 |
January 19, 2012
In This Issue:
Black swan hunting
Big Dig: the sequel
Teardowns and land value
Property rights evolving
Odds & Ends
|
Past Issues |
Black swan hunting
 If housing bubbles are like extreme weather events, Jim Follain has been chasing tornadoes.
Follain, a senior fellow at the Nelson A. Rockefeller Institute for Local Government, has been conducting research on the run-up of housing prices and ensuing crashes, with 2008 being the most notable perfect storm. He's been fascinated with the idea that on the whole, "it's almost like we couldn't see this coming." Like meteorologists and extreme weather events, economists have not been able to predict crashes with great precision - although they are very good at analyzing what happened after the fact. The Black Swan author Nassim Nicholas Taleb describes events such as Google's success or 9-11 in the same way: unpredictable, carrying a massive impact, but where subsequent explanations suggest less random and more predictable characteristics than was previously evident.
So what are the warning signs to work with? Private mortgage insurance used to be a canary in the coal mine, Follain says, but that has fallen away. There are macro factors -income levels, employment, monetary policy and interest rates - combined with the reality that housing markets are intensely local and regional. Subprime lending was prevelant in areas that had the greatest declines, and it's possible, Follain says, to look at the early indications of a "feedback loop" in real estate markets in distress.
Using advanced econometric techniques applied to a large panel data set of annual data for up to 350 cities allowed Follain to look across cities at a point in time, and to look at individual cities across time. Panel data enables analysts to identify the effectsof city characteristics separately from the effects of temporal changes such as economic cycles. His simulations predicted declines in Florida, Arizona, Nevada, and California, he says,"but what actually happened was much worse. The model was good at predicting the worst-hit (Metropolitan Statistical Areas) ... but not the magnititude of the decline."
Follain co-authored the Lincoln Institute working paper, A Look at US House Price Bubbles from 1980-2010 and the Role of Local Market Conditions, with Seth H. Giertz, assistant professor of economics at the University of Nebraska-Lincoln, and plans to include new work in another paper to be posted soon. He presented some of his findings in November as part of the fall lecture series, which can be viewed in its entirety at our Lectures & Video page.
Big Dig: the sequel
It's become a familiar narrative: cities around the world are dismantling urban freeways, burying them underground, or replacing them with multi-modal boulevards and parks. Portland, Ore., led the way with its waterfront park, San Francisco re-created the Embarcadero after the 1989 earthquake, and Milwaukee demolished the Park East Expressway. Seattle is looking to replace the againg Alaskan Way Viaduct, and the Treme neighborhood in New Orleans hopes to be rid of the hulking Claiborne Expressway someday. In New York, the Robert Moses Parkway outside Buffalo may be overhauled, the urban highway named for the great master builder himself - who designed or inspired many of these roadways in the era of urban renewal.
In this most recent contribution at the Atlantic Cities site, we look at the next generation of reinventing urban infrastructure - the lesser-known connectors and overpasses and viaducts typically outside of downtown. It's no easy task, judging by a trio of projects under scrutiny in Boston, home of the $15.6 billion Big Dig: the McGrath/O'Brien Highway in Somerville and the Rutherford Avenue connector through Charlestown, both north of the city, and the Casey Overpass in Jamaica Plain, well south of downtown.
Teardowns and land value
The teardown has an image problem. Neighbors are aghast when an older structure is demolished and replaced was something new and most often larger. The historic preservation movement doesn't take kindly to McMansions rising. But teardowns in established neighborhoods with good density can be a green concept - better than building something new in a cornfield miles away, smart growth advocates would argue. Teardowns take advantage of existing urban infrastructure. And while embodied energy is lost, demolition materials can be recycled; if the new building is energy efficient, so much the greener. Municipalities tend to like the increased property tax revenues from more robust assessments.
Yet another interesting dimension is revealed in teardowns: the value of the land where the doomed house sits. It's very often the location of the parcel, after all, that is so desirable - the improvements on the land is what's replaceable. Teardowns in this context have been studied in detail by Lincoln Institute visiting fellow Daniel P. McMillen, who presented a paper on the topic at the American Economic Association conference in Chicago earlier this month. He is also author of a 2008 working paper on teardowns and a 2006 Land Lines article Teardowns: Costs, Benefits, and Public Policy. Vicki Been, Ingrid Gould Ellen, and Michael Gedal also have a 2009 working paper, Teardowns and Land Values in New York City, that builds on McMillen's work.
McMillen was part of a significant Lincoln Institute presence at the American Economic Association, the largest meeting of economists each year, along with visiting fellows Daphne Kenyon and John Anderson, and former board member Chip Case. Jim Follain, who delivered a fall Lincoln Lecture on his research on predicting housing bubbles, presented on that topic as well.
Property rights evolving
Lincoln Institute President Gregory K. Ingram tackles the subject of evolving concepts in property rights in his quarterly Message from the President, in the January issue of Land Lines, and reprinted here: Clearly defining the ownership of property is often thought to be necessary for the efficient operation of markets and the appropriate use of scarce resources, he writes. Specifying property rights within mature governance frameworks is relatively straightforward for traditional private goods, but it becomes more complex for common property goods such as groundwater, environmental resources, irrigation systems, forests, and fisheries.
Common property goods are often subject to overexploitation (the well known "tragedy of the commons"), and many observers argue that the sustainable use of common property can be solved simply by employing one of two alternatives: private ownership, or public ownership operating within a clear regulatory framework. The argument is that either approach can internalize externalities and reduce transaction costs.
This notion that there are only two discrete solutions - private ownership or public ownership - to promote the sustainable management of scarce common resources has proven problematic for at least two reasons. First, neither private nor public ownership has always conserved scarce resources well, as in the case of the timber industry. Second, many alternative property rights approaches have been successful in managing scarce common resources in a sustainable manner, in some cases over hundreds of years.
Examples of alternative property rights approaches include the management by farmers of irrigation systems in Nepal, by villagers of Alpine grazing lands in Switzerland and Italy, and by villagers of mountain grazing land and forests in Japan and Norway. In all of these cases, farmers owned their private agricultural parcels and also participated as communal owners of commonly held resources.
Analyses of many cases of successful common resources management reveal that specific practices vary widely and depend on underlying institutions, social norms, culture, and ecological conditions. Accordingly, specific practices are usually not transferable from one context to another. However, research also shows that participants in successful systems have seven elements in common: accurate information about the resource; a common understanding about the resource's benefits and risks; shared norms of reciprocity and trust; stable group membership; a long-term perspective; decision rules that avoid either unanimity or control by a few; and relatively low-cost monitoring and sanctioning arrangements.
These systems work best when the common pool resource is in a fixed location, such as forests, grazing land, mineral deposits, and many environmental resources. When the location of the common resource is not fixed, however, virtually no single property rights approach has been very successful. This is famously the case for fisheries, where the stock of fish is mobile and its size is difficult to track. Most property rights systems applied to fisheries give property rights to the annual catch, not to the underlying stock. Many approaches have been attempted to control fish catches, and the most promising current practice uses transferable quotas, but this approach is still a work in progress.
An excellent summary of the evolving theory of property rights is available in the recent Lincoln Institute book edited by Daniel Cole and Elinor Ostrom, Property in Land and Other Resources - also now available as an eBook. Elinor Ostrom in particular has contributed greatly to the property rights literature, and her work in this area was honored last year when she was awarded the Nobel Prize in economics.
The volume includes chapters that address the complexity of property rights and their applications to common pool resources such as air, land, water, and wildlife (including fisheries). In addition, two chapters review the self-organization of property rights practices by miners during the 1849 California gold rush and more recent gold rushes. Those authors found that very similar property rights practices emerged in other such mining situations.
Odds & Ends
A Boston museum's deft attempt at balancing old and new ... Ed Blakely, who is co-author, with Armando Carbonell, of the forthcoming Resilient Coastal City Regions: Planning for Climate Change in the United States and Australia, has published My Storm: Managing the Recovery of New Orleans in the Wake of Katrina (The City in the Twenty-First Century), with Henry Cisneros ... A recent report spells out grim risks and consequences from climate change in China ... This month's highlighted working paper: Analysis of Detroit Property Tax Revenue by Mark Skidmore and Gary Sands.
— ANTHONY FLINT, Lincoln Institute of Land Policy
Lincoln Institute of Land Policy | 113 Brattle Street | Cambridge, MA 02138 | www.lincolninst.edu
|
|
