Monday, February 2, 2009

Ed Glaeser on Bob Ellickson

Kudos to The New Republic for letting one giant in urban economics (Glaeser) review a book by another giant in urban economics (Ellickson). Not surprisingly, Glaeser is a fan of Ellickson's latest. With regard to the current foreclosure crisis, Glaeser advocates using a form of shared appreciation mortgages (SAM):

The best that can be done, I think, is to create an as-if situation that gets servicers to act like local banks. Ideally, a set of sensible rules could lead to renegotiating the mortgages of people who can pay for their homes and speedy evictions of people who bought more than they can afford. If the government sets a series of rules that give servicers safe harbor from lawsuits, then the whole process can be made more efficient. For example, the rules might specify a simple test that determines whether the current occupant can plausibly support the home. If thirty percent or less of the current owner's income can pay for reasonable mortgage payments, marked down to the level implied by current housing prices and interest rates, then the owner can afford the house. If the owner can afford the house under those terms, then the loan should be renegotiated, since that is pretty much all that the house could generate in the best of circumstances. If the owner cannot afford the house, even at today's lower prices and interest rates, then the owner should be quickly moved out. Such an arrangement would be fair all around. If lenders agreed to cut interest rates to current levels, and reduce principal in proportion to the level of housing price declines, then they should be rewarded with a share of the upside. Fully one-half of any future price appreciation, for example, could be shared between the lender and the owner. Ellickson would presumably warn us that this arrangement would reduce owners' incentives to care for their home. To address this problem, the lenders' share of appreciation could be based on the average price increase in the zip code, rather than the actual price of the home.
And being Ed Glaeser, he has some very sensible (and important) things to say about land use regulations:
Over the past forty years, as Ellickson presciently noted in 1975, land-use controls have steadily eroded landowners' rights to build on their property. As new construction in expensive areas declined, prices rose. The collision of robust demand and restricted supply caused prices to skyrocket in America's most attractive areas, such as coastal California and Manhattan. ... Rather than credit subsidies to increase borrowing, it would make more sense to re-think land-use controls. There are certainly legitimate reasons to regulate building, but it seems to me that many jurisdictions have gone too far, putting their own parochial interests first. Perhaps housing policy would do better to create real affordability by eliminating the barriers to building, rather than just inducing lower-income Americans to leverage themselves and bet more on housing.
I couldn't agree more.