born, Eixample + Saria = Upper East Side, etc.), the premium is about 20%-30%. The weak dollar helps, but be that as it may -- salaries are very low compared to Manhattan ones, relative to house prices, and the financial system is certainly no better in producing sustainable house prices than in the US (30 year fixed mortgages, anyone?). So the quality adjustment may be part of the story, but the underlying mispricing is still Elephant-sized, if you ask me.

Friday, 16 October 2009

more crisis round-tabling...

If nothing else, the financial crisis seems to have created a lot of demand for people to sit around round or square tables, and to debate in front of their peers. I am on this afternoon at the Barcelona Trobada, the local version of the all-UC meetings in California. The session chair, Jordi Gali, gave us some homework to make sure we all come prepared:

1. In your opinion, what has been the impact of the crisis on:
(i) how the outside world perceives economists and economic research?
(ii) how you perceive the value of economic research?

2. Do you think the economics profession deserves part of the blame for
the great financial crisis as some (even famous colleagues) would claim?

So I did some background reading, from revisiting the "famous" Krugman piece to the now infamous "Crisis? What crisis?" papers by Chari, Christiano, and Kehoe. The latter's abstract is worth reproducing:

Facts and Myths about the Financial Crisis of 2008
Patrick J. Kehoe - Monetary Advisor
V. V. Chari - Consultant
Lawrence J. Christiano - Consultant

The United States is indisputably undergoing a financial crisis and is perhaps headed for a deep recession. Here we examine three claims about the way the financial crisis is affecting the economy as a whole and argue that all three claims are myths. We also present three underappreciated facts about how the financial system intermediates funds between households and corporate businesses. Conventional analyses of the financial crisis focus on interest rate spreads. We argue that such analyses may lead to mistaken inferences about the real costs of borrowing and argue that, during financial crises, variations in the levels of nominal interest rates might lead to better inferences about variations in the real costs of borrowing. Moreover, we argue that even if current increase in spreads indicate increases in the riskiness of the underlying projects, by itself, this increase does not necessarily indicate the need for massive government intervention. We call for policymakers to articulate the precise nature of the market failure they see, to present hard evidence that differentiates their view of the data from other views which would not require such intervention, and to share with the public the logic and evidence that burnishes the case that the particular intervention they are advocating will fix this market failure.
Some economists, when faced with diatribes like Krugman's, sound a bit like General Buck Turgidson. When scolded by the President about the fact that despite the "human reliability program", an air force general ordered his wing of nuclear-armed B-52's to attack the Soviet Union, Turgidson says:

Well, I don't think it's quite fair to condemn the whole program because of a single slip-up, sir!
Having said that, I think I will talk a bit about unreasonable expectations -- why the public thinks its a good way to measure the value of economics in terms of predictive power, and why that makes little sense.

Tuesday, 6 October 2009

Noisy business cycles

If you read the Krugman piece in the NYTimes, and think that macro has becoming a field of warring tribes with nothing to say to each other... you may be more right than I would like, but it doesn't mean that there is no way to heal the breach. At the CREi seminar this Monday, Marios Angeletos gave a talk on Noisy Business Cycles (forthcoming in the NBER macro annual). The paper marries many elements of real business cycles (RBC) models with noise about the state of the aggregate economy. Because agents do not know how the economy is doing overall, even very small technology shocks can translate into large aggregate fluctuations. The result is an economy that has a strong RBC flavor, but behaves in a Neo-Keynesian way -- noise is going to look like demand shocks. I normally don't as much out of theory papers as I would like, but this one was so clearly presented that I wished we had had another 30 minutes to see some of the applications and extensions...

Moving on...

It's always nice to hear from our former students, and all the more so when they are doing well. Juan Montecino, who attended the ITFD master as part of our inaugural year 2008-09, just dropped me a line from Washington, DC, where he is working for Center for Economic and Policy Research for a think tank called the Center for Economic and Policy Research. He is covering international economic developments, with a special eye on IMF policy and Latin America. Recently, he put his skills to use in the policy paper IMF-Supported Macroeconomic Policies and the World Recession: A Look at Forty-One Borrowing Countries. We hope to see more policy research from Juan in the future!