Wednesday, December 24, 2008

Running the Numbers on Housing

Lots of economists are debating the best government policy for dealing with the housing crisis. Glenn Hubbard thinks we ought to refinance people's loans and Brad Delong agrees. Arnold Kling disagrees because he sees a supply overhang (simply too many houses) as does Megan McArdle. I think it's time to look at some numbers.

My basic thesis is that the demand for houses is very inelastic. Basically each household needs a housing unit of some sort and not very many households need (or want*) more than one. So what I want to look at is how many new households have been created versus how many housing units we've built.

Between 2002 and 2007, the number of households in the US increased by 7.8 million (see table HH-1). During the same time period we completed 10.6 million housing units. For comparison, between 1995 and 2000 the number of households increased by 7.6 million while we completed 8.8 million housing units. The difference between the two periods is 0.2 million households but 1.8 million new units. That means we have about 1.6 million more new housing units that are looking for a new household. Eyeballing the completion data, that's about a year's worth of new housing units.

At about 1.5 million, 2007 was a more normal year for housing completions. So far for 2008, we're running about 25% behind 2007 (Table 5.) At that rate it will take four years to work through the excess housing inventory. If the completion rate slows further, we will be out of the housing slump that much sooner.

While there are probably other ways to consume the excess housing inventory I don't see how simply refinancing them causes that to happen.

* Suppose someone offered you a second house with a few minor conditions. You had to pay the taxes and the cost of maintaining it. In addition, you couldn't use it to house another household. Finally, you had to keep and maintain your existing home. The house is probably located in an outer suburb of a major growing city in California, Nevada, Florida or Arizona. (No it's not in a prime vacation spot.) What would you be willing to pay for the house?

Note: You may have noticed that I didn't use the 2001 data. The Census folks reset their baseline in 2001 so the household data appears to contain a discontinuity.

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Monday, December 15, 2008

Local Productivity Increases

One of the things that economists study is productivity - usually measured in output per hour of labor. Increases in productivity ultimately lead to increases in our standard of living. Increases in productivity can come from a number of sources. The Arizona Republic provided some recent examples from local businesses.

At JP Morgan Chase, a change in regulation makes more efficient processing technology possible.

What's new: New automated teller machines allow customers to deposit checks and cash into their accounts without envelopes. The machine takes a picture of the check or bill and sends it to a central processing facility to clear. A facsimile of the check is printed on a receipt, and the customer gets almost immediate access to the deposit.

Before, the deposit envelope had to be physically collected, transported to the processing site, opened and credited to the customer's account.

The new machines are made possible by the Check Clearing for the 21st Century Act, which took effect in 2004. The measure allows a facsimile of a check, instead of the actual document, to be presented for payment. That has speeded up dramatically the time it takes to process a check.

At Freeport McMoRan, good basic R&D results in lower extraction costs.

At its Morenci mine in eastern Arizona, Freeport uses naturally occurring bacteria instead of commercial sulfuric acid to leach copper from newly mined ore and old dumps. The process benefits the environment and has enabled the company to increase the amount of copper it recovers...

Added productivity: The leaching process eliminates the toxic emissions of smelting process and has reduced production-related energy costs by about 22 percent, according to Freeport spokesman Eric Kinneberg.

At Hickman Farms (egg producer), the latest equipment makes a significant impact.

What's new: Machinery recently installed at a new complex of chicken barns being built by Hickman's in Arlington Valley west of Phoenix can wash, sort, inspect and pack 120,000 eggs per hour...

Added productivity: The new machine can pack 500 cases of eggs per hour with eight employees, compared with an earlier machine that packed 20 cases per hour with five employees.

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Exporting Pilots

I remember listening to a presentation on the economics of residential real estate when the point was made that a community needed to export something in order to be viable. If a community only served it's own needs, it wouldn't survive in the long run.

Here in Arizona we used to depend on the five C's - climate (tourism), copper, cotton, citrus and cattle. Now it's a bit different. Climate is still big, copper is important again, and other things have replaced agriculture.

Goodyear, a west valley community, hosts Luke AFB which is the main training facility for F16 pilots. Since the F35 will replace the F16, the community is working on securing their future exports.

Peoria Mayor Bob Barrett and Arizona Attorney General Terry Goddard are urging Air Force leaders to make Luke Air Force Base the future home of the F-35 Joint Strike Fighter.

The two met with Air Force Secretary Michael Donley; Gen. Norton Schwartz, the service's chief of staff; and other officials last week at the Pentagon to discuss the future of the West Valley base...

The loss of Luke would have a tremendous impact on the West Valley. Barrett argued that its prosperity is tied to the base.

"This is a $2-billion-a-year economic engine that is essentially recession-proof," he said. "We need to continue to join forces and do everything we can to secure the West Valley's financial future - that's essentially what we are talking about. This supersedes all other issues in the West Valley."