August 22, 2005
Housebreaker
Still think we’re not floating along in the biggest housing bubble in history? Yale economist Robert Shiller has a chart he’d like you to take a look at:
Most analyses of U.S. house prices span 25-30 years of data at best. Shiller took a much longer-term approach: using old classified advertisements he was able to trace prices back to the 19th century. What he found was a consistent pattern of bubble and bust:
Every housing boom of the last few centuries has been followed by decades in which home values fell relative to inflation. Over the long term, the portion of income that families spend on their shelter stays about the same.
Builders become more efficient, as they are doing today. Places that were once sleepy hinterlands, like the counties south of San Francisco or a patch of desert in southern Nevada, turn into bustling centers that take pressure off prices elsewhere. Even now, the United States remains a mostly empty nation.
“This is the biggest boom we’ve ever had,” said Mr. Shiller, who bought into the boom himself in 2002, with a vacation home near one of Connecticut’s Thimble Islands. “So a very plausible scenario is that home-price increases continue for a couple more years, and then we might have a recession and they continue down into negative territory and languish for a decade.
“It doesn’t even attract that much attention,” he continued. “There will be many people thinking it was a soft landing even though prices may have gone down in real terms by 40 percent.”
Shiller’s analysis isn’t wholly pessimistic. His data suggest that, over the centuries, homeowners have spent a fairly consistent percentage of their income on housing. Occasionally, however, they’ve broken out of that trend—and that, as The Economist (paid subscription required) notes, is what has happened during the past few years:
Until the late 1990s median house prices were 2.75 times median income. That ratio has risen to 3.4. Arguably, lower mortgage rates justify some of this rise. But even if you look at mortgage payments in relation to household income, many people look stretched.
And as I’ve written before, those buyers are competing with a record number of speculators, who account for more than one-fifth of mortgage originations in the frothiest markets.
Right now, the banks are falling over themselves to service these over-extended buyers with instruments such as interest-only mortgages, which recently have made up around one-quarter of residential mortgage originations. But that won't last. When house prices are rising, the banks always lend as much as possible to increase the value of their collateral. But when prices start to fall, the banks are usually the first to run for cover—which will mean an even bigger bust.
Chart courtesy of Robert Shiller via the New York Times
Posted by Stephen at 6:15 PM in Economics | Permalink | TrackBack (0)
July 15, 2005
On the house
The Economist, ever hopeful that the housing bubble is about to burst, rubs salt in the likely wounds:
It is surely no coincidence that the only two countries where house prices have fallen—Japan and Germany—have seen very weak consumer spending, while those with the strongest housing booms—Britain, Australia and Spain—have binged.
Rising house prices can boost spending in several ways. If homeowners feel wealthier, they spend more. They can turn capital gains into cash by taking out bigger mortgages. Housing booms also encourage higher turnover of properties, and people buy carpets, fridges and so forth for their new homes.
Were house prices to fall, consumer spending would surely falter… [E]ven if prices were merely flat for a few years, the annual growth in consumer spending in most countries might slow to less than 1%.
The Bank of England argued last year that the link between house prices and consumer spending had broken down in Britain, with less of the capital gains in recent years being spent. If so, then spending might not be hurt by flat or falling prices. Really? Over the past year, as the 12-month increase in house prices has fallen from 20% to 4%, the rate of increase in retail sales has dived from 7.5% to 1.3%.
For any given rise in home prices, the boost to spending tends to be smaller in continental Europe than in America, because it is harder to borrow more to extract equity from one's home. A sharp house-price slowdown will therefore be more painful in the United States.
(To read the whole—short—article, you’ll have to spend $129 on a subscription.)
Posted by Stephen at 12:41 AM in Economics | Permalink | TrackBack (0)
July 8, 2005
Nucleonomics
I’ve written several times about the future—and economics—of nuclear power. The Economist has now weighed in and made many of the same points:
It costs German utilities perhaps 1.5 (American) cents per kW-hour to make nuclear electricity, estimates Vincent Gilles of UBS, an investment bank, but they can sell it for three times that amount once credits from Europe’s carbon-trading scheme are included. In contrast, it costs 3.1-3.8 cents to produce power from natural gas in Germany and 3.8-4.4 cents to produce it from coal. In America, where there is no mandatory carbon regulation (and hence no penalty on fossil fuels), nuclear power has less of an edge: coal power costs about 2 cents per kW-hour on average today, gas-fired power costs about 5.7 cents, while nuclear cranks out electricity at 1.7 cents or so.
But the economic case is not as clear-cut as it seems. The costs of nuclear power produced by existing plants are likely to be far lower than the costs of newly built plants, because the capital costs of nuclear plants—typically reflecting half to two-thirds the value of the project in present-value terms—are long forgotten. Most of today’s plants were built in an era when central planners or state utility boards had no idea of the true cost of capital. Today’s low interest rates are good for big capital projects like nuclear, but those rates may change sharply in the future. At the same time, gas and oil prices—whose current astronomical levels enhance nuclear’s charms—may well fall.
Then there’s the unpredictable—and astronomical—cost of reprocessing nuclear waste. British taxpayers recently stumped up $90 billion to deal with the nuclear-waste liabilities of British Nuclear Fuels, a disastrously managed (and bankrupt) re-processor. And never mind that even the nuclear industry’s own (rose-tinted) cost projections still mean that a typical nuclear power plant costs about twice as much as its coal-fired equivalent—and takes forever to build:
A 1,000MW nuclear plant would cost $2 billion and take at least five years to build. A coal plant of that size would cost perhaps $1.2 billion and take three to four years, while a combined-cycle gas plant that size costs about $500m and takes less than two years to get up and running. The bigger the project, the more susceptible it is to delays—and UBS’s [Vincent] Gilles estimates that a two-year delay in nuclear projects wipes out 20-25% of the project’s value to investors.
Small wonder that Standard & Poor’s recently concluded that “the industry’s legacy of cost growth, technological problems, cumbersome political and regulatory oversight, and the newer risks brought about by competition and terrorism may keep credit risk too high for even (federal legislation that provides loan guarantees) to overcome.”
But for all this economic uncertainty, the environmental case for nuclear power remains compelling. As I wrote in a previous post, climate change continues to accelerate, thanks to strong global economic growth, rapid industrialization in Asia, little commitment to conservation in developed economies—and lots of coal-fired power plants that account for over 80% of greenhouse-gas emissions. The usual green alternatives—sun, wind, waves, biomass, hydro—would have little impact, even on the most optimistic forecasts. Natural gas? Cleaner than coal, but costly and still environmentally damaging. Super-clean coal? Even more expensive—and unproven.
Nuclear power, on the other hand, is a viable large-scale way to slow climate change. The (obviously partisan) NEI Nuclear Notes blog recently made the point that if all of the 97 U.S. nuclear-power plants that have been cancelled since 1973 had actually been built, we’d now be halfway to the 7% reduction in greenhouse-gas emissions (from 1990 levels) stipulated in the Kyoto Protocol. The blog also has an interesting post today on nuclear energy and total life-cycle emissions.
At some point, we have to decide which cost—economic or environmental—we care about most.
Posted by Stephen at 12:05 AM in Economics | Energy + environment | Permalink | TrackBack (0)
July 6, 2005
Not exactly trailer trash
The million-dollar double-wide, courtesy of America’s house-price bubble:
MALIBU, Calif. — The crazy California real estate market has come to this: a million-dollar trailer.
A two-bedroom, two-bathroom mobile home perched on a lot in Malibu is selling for $1.4 million. This isn’t a greedy seller asking a ridiculous amount no one will pay. Two others sold in the area recently for $1.3 million and $1.1 million. Another, at $1.8 million, is in escrow. Nearby, another lists for $2.7 million.
As USA Today points out, this is an even worse deal than it sounds. Trailer buyers don’t own the land, have to pay rent ($2,700 a month for the $1.4 million trailer), and can’t get mortgages. So why buy?
The $1.4 million trailer is in a gated, guarded community with a shared tennis court and panoramic views of the Pacific Ocean. It also is on a larger-than-usual “triple-wide” lot … But, it’s still a trailer with a modest kitchen and faux wood floors. Many still have trailer hitches attached.
Which is why developers are trying to redefine the market:
Janet Levine at Maliblue Holdings has bought several old homes and is installing high-end “mobile villas” to put up for sale. Levine and others bristle at the term “trailer.” To be permitted in the park, the home must be perched on piers (a high-end version of up on blocks).
Posted by Stephen at 11:25 AM in Economics | Permalink | TrackBack (0)
July 2, 2005
Why aid fails
As the Live 8 concerts wind down, it’s worth asking: does aid make a difference? Not according to new research from the International Monetary Fund:
“[T]he bad news is that even if delivered with the best intentions and used carefully by responsible recipient governments, there are side effects like adverse impacts on competitiveness, which can offset aid’s beneficial effect on growth. The good news is that by paying careful attention to macroeconomic management and issues like absorptive capacity, perhaps aid may have a better chance of success. We have to be careful, however, given the past chequered history of aid, that we do not place more hopes on aid as an instrument of development than it is capable of delivering.”
This conflicts with the findings of a much-quoted 2000 World Bank study: it found that aid boosted growth in countries with good policy environments. But as Michael Stastny points out, that study was badly flawed:
[It] was critiqued pretty well by William Easterly in the Summer 2003 Journal of Economic Perspectives (see pdf here), where Easterly noted that the World Bank study offered the cautious conclusion that development aid can help when countries have good governance. This seemingly commonsensical result was quickly and widely adopted as gospel by policymakers such as Wolfensohn and Bush, and media such as The New Yorker and The Economist.
[But when] Easterly made small changes to the dataset period, its breadth, definitions of “aid”, “policies”, and “growth” (the main variables in Burnside and Dollar), all rendered the results insignificant. The very conspicuous conclusion was not robust to minor respecification—the aid showed no effect on growth under a variety of measures of good governance.
One example of a particular failure was Zambia. Notes Easterly:
“If Zambia had converted all the aid it received since 1960 to investment and all of that investment to growth, it would have had a per capita GDP of about $20,000 by the early 1990s. Instead, Zambia’s per capita GDP in the early 1990s was lower than it had been in 1960, hovering under $500.”
Africa, for all its international support, is spectacularly ill-equipped to make aid work. Which means the billions of extra dollars that Bob Geldof wants Wednesday’s G-8 meeting to deliver would almost certainly be wasted.
Posted by Stephen at 10:14 PM in Economics | Permalink | Comments (1) | TrackBack (0)
