2008-10-13 (Monday) by Gregory Tucker.

The following paper discusses my previous post in a little more depth.

http://www.kc.frb.org/PUBLICAT/ECONREV/PDF/2q07rapp.pdf

There are three major methods of valuing housing prices: average sales price during a certain time period (RMSL), same sales comparisons (Case-Shiller), and Hedonic pricing models.

Because of the statistical nature of same-sales comparisons, the models give us index values rather than actual prices. They are useful for determining underlying changes in the value of homes, but they are not useful for calculating the total value of a market. Moreover, they exclude new houses.

Hedonic pricing models require vast quantities of data, which probably do not exist for most markets. They might be useful for new home sales, but not for the broader housing stock, especially in more mature markets like inner Portland.

Observed pricing data is all we can use. Houses are heterogeneous, and are sold infrequently. Sample sizes are small. To some extent we should expect variation in the mean and median values due to small sample sizes. Even accounting for seasonal variations, some randomness shows up in the data, but I would argue sample bias may be only one to two percent of the mean.

In an asymmetric normal distribution we don’t expect the mean to equal the median. Is there evidence the distribution is not normal? Does RMLS even publish numbers broken down at this level? Is there evidence that the sample biases are larger than I suggested? I can imagine a lot of reasons why the samples might bias the averages, but I am not yet convinced they actually do show up in the data.

Posted in Portland | Print | 1 Comment »

2008-10-13 (Monday) by Gregory Tucker.

“How should the value of all the homes in a given market be measured?”

Market prices are determined by individuals making (more or less) independent decisions. The Zen but true answer is a property is worth what it is worth–nothing else. A seller may have felt his or her house was worth a certain amount at a certain time, but because they didn’t sell then, the “appraisal” was just a guess.

Self appraisals, especially in the housing market, are notoriously unreliable to behavioral economists. Emotions are involved in the selling decision. Sellers are viscerally averse to taking a loss. Even worse, when homeowners watch their home’s “value” at the market peak, they reset their expectation of what constitutes a “loss”. Many respond to weak market conditions by raising–not lowering–their fantasy price, apparently in hopes of building in negotiating wiggle room. This results in even lower liquidity at a time when markets are already dysfunctional.

Appraisers have more objective methods, involving recent comparable sales, or comps. When we sold our house in Dallas we obtained a $300 appraisal to price our home. Our home went a little below appraised value. The appraisal process was fairly reliable, because Dallas possesses vast tracks of suburban wastelands with row after row of identical houses. In Portland I asked our Realtor about the value of an appraisal, but he said it is only useful for getting the bank to sign off on the deal, nothing more–they simply verify the house isn’t wildly overpriced.

The total price of all homes in a market is simply the RMLS average price times the total number of properties. From there you can adjust for systemic risks. For example, the systemic risk in New Orleans or Miami or Southern California is higher than in the midwest, for example, which is free from hurricanes and earthquakes. Portland, by the way, is also subject to earthquake risks, though many homeowners don’t realize it. Systemic risks are those which can cause a severe imbalance between buyers and sellers.

The risk adjustment is roughly equivalent to the observation that Gates (who art in Redmond, William be thy name), may be forced to liquidate his positions in MSFT, causing a severe mismatch in buyers vs. sellers. Risk adjusted return calculations are a well-known albeit overlooked calculation in investing. Systemic risks could be positive as well. A company might open a major facility in Portland, or rapid changes in weather conditions in the U.S. induced by global climate change may encourage hundreds of thousands to move to Oregon and Washington in the course of a few years. Both could cause real estate values to skyrocket.

Posted in Portland, DFW | Print | 1 Comment »

2008-10-11 (Saturday) by Gregory Tucker.

I understand the NASA Mars Science Laboratory (MSL) is in danger of being cut due to cost overruns. We have already spent $1.5 billion and 4 years on its construction, and now that work is in jeopardy over $300 million. Please note that every significant accomplishment of our country, including the Apollo missions and the Panama Canal have gone over budget. Allowing the MSL program to lapse would be a tragic waste of taxpayer dollars.

NASA remains relevant to our economy and to science. MSL is not only a significant piece of our scientific exploration of the universe, but the pioneering missions of NASA have inspired me and tens of thousands of Americans to explore careers in science and engineering.

Please find a way to get this program done.

Posted in Space | Print | 1 Comment »

2008-10-11 (Saturday) by Gregory Tucker.

Having graduated from high school in the late 80’s, I was not “around” the early online scene. At that age we had better things to do, or so we thought at the time, so my awareness did not develop until the early to middle part of the following decade. What a joy it was to read Michael A. Banks’ On The Way To The Web to fill in the gaps.

We met some interesting characters on the way. The most memorable character whom I had never heard of before was William F. von Meister, or “von Scheister”, the serial entrepreneur and son of European royalty who started CompuCon in the late 70’s, which became The Source in 1979. From there, we also learned about the origins of CompuServe, and we experienced how the entire online industry developed, given the technical and competitive constraints. We learned what made CompuServe popular, and what differentiated AOL (as if this weren’t obvious).

In Chapter 2 “In the Money” Banks introduces us to timeshare computing, but most importantly he introduces us people like Larry Roberts, Vint Cerf, and Bob Kahn, who were major players in the early days of the ARPA/DARPA project that became the Internet. In the opening chapters of the book, my main criticism is the shallow portrayal of these people. Where did they work? What did their offices look like? Or smell like? What restaurants did they frequent? Such details, while seemingly mundane, turn these legends into real people with real thoughts and real limitations. Banks deflects this criticism in the Afterword by emphasizing the intent to focus on the services that preceded popular adoption of the Internet, but this gap still feels real to the reader.

Similarly, having built up a wonderful cast of characters and companies, Banks kills them off rapidly and ungraciously in the final Chapter 15 “Moving to the Net”. The same deflection applies—by 1994 the web was well established and hence outside the scope of the book—but Banks would have done well to spend some more time on how these pre-web pioneers dealt with the Internet, how they adjusted their competitive strategies, and how and why those strategies succeeded or failed.

While the first two chapters and final chapter were weak, the center of the book provides a fascinating journey through a period of time that has not been well discussed elsewhere. The book fills in gaps, but it also puts our current Internet into context.

Posted in Technology | Print | 2 Comments »

2008-10-09 (Thursday) by Gregory Tucker.

Compare Phoenix with Portland. Using Case-Shiller numbers PHX has declined 34.4% since its June 2006 peak. PDX has declined 6.6% since its July 2007 peak. PDX data represent 13 mo. decline, and 13 mo. into its decline, PHX had also declined 6.6%.

Exactly the same. I am not making this up.

Phoenix has 13 more months decline than Portland. Where will we be in another 13 months? Some say we won’t decline that far–less drinking means smaller hangover. Others say we have another 27.8% to go, just like Phoenix–late to the party and late to the hangover. Affordability here is lower than Phoenix.

I personally believe we are not even close to the bottom. I think 13 months from now our decline (from peak) will be closer to 34.4% than 6.6%. Neither market has hit bottom yet, and fundamentals point to continued declines in both markets.

Posted in Portland | Print | 1 Comment »

2008-10-02 (Thursday) by Gregory Tucker.

http://www.wwu.edu/depts/skywise/a101_planets.html

Posted in Space | Print | No Comments »