Felix Salmon

Homeownership and positive externalities

Felix Salmon
Jun 14, 2010 19:39 UTC

My post on falling homeownership sparked an interesting debate about whether and where one might find positive externalities associated with people owning their homes. Certainly a lot of old-fashioned home-improvement expenditures, which make sense insofar as they increase the value of the home, stop making sense when any increase in value just goes straight to the bank. But are there other areas in which homeowners impose more positive externalities than renters?

DanHess, in the comments to my post, says that some investments make sense just on a cashflow basis, and therefore could sensibly be implemented even by someone underwater on their mortgage:

I have found that many things I have done on my home were discretionary, from the kitchen to bathrooms. New energy efficient windows, attic insulation, an attic fan, ceiling fans, and high efficiency appliances are all examples of investments I made which are each realizing a 10% or greater real return for the lifetime of the investment because of utility savings. In each case, I have been able to see the savings appear. That insulation will be just fine 50 years from now. None of these investments are available to renters.

And Matt DeBord, of TBM’s Shifting Gears blog, shared by email his own experience in LA. He’s helped create a dual-language immersion program at a nearby grade school, now headed into year 3, and he’s going out of his way to support locally-owned businesses, rather than big national chains. Those aren’t the kind of things that he did when he was renting downtown.

Are these not the kind of things that renters in his neighborhood do as well? Well, they might be, if his neighborhood had much in the way of renters, which it doesn’t. And insofar as it does have rental properties, they tend to be much less nice than the homes which are owner-occupied. In areas like downtown with nice rental properties, renters can end up with more disposable income (since renting is still cheaper than buying), but it doesn’t benefit the neighborhood in the same way, since the neighborhood is more dominated by national chains, and there’s less effort put in to supporting local schools.

For me, it’s important to distinguish between two things which are separate, if highly correlated: homeownership, on the one hand, and the amount of time that you expect to stay in your home, on the other. A lot of the rhetoric about the upside of homeownership elides these two things; and for a long time doing so made perfect sense. After all, someone with a 30-year mortgage is likely to stay put for much longer than someone with a 1-year lease.

But during and after the housing bubble, that changed. Buyers were encouraged to “Flip this House“, and then, when they ended up underwater or when their teaser mortgage ended, resigned themselves to losing their home. Anecdotally, friends of mine who were planning to have babies were buying apartments which were not remotely suited to raising a family, intending to sell at a profit when the baby arrived: the ownership time horizon shrank a lot, during the bubble, and I don’t think that it has grown much if at all since.

Meanwhile, in a world where landlords have no ability to raise rents significantly for the foreseeable future, renters can feel a lot safer in their homes than they have in years. Many people who have learned the lesson of the housing bubble are now happy to rent in perpetuity — and that doesn’t mean moving house on a regular basis.

So it seems to me that owners, with shortening time horizons, are less likely now to do things like install high-efficiency appliances and invest time and effort into their local schools, while renters, with lengthening time horizons, are more likely to. Probably homeowners still score higher on the positive-externality front than renters do, but the difference is narrowing.

Matthew DeBord isn’t so sure. “Limited evidence on my front suggests that those getting out from under negative equity stay in the hood, rent, and continue to build the area,” he writes. “They’re already vets of commitment.” That makes sense: you go to the more-expensive local hardware store because doing so pays off over time, once you’ve built up a relationship there. And once you have that relationship, then you don’t need to lose it just because you lose your house.

My feeling is that a lot of what we’re seeing is related to rental properties generally being designed for and marketed to the childless, while families, who tend to stay put if only to give the kids continuity, are more likely to own and to build up real local communities. Parent-teacher meetings are a great way of getting to know your neighbors. But if and when families start to rent nice places, they’re just as likely to build strong communities as those who own. It’s not homeownership that creates the positive externalities, so much as simply intending to stay where you are for a while.

Update: There’s nothing like empirical data to destroy a blog thesis! Adam Ozimek compares rental tenures in 2004 and 2008, and finds no evidence that renters are staying in their homes any longer.


Felix, there are a few “positive externalities” that you forgot to mention: first, while your main focus the economic are very important, they may not be the most significant. As for the economic, you will find from almost all studies of CLT/Affordable housing programs, that their new home owners are much MORE likely to stay current on their mortgage payments, and ALL their other debts. More so than other owners and almost all renters.

But, was is also significant is that new home owners also tend to have less divorces and commit fewer crimes. More important, if they have kids, the kids also commit fewer crimes, do better in school, get more higher education degrees, attend churches and play more community sports.

Not all of course, just as not all crack producers own their crack houses. Please note, most owners of crack houses do not stay long enough to pay off their 30 yr loans.

But, a LOT more new home owners, especially with children, do much better in life & society, by all of {y}our Judeo-Christian family values.

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The Greece downgrade non-event

Felix Salmon
Jun 14, 2010 17:35 UTC

Here’s a graph of the stock market plunge in the wake of Moody’s shocking four-notch downgrade of Greece to junk status:


By my eyes, that’s a drop of about 2 points in the S&P 500, or 0.18%. In other words, the market didn’t even blink.

There are two big lessons here, I think. Firstly, beware all market reporting: you can be quite sure that if the market was down sharply today, everybody would be citing the Greece news as the reason for that. And secondly, no one cares about the ratings agencies any more. Moody’s is a joke, it’s massively behind the curve, and bond investors feel free to ignore anything it says.

It’s true that there are still some bond investors who are constrained by credit ratings, but they’re not the kind of people who are playing in the market for Greek debt, which has for months been dominated by European banks and the ECB. Even so, a monster downgrade of an EU country to junk status would have caused chaos in the markets not all that long ago.

So well done, markets, for finally treating the ratings agencies with the respect they deserve — which is to say, none at all. Now let’s try to get the government to do the same thing, and get rid of the silly and outdated NRSRO designation.


The ratings agencies now have the same credibility as sell side brokerage analysts. However, they are far more dangerous because many of the world’s accounting rules still imbue them with special powers.

As you point out, it is time that they are made legally irrelevant as well as practically irrelevant.

For some reason, the world’s financial system is simply pretending that 2007-2008 never happened. This has become the Mother of All Moral Hazards with governments and central banks doing anything they can to avoid bringing sanity to the lunatic asylum of the financial sector.

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Did the failure of genomics doom the US economy?

Felix Salmon
Jun 14, 2010 16:10 UTC

Mike Mandel has an interesting nominee for the most significant economic event of the past decade: the failure of the Human Genome Project to become the medical and financial blockbuster that everybody expected ten years ago.

If the project had met its expectations, says Mandel, we might be looking at spending much less money on treating incurable diseases like cancer and diabetes; we would have created a lot more great jobs in the pharma industry; and the US would have a trade surplus in pharmaceuticals, rather than a trade deficit of more than $30 billion.

Still, hope springs eternal, for Mandel, at least:

Here’s how I see it: The U.S, and more broadly the “advanced” countries, did what they were supposed to. They invested heavily in the cutting-edge new technology, biotech, which promised to make the biggest difference in the most important areas–health, food, energy. The research has gone great, tremendous progress has been made. Commercialization thus far has sporadic–but the gap between research and commercialization is one which has been repeatedly bridged in the past. So I’d say that the odds are good that the Human Genome Project will have a significant economic impact over the next 5-10 years.

Mandel does worry whether “a misguided patent system” is a “structural impediment in the U.S. innovation system”; I’d be interested in that too. But the big picture is that the US made a multi-billion-dollar bet on genomics, and so far that bet has failed to pay off. That doesn’t mean it was a bad decision, but it’s still worth thinking about what might have been. Maybe we were just unlucky.


Re socialized healthcare and its unwillingness to allow treatments with pricey new drugs: Washington Post today (16 August 2010) states that the FDA may rescind its approval of Avastin (a cutting-edge anti-cancer drug) for patients with breast cancer since it exceeds the cost-effectiveness threshold that will be set under Obamacare. Assuming the states and the Supreme Court don’t shoot down Obamacare as just plain unconstitutional, this means that no matter how much cash you willingly pull out of your wallet to get yourself or a loved one treated with this new drug, the healthcare system will not allow it to be made available for you. You will be told to “make your final arrangements”. (However, wanna bet that any member of congress who gets breast cancer will be able to obtain all the Avastin she wants?)

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The Renaissance common-sense test

Felix Salmon
Jun 14, 2010 13:51 UTC

Robert Frey, formerly of Renaissance Technologies, has a new Fund of Hedge Funds, and good for him. He also lifts the kimono ever so slightly on how Renaissance works:

At Renaissance, models had to meet four principles, says Mr Frey. These were (and maybe still are): simplicity – “don’t make it more complicated than it needs to be”; commonality – “make it as broad as possible”; stability – “models you have to readjust constantly probably aren’t as good as ones that stand the test of time”; and rationality – “it can’t just be statistically valid”. You have to employ reason to identify a statistically significant but spurious pattern.

I think that quants in general would pay lip service to these principles, but they wouldn’t necessarily give them such a central importance. Of course, the proof of the pudding is in the eating: what counts as simple and stable for Renaissance’s purposes would probably be considered nothing of the thought by mere mortals.

But I do like the final “common sense” test. “This strategy works, but I don’t know why” is always a bad way of trying to make money, because it’s very likely to be a statistical fluke. Ideally, of course, there would be a sequencing test too: it’s not enough to come up with a strategy which works and then try to work out why. You have to start with a theory of why a certain strategy might work, and then test it. I wonder whether Renaissance does that.


The Economist, amusingly, is saying the reason RenTech succeeded so wildly is because … they don’t obey any common sense rules, and do, in fact data mine to their heart’s content. We all know those crazy physicists and astronomers are big on mindlessly using false correlates.

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Felix Salmon
Jun 14, 2010 05:42 UTC

Bloomberg commissioned a custom drawing of Helvetica for their new Businessweek logo — Brand New

Ryan Avent on the costs and benefits of homeownership — The Bellows

Scott Tobias on Verhoeven’s Starship Troopers — AV Club

Mirror 1-0 Kitten — YouTube

Bloomberg Defends BP CEO: “Rather than excoriate the oil industry, Bloomberg questioned Washington” — NBC NY

Forbes staff is asked to help the boss get more Twitter followers — TBI

Analyst sees T-Mobile USA as iPhone contender: makes sense for international roaming ability — Reuters

In 2008, BP Touted New Tech To Measure Oil Flow — MoJo

Senate moves to keep 401(k) fees hidden — Moneywatch

This is your brain on web: Steven Pinker weighs in — NYT

“African teams always have the coolest nicknames” — The Paris Review


All US business magazines would be wise to try to understand why The Economist is the only newsweekly with rising circulation and ad pages.

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The divorce diet

Felix Salmon
Jun 14, 2010 05:12 UTC

Abby Ellin finds some interesting body-weight literature:

A 2008 study in the Journal of Economics and Human Biology examined data from 12,000 men and women ages 18 to mid-40s. Compared with when they were single, the body mass index (or B.M.I., a height-to-weight ratio) of married men increased by 1.5 percent above and beyond what they would normally gain as they aged, and that of women shot up 2 percent…

The B.M.I. of couples who lived together without making it legal increased by only about 1 percent…

If the relationship disintegrates people tend to lose weight. According to Professor Argys, divorced men usually revert to their pre-marriage B.M.I., and divorced womens’ B.M.I.’s are actually 2.5 percent lower than when they married.

The abstract is here; an ungated version of the paper is here. One big question, of course, is how come obesity has been rising even as fewer people have been getting married. Of course you want a pretty chart:


I’m surprised that women are so much heavier on their wedding day than they were one year earlier. That doesn’t conform with what I’ve seen.


My name is Melony, i had a problem with my husband sometimes ago but never knew what the problem was,i tried to asked him but he refused to tell me what it was as time goes on i discovered he was having an affair with a friend of mine that happens to be my best friend,i was so sad that i never knew what to do next,during my search for a way out i met a friend of mine who had similar problem and introduced me to a man who helped her with his situation,on getting to the man i discovered he was a spell caster i was shocked because i have not had anything to do with a spell caster in my entire life so i tried to give this man a chance cos i never believed in spell casting as i thought it will not work for me but to my surprise i got positive results and i was able to get my husband back from her even after the spell caster did all. i discovered my husband fell much more in love with me on like before so i was so happy that i never know what to do for him so i am using this opportunity to tell anyone on this blog havin similar problem visit thegreatoracletemple@gmail.com and your problems shall be solved…

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Zach Kouwe fired again

Felix Salmon
Jun 12, 2010 16:54 UTC

In February, a NYT blogger, Zachery Kouwe, was fired for plagiarism. The proximate cause of the firing was a complaint from the WSJ, but he’d had run-ins with other publications in the past, including nicking a memo from Dealbreaker without attribution. That didn’t stop Dealbreaker hiring Kouwe in April. Which seemed a bit odd at the time, and which in hindsight was certainly a mistake, since now they’ve gone and fired him. But it wasn’t for plagiarism, this time.

I spoke to Matt Creamer, the executive editor of Breaking Media, Dealbreaker’s parent. He sent me this statement:

Zachery Kouwe was a freelance contributor on Dealbreaker for just over two months. We ended the relationship on Thursday after it came to our attention that he wrote emails to Dealbreaker commenters referencing their workplaces. Our readers and commenters trust us with personal information and we take that responsibility very seriously. Anyone who registers on our sites should feel confident their information is secure.

For the backstory, read the comments to this blog entry — the last one that Kouwe posted on the site. One anonymous commenter — and Dealbreaker prizes its commenters’ anonymity greatly — wrote that “Kouwe e-mailed me the other day to tell me he ‘knew’ where I worked”, and later posted a screenshot of the emails in question. It seems that Kouwe obtained the commenter’s email address — presumably through his privileged access to the commenter login system — and then emailed the commenter to tell him exactly where he worked. And this didn’t only happen once, as a different commenter explained:

It crosses a line when Zach sends unsolicited emails to posters (which I can bear witness too although in my instance it was entirely harmless). Many of us work at shops where unapproved communication with media outlets quickly leads to termination.

Dealbreaker’s editor, Bess Levin, replied:

What happened is NOT condoned by Dealbreaker and you can rest assured we’ve taken the necessary steps to ensure it will not be happening again.

The necessary step in question was, clearly, firing Kouwe. (Officially, Kouwe resigned from the NYT, and he was only ever a freelancer at Dealbreaker, so if you’re splitting hairs you can make the case that he wasn’t technically fired either time. But he was fired both times.)

Kouwe declined to comment on the situation, but it seems that two months of aggressive needling from Dealbreaker’s commenters finally got to him. There’s no doubt that the commenters on the site — who are not representative of its readers, and who can be extremely mean — applied a lot of negative pressure on Kouwe from day one.

But at a site like Dealbreaker, commenter anonymity has to be non-negotiable. The problem is that complete anonymity can result in incoherent chaos, and as a result the editors encourage a move to pseudonymity instead:

A great many of our commenters have a quite reasonable fear of publicly writing on the site. Wall Street is notoriously ill-humored about unauthorized comments. This is one reason we make such a big deal of promising to keep comments and tips anonymous for those who don’t want to read their names among the pixels of DealBreaker. But it sometimes becomes confusing with so many people writing under the same name—Anonymous. We’d like to gently suggest that each of you chose a pseudonym and try to stick with it. It’s a small step but one that we think will greatly improve the comments section.

The danger with this system is that if you sign up for a pseudonym using your personal email address, and then post a comment from your work IP address, Dealbreaker’s editors, if they’re feeling aggressive, can use that information to find out where you work. As a result, it’s imperative that Dealbreaker’s commenters trust its editors not to do that kind of thing. Clearly, in Kouwe’s case, they couldn’t.

Kouwe himself, interestingly, never left a comment on the site. I said after he was fired from the NYT that he simply didn’t understand what blogs were all about, and this episode only reinforces that judgment. One of the biggest differences between journalists and bloggers is that journalists often have a bizarre phobia of making an appearance in their own comments sections, while bloggers feel that’s an important part of what they do daily. But if you’re a journalist who feels constrained from engaging with commenters directly, then maybe that helps push you towards less kosher means of engagement.

Kouwe isn’t evil, but he clearly isn’t cut out to be a blogger, either. There can be a lot of pressures in the world of professional blogging — pressures to come up with stories, pressures from commenters — and when faced with those pressures, Kouwe seems to have a habit of buckling and doing something unethical. It’s a personal weakness, and it’s sad, because Kouwe is a genuinely well-liked guy. I wish him all the best, in some area outside blogging.


@Anal_yst: DB is less about finance than a culture of malice. I only read it when they’re “reporting” on someone I don’t like. Like porn, they cater to my baser instincts. Something about the culture of finance exacervates the natural tendency of internet discourse to be mean-spirited. Zero sum self-esteem issues or something. It’s simply repellant and there’s nothing at all to excuse that conduct though you say Kouwe’s conduct isn’t excused by the malicious tenor of commenters and blog postings of Bess Levin on DB. Kouwe’s a blip; guys like you represent pervasive tendency of the Internet to worsen human misery.

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The wrong kind of falling homeownership

Felix Salmon
Jun 11, 2010 20:21 UTC

Richard Florida has long been in the same camp as me on the homeownership front: it’s too high, and creates problems like labor immobility and rental ghettoes populated only by people who can’t afford to buy. Today he says that we’ve already had a “great homeownership reset”, based on a paper by Andrew Haughwout, Richard Peach, and Joseph Tracy of the NY Fed. Take into account all the people who are underwater, on their mortgages, he says, and you’ll find that “US homeownership is already lower than you think” — just 61.6%.

But the problem is that this is exactly the kind of reduction in homeownership that we don’t want. Homeownership isn’t all bad: there are upsides to it, as the authors of the paper explain.

Because owners have a financial interest in their property, they have incentives to take measures that will maintain or increase the value of that property. Some of these measures—such as fixing a leaky roof—are closely related to the house itself. Others, such as investing resources in the betterment of the neighborhood and the community, have broader beneficial effects on the local area, creating what economists call “positive externalities.”

It’s possible to argue for hours about just how big these upsides are, and whether or not they outweigh the downsides of homeownership. But it’s undeniable that when homeowners go underwater on their mortgages, a lot of these upsides disappear: you’re not going to invest in your house if the return on that investment accrues to your lender rather than yourself.

At the same time, the downside of homeownership hardly goes away the minute you go underwater on your mortgage — to the contrary, it’s exacerbated. The serious problems associated with those crumbling exurbs get much worse with each extra underwater homeowner: now, alongside the rental ghettoes, we have to deal with foreclosure ghettoes as well. If you’re living in a home with negative equity, then you have all the downside of renting, (not being willing to invest in your house, for instance) alongside all the downside of owning (like not being able to easily move to where jobs are).

Tracy Alloway, blogging the Fed report, explains why homeownership is very likely to fall over the next five years: those underwater homeowners would have to save an extra $1,222 a month, on average, if they’re going to close out their existing negative equity and buy a new home in five years’ time. And that’s not going to happen. As a result, we face essentially two choices: either the misery of America’s millions of underwater homeowners is likely to continue for the foreseeable future, or else the walking-away trend will continue to rise, and we’ll have another fully-fledged solvency crisis in the US financial system.

When the NY Fed starts talking about the effective homeownership rate falling, then, there isn’t much in the way of a silver lining, even for those of us who want to see the homeownership rate fall. All we’re really talking about is the personal insolvency rate rising. And that does no one any good.


Silly me. For a moment there I actually thought I was dealing with people who can tell the difference between social democracy (socialism, even) and communist dictatorship, not to mention the fine line between white-collar econocide and mass murder. George HW Bush did more damage to America’s political vocabulary than even I’d anticipated. For all that this may have been a lapse on my part, at least the other Dan (Hess, bless ‘im) didn’t completely miss the boat.

And now to this.

Given that bipartisan budgetary priorities are set to continually rewarding sophisticated issuers of massive quantities of questionable loans spun into questionable financial instruments. the entire US economy, housing and all, is tracking toward another merciless disaster. It’d take you a million years of earning a million dollars a year and giving it all to the government to shave ten percent off just the recent downside to investment bank handouts.

For sheer soviet-esque disloyalty to free market principle, what already took place between Treasury and banksters was appalling enough, hard to beat in the iniquity stakes. The scope of collateral vandalism and lasting damage to the market is only gradually becoming apparent to all. Go ahead and check out the news at housingwire.com. Faint of heart, take note: none of it is uplifting, and no end in sight.

What happens next, as the immense shadow inventory swept under the rug at prior Treasury/bankster love trysts starts looming to the fore, is destined to inflict another >20% injury on home equity values. Homesteaders across the board are looking at decades of relative economic servitude, growing despair and plummeting influence over the asset value of their real estate investment. Despite what both mainstream parties seem to be saying, that can’t be a good thing.

But chin up, sez the optimist in me, no matter how much externality and suspension of disbelief it may take, together we can ride this one out. Look on the bright side. There’ll be exceptions, such as the bulletproof enclaves where “investment” bankers and their political facilitators reside. Funny how their money’s safe as houses. It’s as if bankers were in a union or something.

Frankly, it’s too bad regular humans aren’t quite as united. But they could be.

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How BP will announce its dividend suspension

Felix Salmon
Jun 11, 2010 17:48 UTC

The WSJ is running a poll asking whether its readers think BP will suspend its dividend; so far, with 2,342 votes, the results are almost exactly 50-50. But I think that Peston is right on this one and that the WSJ’s readers are a bit behind the curve: the dividend suspension is not a question of whether, but when.

The timetable works like this: tomorrow there’s a phone call between David Cameron and Barack Obama, in which BP will be discussed. They won’t have a lot in the way of substantive disagreements: they’ll both agree that BP should pay all legitimate damages arising from the spill. The only difference between them will be rhetorical: Obama will continue to bash BP, while Cameron will either personally or through his finance minister continue to make noises about how important the company is to the UK economy.

On Monday, the board of directors of BP will meet and will decide to delay the company’s second-quarter dividend, currently due to be announced at the end of July, “until the crisis can be brought under control”, in the words of Robin Pagnamenta. That’s likely to be a while, and we can probably expect the same suspension to apply to the third-quarter dividend, as well.

There won’t be any official announcement on Monday, though: first of all comes the big meeting in Washington between Obama, Tony Hayward, and BP chairman Carl-Henric Svanberg. Svanberg and Hayward will try to persuade Obama to lay off the BP-bashing, on the grounds that if he drives the company into bankruptcy, there won’t be anybody left to pay for the spill. Obama will be unconvinced, but will at least be happy to get credit for persuading BP to suspend its dividend payment.

So after the meeting, BP will announce that it’s in full agreement with the Obama administration that it should start saving up money now for any future liabilities, rather than making cash payments to shareholders while those liabilities are still very much up in the air. That might give it a few brownie points with the administration and the public — not a lot, but at least it will be seen as a move in the right direction.

The losers here will be anybody who’s reliant on BP dividends for income, like my commenter jimko for instance. But that’s the nature of dividends: they’re unpredictable, and they certainly can’t be relied upon in a crisis. Some stocks are safer than others, but there’s no such thing as a truly safe stock. As BP’s owners are now finding out. As ever, when politics clashes with economics, politics wins.


Well, commenter jimko, wherever you are–YOUR company is destroying MY coastline at this very moment. It just kills me that your dividend check is going to be a little light as a result. Do you actually understand what stock ownership is? That’s your freaking oil rig lying on the bottom of the ocean in a pile of twisted and burnt rubble. Yours. You don’t get to buy shares in a company and then pretend that you are somehow utterly insulated from the moral consequences of their business decisions. You’re on the hook for–potentially–the full value of your investment, every time you buy a stock. You ought to have worked that out by now, frankly.

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