Sunday, April 19, 2020

A Missed Prediction and A Couple of Articles

First, just to make it official, my bold coronavirus prediction in the previous post went up in flames.  I had hoped that widespread lockdowns would lead to a sharper decline in new cases, but the decline has been less pronounced.

Earlier in the month, I mapped out two trajectories.  Nothing particularly scientific about them, but at the time, either trend fit the earlier data.  It appears in the last two weeks that new case growth is following the less optimistic trend.

Second, I have seen a couple of recent articles that I figured I would comment on here.  First, here is an interesting article from Salim Furth at Market Urbanism where he comes to a counterintuitive conclusion - that coronavirus infections within the NYC metro area are negatively correlated with subway usage and density.  An interesting and thought-provoking finding that I'm not entirely sure I know what to do with.

Second, here is an article at Bloomberg: "Another U.S.-Wide Housing Slump Is Coming: The coronavirus pandemic will cause many cash-strapped Americans to sell their homes, flooding the market with excess supply." It makes many predictions about a coming housing bust due to the coronavirus.  It's hard to know exactly what will happen, so I will let you decide how much you should fear their predictions.

Obviously, in general, I will take a more optimistic view than the author.  One reason comes from this snippet at the end of the article:
It’s also impossible to quantify how Americans will perceive homeownership given the hardship so many will endure. If frugality is embraced as it was after the Great Depression, homes will once again be viewed as a utility. The McMansion mentality is at risk of extinction.
The reason why the collapse in the subprime mortgage market hit the housing market so hard was because the lead up was predicated on the fact that there had never been a nationwide decline in home prices. But now for the second time in a little more than a decade, Americans are poised to witness the impossible.    
The idea that the housing bust was fueled by the idea "that there had never been a nationwide decline in home prices" is ludicrous no matter how many times it is repeated.  It's the sort of unfalsifiable assertion that has filled in the many gaps in the bubble narrative that couldn't be filled in with data.  Even Case and Shiller didn't predict a nationwide decline in home prices. And the reason they didn't is because there was no reason for one. The reason there was a nationwide decline in home prices is because we made it effectively illegal to sell mortgages to millions of households who would have been homeowners for decades before.  We wiped out demand for housing in their neighborhoods, and prices cratered.  The bad news is that was tragic.  The good news is that you can only perform amputation once.  So, there is a lot of analysis that treats a housing collapse as a natural part of an economic downturn, based on data from the financial crisis, and it just doesn't reflect a natural response of a housing market.  Practically everyone will make that mistake, which is why I think there are potential bargains among the homebuilders.  Asset markets are usually efficient, but occasionally the humans that make them are universally wrong enough to make them inefficient.

Another myth about housing is the "McMansion mentality" as contrasted with the frugal post-depression generation.  This myth can be falsified, however.  Here is a graph that is an estimate of net residential investment.  It is residential investment (excluding brokers commissions) minus the BEA's estimate of the aging of the existing stock of housing.

The period that has been deemed the "housing bubble" period was the culmination of one or two decades of the slowest pace of residential investment since the Great Depression.  Those frugal post-Depression families were building homes like crazy - at a rate not seen since.

One reason they were building like crazy is because they built so little during the Depression.  The last decade - the decade this author associates with "the McMansion mentality" matches the Great Depression in the lack of residential investment.  Homes aren't viewed as a utility.  They are a banned substance.  Would that we were about to engage in a corrective decade like those frugal post-Depression families did.  But we won't. We can't. We're tied up in knots with ungenerous and untrue myths about our fellow countrymen.  So, we will struggle to do much better than a Depression. But it will be a Depression in real growth and consumer surplus, not a Depression in rents, prices, or landlord profits.  Coronavirus might create a brief contraction in prices, but unless we escape the real Depression, it won't be permanent.

8 comments:

  1. Well, if it makes you feel any better, predicting COVID-19 cases is a bronco for everyone, evidently

    My take is we have a virus quickly becoming endemic, maybe even in other animal populations. Lockdowns may retard the virus' progress, but the virus will win in the end.

    The outlier is China. Lockdowns seem to have worked there. Maybe they can proceed by keeping out foreigners and wait for the vaccine.

    House prices? I think you are right, but that assumes the US will recover from the 2020 Depression.

    If we end up with 50 million unemployed, and skipping out on rent becomes a national right....

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    1. Interesting. I had forgotten about that story of cats in a zoo catching it.

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  2. The word today, and this may change at any time, is that felines large and small catch COVID-19, but dogs not as much. Ferrets are vulnerable, so if this also means city squirrels I do not know.

    The spooky aspect of all the lockdowns is that if successful, such as in China, that leaves a naive population and a novel virus lurking. A single new infection can do the Wuhan thing all over again, so eternal vigilance on steroids must become the norm.

    The good news....

    A new study on LA County, from USC–

    “221,000 to 442,000 adults” in LA County have COVID-19 antibodies in their blood. No one knows how many additional children have antibodies to COVID-19.

    There are 617 COVID-19 related deaths in the county, usually people with co-morbidities.

    That’s a 0.01% to 0.03% death rate from COVID-19—but even that measures only adults. The death rate would sink if children were added into the mix. So, deaths are in line with a seasonal flu that was “heavy in,” to quote ASK.

    No doubt the USC study will now be attacked or defended on its methodology, because COVID-19 is no longer about policy options, but defending one’s previous positions or even ideologies.

    Or securing favorable treatment from various federal programs....

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    1. My guess is it will be attacked because there is no way that death rate or exposure level is generalizable.

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  3. https://marginalrevolution.com/marginalrevolution/2020/04/the-subways-seeded-the-massive-coronavirus-epidemic-in-new-york-city.html

    You mentioned subways. The nice thing about Covid-19 debates is the same thing that is nice about macroeconomic debates. No one is ever right or wrong!

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    1. I'm surprised that Tyler was unaware of this article from a Mercatus scholar pushing against that paper:
      https://marketurbanism.com/2020/04/19/automobiles-seeded-the-massive-coronavirus-epidemic-in-new-york-city/

      The thing with the studies claiming high infection rates is that by several measures, NYC has 20x as many cases as much of the rest of the country, so if you think that the infection rate is more than a couple % in other places, you've got a lot of explaining to do in addition to just having some data.

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  4. An estimated 13.9% of the New Yorkers have likely had Covid-19, according to preliminary results of coronavirus antibody testing released by Gov. Andrew Cuomo on Thursday.----CNBC

    And 21.2% in NYC. Not sure what the point of lockdowns is anymore in New York City...

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  5. Good afternoon, I'm a new reader of your blog. I liked your analysis of the current situation with the housing market. Thanks for sharing!

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