Friday, August 31, 2007


HPA or Home Price Appreciation has clearly slowed and for the first time is actually negative. But the truth is it came along at the right time.

According to Michael Donihue and Andriy Avramenko of Colby College
During the period from 1990 to 2002, U.S. households experienced a dramatic wealth cycle, induced by a 369 percent appreciation in the value of real per capita liquid stock-market assets, followed by a 55 percent decline. However, despite predictions at the time by some analysts relying on life-cycle models of consumption, consumer spending in real terms continued to rise throughout this period. Using data that include the period from 1990 to 2005, traditional approaches to estimating macroeconomic wealth effects on consumption confront two puzzles: (i) econometric evidence of a stable cointegrating relationship among consumption, income, and wealth is weak at best; and (ii) life-cycle models that rely on aggregate measures of wealth cannot explain why consumption did not collapse when the value of stock-market assets declined so dramatically. We address both puzzles by decomposing wealth according to the liquidity of household assets. In particular, we find that significant appreciation in the value of real estate assets that occurred after the peak of the wealth cycle helped to sustain consumer spending from 2000 to 2005.

And what fueled the HPA? Well, low interest rates, and rising income of course.
The widespread nature of the recent international house price boom suggests that the underlying forces behind this sustained price increase may be common across countries. Many OECD countries have, over the past decade, witnessed sustained increases in living standards while housing affordability has further improved in recent years with the low interest rate environment experienced by many of these countries. In this paper we propose a theoretical model of house price determination that is driven by changes in income and interest rates. In particular, the current level of income and interest rates determine how much an individual can borrow from financial institutions to purchase housing and ultimately this is a key driver of house prices. The model is applied to a panel of 16 OECD countries from 1980 to 2005 using both single country-by-country and panel econometric approaches. Our results support the existence of a long-run relationship between actual house prices and the amount individuals can borrow and we find plausible and statistically significant adjustment, across countries, to this long run equilibrium.

It seems they miss an important factor in the recent HPA. The willingness of banks to take on clients they previously would not have. The so called sub prime market has really just been fueled by an increased willingness to lend given an particular interest rate and income level, or what the authors call an ability to borrow. Many more people were able to borrow during this boom, thus further fueling the home price appreciation. I do not know if this was an international phenomenon, and I'm not sure I could immediately produce a variable which captures that idea.

Hat Tip: The New Economist

Sunday, August 26, 2007

Hard Drives

Apparently they are all used to store porn.
Unexpected candidness is a recurring theme of our CE-Oh no! series of posts, but this latest example from Bill Watkins, the CEO of Seagate, truly takes the biscuit. At a recent corporate dinner in San Francisco, the Texan CEO produced a quotable line edgy enough to give any PR people in the immediate vicinity an instant heart attack. In his exact words: "Let's face it, we're not changing the world. We're building a product that helps people buy more crap - and watch porn." We're gonna have to give the guy a break for two reasons: a) alcohol was readily available, and b), all those naughty digital photos have gotta be stored somewhere, and Seagate is in the digital storage business. Besides, the rest of Watkin's quotes are relatively thought provoking: his views on media distribution ("It's the content that's important"), Dell's problems -- no, not those ones -- ("They don't understand the consumer"), and other areas of the technology industry appear to be fresh and honest. Maybe just a bit too honest this time around.

Thursday, August 23, 2007

Lou Dobbs the Real Moron

A recent episode of Lou Dobbs saw him again attacking immigrants and a group of economists in favor of more open borders. I'm proudly one of the 500 Jackasses of which he speaks.

Dangerous Ideas

Steven Pinker has a list of dangerous ideas listed in the form of questions. I provide my short reflexive answer to each.

Do women, on average, have a different profile of aptitudes and emotions than men? YES

Were the events in the Bible fictitious -- not just the miracles, but those involving kings and empires? YES

Has the state of the environment improved in the last 50 years? DK?

Do most victims of sexual abuse suffer no lifelong damage? NO

Did Native Americans engage in genocide and despoil the landscape? DK?

Do men have an innate tendency to rape? NO

Did the crime rate go down in the 1990s because two decades earlier poor women aborted children who would have been prone to violence? MAYBE

Are suicide terrorists well-educated, mentally healthy and morally driven? DK

Would the incidence of rape go down if prostitution were legalized? YES

Do African-American men have higher levels of testosterone, on average, than white men? DK

Is morality just a product of the evolution of our brains, with no inherent reality? NO

Would society be better off if heroin and cocaine were legalized? YES

Is homosexuality the symptom of an infectious disease? NO

Would it be consistent with our moral principles to give parents the option of euthanizing newborns with birth defects that would consign them to a life of pain and disability? NO

Do parents have any effect on the character or intelligence of their children? YES

Have religions killed a greater proportion of people than Nazism? YES

Would damage from terrorism be reduced if the police could torture suspects in special circumstances? NO

Would Africa have a better chance of rising out of poverty if it hosted more polluting industries or accepted Europe's nuclear waste? NO

Is the average intelligence of Western nations declining because duller people are having more children than smarter people? NO

Would unwanted children be better off if there were a market in adoption rights, with babies going to the highest bidder? YES

Would lives be saved if we instituted a free market in organs for transplantation? YES

Should people have the right to clone themselves, or enhance the genetic traits of their children? YES

Pinker captures my feelings on this best here:

"Sunlight is the best disinfectant," according to Justice Louis Brandeis' famous case for freedom of thought and expression. If an idea really is false, only by examining it openly can we determine that it is false. At that point we will be in a better position to convince others that it is false than if we had let it fester in private, since our very avoidance of the issue serves as a tacit acknowledgment that it may be true. And if an idea is true, we had better accommodate our moral sensibilities to it, since no good can come from sanctifying a delusion. This might even be easier than the ideaphobes fear. The moral order did not collapse when the Earth was shown not to be at the center of the solar system, and so it will survive other revisions of our understanding of how the world works.