The Liberal Order

Should you short the stock of Costco and Target?

I was in Barnes and Noble two weeks ago and noticed that though there were quite a few people mulling around in the store, I didn't see anyone purchase anything other than coffee or some other refreshment from the café. In fact, about half the people in the store were in the café using the wi-fi. I ended up purchasing a remainder book for $6. 

These big-box retailers are struggling and the end of big box retailing is near. Internet retailing is reducing the revenue per square foot for bricks-and-mortar retailers. Stores like Barnes and Noble, much like Borders before them, also struggle with space dedicated to near-obsolete media - DVDs and music CDs.

Megan McArdle has more about how survival of big-box retailers will depend on niche products. Still a long shot.

Now, short BKS stock?

 

HOAs and State Legislation

What differentiates a local, state, or national government from a homeowner's association (HOA)? Given the limited scope of the HOA, as well as the incentives of developers to provide an efficient mix of public goods (i.e., landscaping, garbage and lawn debris removal, pools, etc.), as Don Boudreaux and Randall Holcombe point out, HOAs tend to be less controversial. The HOA agreement is an ex-ante contract that you agree to prior to buying your home. 

So HOAs ought to be viewed more favorably than typical forms of government, thought they still are governments. Consequently, there has to be some means of residents petitioning and challenging their HOAs without having to run for office.

North Carolina's state legislature is considering limits on HOAs that intrude on homeowners' rights. 

Another hot-button issue was the ability of HOAs to foreclose on homeowners that don't pay their dues and assessments.

Tammy Neal, a real estate broker and former appraiser who lives in Union County, said she ran across an HOA board that foreclosed on a homeowner who owed $50. She called it "a travesty."

I agree, that sounds heavy-handed, but is it any less egregious than current asset seizure forfeiture laws? 

HOAs need to find more resident-friendly means of addressing delinquent residents and those who refuse to comply with guidelines. Yes, some residents are simply malcontents, who then need prodding by formal public institutions to hold them accountable. But such action should be a last resort. 

From my experience, I've seen too many people who sit on HOA boards who are control freaks that relish in exercising their authority and pushing people around. But it's also the case that HOAs cannot selectively enforce regulations, leaving them little room when it comes to enforcing what appear to be minor infractions.

For example, if the HOA agreement stipulates no commercial vehicles are permitted in a homeowner's driveway for more than ten consecutive days (this provides leeway for a homeowner having commercial work done on their home), then by allowing a resident to park a car in her driveway emblazoned with logos on the side of the college where she works, it makes the HOA susceptible to a lawsuit if it then denies the right of the homeowner who owns a moving business to park his moving truck in his driveway.  

What Does It Mean To Say That Median Household Incomes Are Decreasing

Russ Roberts asks a good question.

I always say, just observe what's around you. That may not always prove accurate, but that depends on where and what you are observing. For example, you can't look at living standards or behaviors in the DC area and conclude that things must be pretty good around the country - DC is not average America. But I teach at a college where the students come predominantly from typical middle class families, many from even lower-middle class families. Most have cell phones, laptops, a car on campus (with the insurance needed to operate that car in NC), a large flat-screen tv in their dorm room (nobody that I knew of had a television in their dorm room when I was in college), microwaves, air conditioning, etc. 

Given that about 70% of high school graduates in the U.S. now go on to college, and that colleges seem to be catering to the median student in ways never seen before, can we safely conclude that living standards in the U.S. are rising, not stagnating?

A lot of the campus residence halls in the U.S. were built in the mid-20th century when it was common for kids to share bedrooms and bathrooms at home. Today, students arrive at college not used to sharing a room or the communal experience of the older dorms, Newman said. Students are also bringing more gadgets, including refrigerators, microwaves, flat-screen TVs and computers.

"Just the stuff that people bring with them, the type of housing has to change ... we are changing the types of amenities we're offering to remain current and relevant to the student of today and of the future," she said.

The challenge is making sure the buildings last the next 100 years since universities can't afford to renovate them year after year, she added.

On the other side of the University of Michigan campus, a privately owned 10-story apartment complex called Zaragon Place has a wait list full of students hoping to live in the building that opened in 2009. The fully furnished apartments -- complete with black leather couches, 42-inch flat-screen TVs, granite kitchen countertops, washing machines and dryers -- cost about $1,189 a month. (North Quad costs about $1,412 a month for a two-room suite with a private bathroom). Students have access to a 24/7 gym, underground parking and a convenience store next to the building.

- - - -

"Kids today want more privacy, they want better amenities, and in a lot of cases, they don't want to have three or four roommates," he added.

He says North Quad is an "exception" in terms of quality, but even then, the dorm isn't on the same level as Zaragon housing.

"We're offering an entirely different product based on the quality, closeness, the adult nature of it and its sophistication," he said. "We believe that's what kids want, and that's how they want to live."

Is it a wonder why students today have such an entitlement attitude about their grades and classes?

 

 

Coase, Regulating Ideas, and the News & Observer

In 1974, Nobel laureate economist Ronald Coase published in The American Economic Review "The Market for Goods and the Market for Ideas." In it, Coase maintains that arguments for regulating goods and services can be more readily applied to regulating ideas, notwithstanding the much stronger opposition to the latter. As he reasons, you can generally tell when you get a bad haircut or a bad can of peaches, but you can rarely ever tell when you're fed a bad idea. More importantly, given the incentives that exist, markets tend to weed out defective goods and services fairly well, while on the other hand those same incentives don't work as effectively when it comes to things like political speech, media reporting and the like. The negative externalities in markets for ideas make them ripe for regulating.

As absurd as Coase's argument may seem to some - and I'm certain newspaper reporters and editors fit this category of opponents - there is some credibility to it. For example, consider what the Raleigh News & Observer has published just in one week without critical review or validating the accuracy of the included statements and data.

First, on Sunday Saturday, June 11th, it reported in its "Notable Numbers" column that the average teacher salary in North Carolina is so low that the state ranks #45 in the United States in teacher pay. Not true. According to the National Education Association, the average teacher salary in North Carolina for the 2008-2009 school year was $48,648, placing it at 25 out of 51 in terms of average teacher salaries in the U.S. (See chart C11 on page 19.)

I submitted a letter to the editor to correct this mistake and to also explain why it is misleading to compare the average teachers' salaries across states without comparing costs of living too. (The average teacher in North Carolina earns 89.6% of what the average teacher in the U.S. earns. This is exactly equal to the ratio of per capita income in NC relative to the U.S. (90%), and five percentage points greater than the ratio of the median household income in NC relative to the median household income in the U.S. (84.2%).)

The next day I received an email from someone at the N&O requesting the source for my data, which I provided. I have yet to see a correction for their statement.

Second, the paper's columnists, reporters and editors have repeatedly argued in favor of making permanent the "temporary" one-percent increase in the state's sales tax rate, referring to it as a "one cent" increase in the tax and therefore dismissing its imposition as insignificant. This obviously influenced at least some readers (and see here), including this person who fails to understand how markets spontaneously coordinate social behavior and how markets have empirically improved the human condition multiples more than has government. Using its own projections, I explained to two different N&O writers that this "one cent" increase in taxes actually cost the average family of four in North Carolina about $420 per year, not one cent.

Third, on June 14^th, the paper published as an op-ed what can only be regarded as a sales pitch for its real estate and homebuilding advertisers. Along with other things, Tim Minton, an executive vice-president of the Home Builders Association of Raleigh-Wake County, relays the erroneous assertion that since here in Raleigh we didn't experience as large an increase in home prices during the housing boom we can expect to NOT see as large a decrease now that the bubble has popped.. (David Bracken, a staff writer for the N&O, has also written as credible news story what can only be deemed a sales pitch for the housing and real estate industries in NC). 

Minton's arguments are wrong on two fronts. The first is that housing prices in Raleigh are actually high relative to median household income and rents in this area. Look at this chart here. (You can sort by clicking on the headers for each column.) Raleigh ranks sixteenth highest of 144 cities in terms of the median home price to the median household income in the area. The price-to-income ratio in Raleigh currently exceeds that of Washington, DC, the only city to have experienced home price appreciation last quarter of the twenty cities tracked by the Case-Shiller index. Look also at the adjusted price-to-rent and the adjusted rent-to-mortgage ratios, in both Raleigh ranks ninth of the 144 cities. Both reveal that, ceteris paribus, it's currently better to rent than to buy in the Raleigh area.

On the second front, as I argued here, Raleigh did not experience as large an increase in housing prices as did other larger metropolitan areas, but that's because the vast open spaces here relative to those other cities give Raleigh a more elastic supply curve for housing. In other words, as demand for housing increased in Washington, New York and Los Angeles, you couldn't build more homes so housing prices skyrocketed. On the other hand, as demand for housing in Raleigh increased, builders responded by building more homes. Worse still, they overbuilt larger, more expensive homes. There is still a glut of homes priced in excess of $400,000 here and we have yet to see a bottom.

The purpose of a newspaper is to inform its readers, objectively using facts and information that have been critically scrutinized, as well as expressing opinions that are clearly noted as such and are based on factual information and reasoned analysis. It's not supposed to act as cheerleader for any specific cause or political party, or to surreptitiously promote the interests of its largest advertisers. I'm all for a turn around in the economy and housing market here - I benefit from it. But if I'm a potential home buyer, I rely on information from others, including the media, on whether I should or should not buy a  home. Given the News & Observer's actions, why shouldn't it be regulated just like the rogue industries the writers and editors themselves vilify for dishonest and self-serving behavior?

I don't believe that the people of the N&O are bad people. In fact, those I have dealt with in the past have been very good and exceptional people to work with. And I certainly don't believe they are ignorant. But I'm always surprised to read what I consider either shoddy journalism or veiled attempts to sway public opinion, not to inform. (I am also surprised at how regularly it editorializes in favor of group interests at the expense of individual rights, notwithstanding publishing stories such as this, which is the epitome of promoting group interests over individual rights.)

The fine people of this paper need to be more objective in their analyses of events and stop publishing one-sided interpretations. A good newspaper allows for reasoned debate. 

Arnold Kling Speaks Some Sense

Arnold Kling reasons:

But ultimately, the financial sector (including government) is not some separate entity. We as investors and taxpayers ultimately have the financial sector on our balance sheets. By creating the illusion that there are more safe assets in the economy than actually exist, we end up fooling ourselves.

This is exactly right. Diversifying risk and allocating it to least cost avoiders is an important purpose for the existence of investment and commercial banks, as well as insurance companies and the like. But the risk hasn't been eliminated. And as Nassim Taleb argued in criticizing the Black-Scholes Options Pricing Model, it is often obfuscated, hidden, and therefore mispriced.

The result is that risk is allocated inefficiently and way too much is taken on. Recent investment tools and products of Wall Street, including collateralized debt obligations (CDOs), collateralized mortgage obligations (CMOs), special purpose vehicles (SPVs), structured investment vehicles (SIVs) and credit default swaps (CDSs) did not eliminate or even reduce risk in the housing market. Instead, it buried the risk under layers upon layers of derivative assets, leading lenders to take on far more risk than they thought they were when purchasin mortgage assets, especially subprime mortgages.   

"One-half of 1,000 people polled admitted they are not responsible with their finances."

All right, that's not quite what the article claims, but it's close.

Half of the more than 1,000 borrowers surveyed by the National Foundation for Credit Counseling said they would never be able to afford the 20% down payment required under the qualified residential mortgage structure.

Isn't this a signal that for people who are extended loans, too many will subsequently find themselves having trouble repaying due to their irresponsible budgeting practices?

The nonsense comes later in a quote from the National Foundation for Credit Counseling.

"Although renting has many advantages, it may not stimulate the economy as much as an uptick in the housing market world, as renters do not typically spend as much on home improvements, lawn equipment, appliances, or other areas, which would lead to job growth," according to the NFCC.

No, they probably won't, but spending is not exogenous. If I currently rent I may indeed spend my money on fast cars and entertainment rather than on home improvements and lawn equipment. But once I purchase a home and become a homeowner, I may indeed shift my purchases from fast cars and entertainment (i.e., spending in those sectors declines) to home improvements and lawn equipment (i.e., spending in those sectors increases). But there is no net increase in economic activity as my spending on home improvements and lawn equipment is paid for by my decrease in spending on fast cars and entertainment.

 

Is there a Coasean solution?

The town of Cairo, Illinois (According to Wikipedia, population was 2,831 in 2010, down from 15,203 in 2000.) is threatened by flooding of the Mississippi River and the Army Corps of Engineers is ready to blow up a levee in order to save Cairo, but at the expense of thousands of acres of farmland in Missouri.

The Corps of Engineers says the action is necessary to save the town of Cairo, Illinois, although it will flood rural Missouri farm communities. "I know that the price being paid is high," said Maj. Gen. Michael Walsh on Saturday.

Really?!? How much does Maj. General Walsh know about the value placed on the farmland by those who will be adversely affected by the blowing up the levee?

Nobody knows the true extent of the damage should nothing be done, but neither do they have a complete understanding of what will happen if they do blow up the Birds Point-New Madrid levee. What we do know is that if it is blown up, about 130,000 acres of farmland will be destroyed and 90 families misplaced. Yes, that's not the nearly 1,000 families that would be adversely affected by not blowing up the levee, but Cairo has become a, let's say, less-than-desirable ghost town. Who's to say saving Cairo at the expense of the farmland is less welfare destroying than if the river was left to do its deed? 

Time constraints inhibit Coasean bargaining. But then, as Coase would argue, there's no reason to believe politicians and bureaucrats have any better information needed to remedy a more socially preferred solution than simply allowing the status quo to prevail. 

This is not to say that I am not sympathetic to the people of Cairo, IL any less than I would be to the owners and leaseholders of the Missouri farmland. In either case a tragedy ensues. I'm just for enabling the parties to bargain for a preferred remedy to their impending misfortune, if there is one, or just letting nature take its course. No lives need be lost, and property loss appears inevitable. Allowing the Army Corps of Engineers to pick winners and losers is bad policy, especially given their ineptness in the past. 

UPDATE: As I understand it, should the river crest over the levy, flood insurance should kick in for residents of Cairo, IL, assuming that they have flood insurance. If the Army Corps of Engineers blows up the levy, this action is not covered by insurance, so the owners of the 130,000-plus acres (more than 200 square miles of land) are not covered for their losses. The insurance lobby is powerful at both the state and the federal level. I'm guessing (I may be wrong) that the insurance lobby is rooting for blowing up the levy. Whether or not they have any influence in this decision is yet to be seen.

Which States Have the Worst (still) Looming Housing Problems?

Shadow inventory is still a major problem in most housing markets.

To get a sense of where your housing market stands, take a look at CoreLogic's comparison of each state's tally of mortgages that are at least 90 days late to its current sales rate. The states with the most distressed housing inventory are New Jersey, Illinois, Maryland, and Florida, while those with the least distressed inventory are North Dakota, Alaska, Wyoming, and Montana.

States with the most distressed properties are expressed in red

Source: CoreLogic

 

Are Middle Class Incomes Really Falling?

Not according to this comparison by Business Week of prices of many household goods and services, as well as median household income.

Even this doesn't correctly account for many relative price changes. For example, the prices of cars and houses are both up in real terms (16.4% and 3.4%, respectively), but the analysis doesn't account for quality changes. Cars have improved safety features (air bags, disc brakes), more efficient engines that last longer, and added features such as air conditioning and radios with CD players. Homes today are larger than they were in 1980, they now have central heat and air conditioning, built-in microwaves, hardwood floors, and granite countertops.

This also applies to many of the other items such as computers (-80.9%) and telephone service (+9.9%). The price changes don't take into account things like increases in computing power, measured in MIPS (million instructions per second), storage, memory and screen quality. Similarly, the price changes don't reflect services added with telephone service today such as voice mail, multi-ring, and call waiting. Additionally, prior to deregulation, long distance phone calls subsidized local service. After deregulation, the price of local services increased, better reflecting the average total costs of providing the service, while long distance services decreased substantially.  

Most importantly, as Michael Cox puts forth so well, the price should be measured in terms of time spent working rather than in terms of money.

Effects of the Mortgage Interest Deduction

[O]ur research suggests that the deductibility of mortgage interest decreases rather than increases homeownership attainment in the typically more tightly regulated urbanized places. What about the less urbanized places with lax land use controls? In these places the MID does have a positive impact on homeownership attainment (at least for higher income groups). However, recent research (Hilber and Mayer 2009 and Hilber 2010) suggests that in these ‘elastically supplied’ places homeownership may generate few or no positive externalities. We conclude that the MID is a costly and ineffectual policy for boosting homeownership and social welfare.

And how costly? (PDF file)

There are an estimated 115 million households in the US in 2010 (the most recent Census Bureau estimate available). Hence, specification (3) in Table 4 implies that the subsidy in any given year generates 1.95 millions new homeowners in the United States (1.7 percent times 115 million). At an estimated total cost of 104.5 billion in 2011 (OMB, 2010), the subsidy per converted homeowner thus amounts to a staggering $53,590. That is, to move a renter household into homeownership through the MID costs US taxpayers $53,590 in foregone tax revenue annually. This amount is likely a lower bound estimate. The other rigorous specification in Table 4 that includes state time-trends (column 2) implies an amount of $75,920.

The extensive cost of this program benefits almost exclusively the most well-off. Why aren't Democrats going after this rather than pushing to discontinue the Bush tax cuts on household incomes above $250,000? 

 I would also argue that the mortgage interest deduction also encourages inefficiently larger homes given the subsidy.