The Unassuming Economist

From a NBER paper by Marco Leonardi & Enrico Moretti:

“In many cities, restaurants and retail establishments are spatially concentrated. Economists have long recognized the presence of demand externalities that arise from spatial agglomeration as a possible explanation, but empirically identifying this type of spillovers has proven difficult. We test for the presence of agglomeration spillovers in Milan’s restaurant sector using the abolition of a unique regulation that until recently restricted where new restaurants could locate. Before 2005, Milan mandated a minimum distance between restaurants that kept the spatial distribution of restaurants artificially uniform. As a consequence, restaurants were evenly distributed across neighborhoods. The regulation was abolished in 2005 by a nationwide reform that allowed new restaurants to locate anywhere in the city. Using administrative data on the universe of restaurants and retail establishments in Milan between 2000 and 2012, we study how the spatial distribution of restaurants changed after the reform. Consistent with the existence of significant agglomeration externalities, we find that after 2005, the geographical concentration of restaurants increased sharply. By 2012, 7 years after the liberalization of restaurant entry, the city’s restaurants had agglomerated in some neighborhoods and deserted others. By contrast, not much happened to the spatial concentration of retail establishments or even retail establishments that sell food, which were never covered by the minimum distance regulations and therefore were not directly affected by its reform. We also find that in neighborhoods where the number of restaurants grew the most after the reform, restaurants reacted to the increased competition by becoming more differentiated based on price, quality and type of cuisine.”

On cross-country:

• Cross-Country Comparison: Home Rent Growth – Core Logic

On the US:    

• There Was No Housing Bubble in 2008 and There Isn’t One Now. Some smart economists are challenging the conventional wisdom that the Great Recession was triggered by out-of-control home prices. – Bloomberg
• Apartment Occupancy Just Hit a Historic High. Is That Good? There’s a silver lining to astronomic U.S. rent hikes: Most tenants won’t pay them, because they’re already locked into their leases. – Bloomberg
• Housing costs swell, hampering home buyers and pushing up rents – New York Times
• Call for Papers: The Mortgage Market Research Conference: Call for Papers – Federal Reserve Bank of Philadelphia
• Mortgage Rates Hit Highest Levels Since Spring 2020. Increase in cost comes after ultralow rates have fueled boom in home sales and prices – Wall Street Journal
• Wall Street Is Using Tech Firms Like Zillow to Eat Up Starter Homes. A business that’s touted as a convenience for home sellers has created a secret pipeline for big investors to buy properties, often in communities of color. – Bloomberg  
• People Don’t Want to Move to Shrinking Cities. Slowing population growth could worsen America’s geographic divides, with home prices skyrocketing in some places and plummeting in others. – Bloomberg
• Rising sea levels threaten affordable housing – NPR
• ‘Magic’ Multigenerational Housing Aims to Alleviate Social Isolation. Two co-living communities set to break ground this year seek to address loneliness, as well as the caregiving and affordable-housing shortages, in the U.S. – Wall Street Journal
• U.S. mortgage interest rates surge by most in almost 2 years – Reuters
• Can You Game Your Way Out of American Housing Injustice? A new video game uses a choose-your-own adventure format to interrogate the illusion of choice in the U.S. housing system. – Bloomberg
• There’s Still No Amazon for Housing, But Fintech’s Working on It. Buying and selling a house is a large, complicated transaction, so companies are focusing on making small parts of it easier. – Bloomberg

On China

• China Plans Millions of Low-Cost Rental Homes in Equality Push – Bloomberg

On other countries:  

• [Germany] Germany Fights Soaring Home Prices With Curbs on Mortgage Lending. As in the U.S. and other economies, pandemic financial support has sparked a surge in property investment and borrowing in the country – Wall Street Journal
• [Germany] Germany asks banks to build buffers as property market heats up – Reuters  
• [Hong Kong] Why Hong Kong housing and office markets are facing very different supply shocks – South China Morning Post  
• [United Kingdom] U.K. House Prices Surged Last Year at Fastest Pace Since 2004 – Bloomberg
• [United Kingdom] Help to Buy has pushed up house prices in England, says report. Lords claim flagship £29bn policy would have been better spent on social housing – FT
• [United Kingdom] Letter: Britain must encourage more affordable housing – FT
• [United Kingdom] As the North Cotswolds Get Hipper, Home Values Soar. House prices in this section of the English countryside have risen thanks to the flurry of celebrity residents who have turned the north Cotswolds into the place to see and be seen – Wall Street Journal

From Bloomberg:

“Housing markets are red hot, with prices up more than 18% from November 2020 to November 2021. That’s an acceleration over the previous two years, which saw increases of 4% and 8% each. It’s also a faster rate than the U.S. experienced during the housing boom of the 2000s that preceded the Great Recession.

That comparison is causing some heartburn. “Are we in another housing bubble?” asked Mark Zandi, chief economist at Moody’s. The consensus, shared by Zandi, is that the answer is no — or, at least, that today’s bubble is different and less dangerous than the last one. Lending standards are more strict than they were 15 years ago, for example, which ought to mean that fewer homeowners are at risk of defaulting if prices fall.

CNN, though, found a reason for pessimism in that optimism. “The good news is that few economists believe that the current run-up in housing prices is a bubble that’s about to burst, taking the economy down with it,” Chris Isidore of CNN Business wrote on Oct. 27, 2021 before adding ominously, “The bad news is that practically no one was worried about the housing bubble in 2007, either.”

But there’s another reason for sanguinity about the current housing boom: We may have misunderstood the last one all along.

The economists David Beckworth and Scott Sumner have argued that the timing of the last housing bust does not line up with the conventional wisdom that it played a central role in the recession that began in December 2007. The housing market peaked in early 2006, and sustained nearly two years of decline before the economy stopped growing as unemployment stayed low.

Kevin Erdmann — the author of a new book about housing, “Building from the Ground Up,” and a colleague of Beckworth and Sumner at George Mason University’s Mercatus Center — has more recently challenged the claim that the U.S. built too many houses back then. He points out that spending on housing didn’t grow any faster than spending on other consumption goods during the boom (or the preceding decades). The notion that the price increases of 2000-2007 were unsustainable, he points out, also doesn’t match the experience of other countries. The U.K. had a larger increase, a shorter and less severe decline, and a stronger rebound.

Erdmann does not deny that average home prices rose too much in some metropolitan areas during that period. But these spikes were a function of too little homebuilding, not too much. Prices rose fast in two types of cities: those with tight constraints on supply (including New York and San Francisco) and those that dealt with an influx of newcomers from those places (such as Phoenix and Miami). “

Read the full article here.

A new paper studies mortgage loan approval rates for white and blacks. “In the first seven days of the month, Black applicants have 20 percentage point lower approval rates than white applicants. The approval gap declines to just 10 percentage points on the last day the month,” as shown in the figure below. Why? The authors examine the hypothesis that this occurs because loan officers have monthly volume quotas, which gives “them less scope to apply subjective preferences” at the end of the month. They calculate “an upper bound for the costs of discrimination”: “if the Black approval gap on each day of the month was as small as it was on the last day, approximately 1.4 million more Black applicants would have been approved between 1994 and 2018,” corresponding to over $200 billion in total loan volume.  

The figure reports approval rates, which we define as the fraction of loans that are originated out of the total number of applications (excluding withdrawn applications). We present the difference between the Black approval rate and the white approval rate on each day.