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March 2002
Wharton News
Development Restrictions and High House Prices? Center Director Joseph Gyourko Deals with that Issue in the "Economic Scene" Section of The New York Times of April 28
Is America divided into a "red" conservative heartland and "blue" liberal coasts? And is that division to some degree reflected in a difference in housing costs in the two "Americas"? Why is housing affordable in most places (the "red" America) and so expensive in others ("blue" America)? Wharton's Martin Bucksbaum Professor Joseph Gyourko and his Harvard colleague, Edward Glaeser, a recent Visiting Professor at the Zell/Lurie Real Estate Center, provide an interesting analysis of these questions. One answer has something to do with land prices: people really wish to live in California or New York City, the amount of land there is fixed, demand is high, ergo, prices rise. Tests done by the two economists found, however, that demand alone does not explain differences in prices. Land use regulation in built up areas ("blue" America) results in soaring prices. And that's fine where people already own their homes. Glaeser notes that "local homeowners are powerful over their local areas, and they want to make their housing as expensive as possible." But Professor Gyourko notes that "there may be more to it than voters acting in their economic self-interest. Outside of the coastal areas -- and the Amtrak NE Corridor -- civic culture is really different." Maybe there are two Americas, as Professor Gyourko concludes: "One allows development, and the other puts a lot of restrictions on it."
Rebuilding on the World Trade Center Site
An Op-Ed article in The New York Times - By Witold Rybczynski
Witold Rybczynski, Meyerson Professor in Penn’s Graduate School of Fine Arts and Co-Editor of the Wharton Real Estate Review, writes that New York City should not replace the destroyed World Trade Center Towers with new towers. His op-ed article, appearing in the March 25th edition of The New York Times, argues that planners should take the opportunity to create four smaller blocks on the 16-acre site and incorporate mixed use development. The World Trade Center site must continue the transformation that had been taking place before September 11. The site should become a place "where people live as well as work, and any new development ... should encourage this trend".
The New York Times Interviews Professor Mayer on Buying a Home
- 4BR, 2 Baths, and an Analyst's Couch?
This recent lead article in The New York Times Sunday Real Estate Section addressed the question "What goes on in the minds of potential home buyers?" The article quoted Wharton Real Estate Professor Chris Mayer, who believes that for sellers, loss aversion is the primary psychological motivation "People make financial decisions differently on assets that have declined in value as opposed to assets that have increased in value," said Mayer. "Let's say I bought a house and the housing market has gone up 30 percent. Now I'm thinking of selling, and somebody makes an offer for a gain of 25 percent. I would very likely take it and be happy. The key to that decision is that the seller's benchmark is what he or she paid for the house, not some index of how houses in that market have done recently. In a down market, a seller would probably react differently. Let's say prices fall 30 percent. If the seller got an offer from someone to buy for 25 percent below what they paid, they would very likely turn down the offer and leave the house on the market in the hopes of getting a better offer. This behavior is odd to most economists because we believe people should benchmark performance against a market indicator. The person who receives an offer of a 25 percent gain over their original price will view himself or herself as being successful, even though they've done worse than the market. But the homeowner in a market that went down 30 percent who gets an offer only 25 percent down -- they will actually have outperformed the market."
"What that means for the real estate market is that, at least at the start of a downturn, many overpriced houses remain on the market. Eventually, as the number of houses on the market grows and the number of closed deals declines, sellers revise their prices downward. Many sellers, however, never drop their asking price enough and eventually withdraw from the market. Then, when there is a new upturn, houses start selling quickly because sellers are again accepting offers based on what they paid - sometimes decades ago - and not the current market value."
"Real estate markets are very inefficient in setting prices. That's because the comparables used by buyers and sellers are old news. People look at sales that went to contract six to nine months ago in order to determine today's asking price. If you thought about buying or selling a stock, you wouldn't decide how much a share of IBM is worth by looking at the closing price six months ago. But that's what people do in real estate all the time."
Chris Mayer - ONCOR Conference Panelist
Wharton Professor Chris Mayer will offer his insights on real estate cycles at a panel session for the ONCOR International Sales Meeting to be held in New Orleans on Friday, April 5th, 2002.
Business Week quotes Professor Susan Wachter in Recent Article on Housing Markets
The March 11 edition of Business Week examined whether the latest housing boom is sustainable or a real estate bust waiting to happen. The article quoted Wharton Real Estate Professor Susan Wachter: "We may very well be in a world where growth controls and infrastructure restraints have slowed the market’s response to an increase in demand," she said. Wachter, who had taken a leave of absence at the request of the Clinton administration to serve at the Office of Housing & Urban development (HUD) also pointed out that the Federal Housing Administration has seen mortgage delinquencies and foreclosures jump to 0.71% from 0.59% of it’s portfolio in the middle of last year - a rise that translates to about a $600 million increase in delinquencies.
February and March have seen Professor Wachter pursue a busy agenda. On February 7 she was a panel participant and paper discussant at the "Policies to Promote Affordable Housing" Conference hosted by the NYU Law School and the Federal Reserve Bank of New York. On March 6 she was a presenter on "The Homebuyers of Tomorrow," a forum sponsored by the Consumer Federation of America and Freddie Mac in Leesburg, VA. Wachter proceeded to the Lincoln Land Institute in Cambridge, Massachusetts, where she presented a paper co-authored with Steve Malpezzi on the "Role of Speculation in Real Estate Cycles" as part of the "Speculation on Community Land in Real Estate Markets" Conference. On March 13-15, she traveled to Tampa, Florida, where she was the keynote speaker at the "Next Generation of Community Statistical Systems" co-sponsored by the Fannie Mae and Ford Foundations.
Housing Subsidy Study by Professor Todd Sinai Featured in Business Week
A study of the impact of housing subsidies from 1977 to 1996 by our own Professor Todd Sinai and Joel Waldfogel of Wharton’s Business and Public Policy Department, was featured in a February edition of Business Week. They found that subsidies, while reducing privately funded development, also increase the low-income housing stock. The authors claim that giving poor people housing vouchers creates more homes than directly funding public housing construction, possibly because vouchers are more likely to reach the poor. For more information about this study, see Working Paper #394 [PDF, 92K].
Growth and Convergence in Metropolitan America by Professor Janet Pack
Janet Rothenberg Pack, Professor of Public Policy and Management at Wharton with a secondary appointment in the Real Estate Department, has recently authored a book -- Growth and Convergence in Metropolitan America, published by The Brookings Institution. In her book, Professor Pack urges consideration of a regional perspective that encompasses broader socio-economic measures and identifies a variety of significant growth trends that have served to concentrate welfare into the largest metropolitan regions in the United States. Pack cautions against a continued focus on population growth in favor of public policy concerned with improving income, education, and employment levels.
Peter Linneman - Keynote Speaker
In February, Peter Linneman was the keynote speaker at the University of Colorado’s Real Estate Annual Conference where he discussed the state of the economy. In April, Professor Linneman will be in New Orleans at the GVA Worldwide. His keynote speech is entitled "Is the Future of Real Estate Where We're Headed?"
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