Last week I was invited to attend a membership breakfast for MetroMultifamily; a local organization for businesses that manage multifamily housing. At the breakfast were many great speakers but maybe some with misguided opinions.

The consensus of all the speakers was summed up spectacularly by the sponsor of the event, Servicemaster Clean, who said "We're still drowning but we're downing closer to shore." But there seemed to be a feeling, and a quite optimistic one at that, that the Portland rental market would be tightening up drastically in the semi-near future. This belief was supported by the seemingly larger market of renters brought on by the effects of the recession. Many homeowners switched to renters out of necessity and now the question on every manager's lips is, Will they stay renters or go back to owning.

Many of the illusions people held pre-recession were that owning meant wealth, money, and an ever-increasing investment. Unfortunately, this trend was broken by the unsustainable mortgage portfolios held by banks. Now many previous homeowners and potential homeowners are starting to understand the monumental risks associated with owning property, which could push many potential homeowners into the rental market for a good long time. But the speculated upward pressure in rents is not going to come from prior homeowners.

It will be the masses of young and middle-aged people who moved in with roommates or moved back home. Once the economy starts to bloom, these people will be the primary reason for increased demand for apartments. The roommates will separate and once again become single dwellers and the ones that moved back home will reemerge as renters. The possible influx of renters could bring prosperity to many of the multifamily management companies around Portland.

But I believe many have overlooked the existing renters - the ones not badly effected by the recession who were able to maintain their housing situation. These are the people who still have good credit, haven't gone through bankruptcy, possibly holding a little nest egg whose purchasing power has greatly increased in light of the currently deflated housing prices. These are the future homeowners. These are the people who will be exiting the rental market and moving into the owning market, and there are quite a few of them out there.

This past month saw a 27% increase from the previous month in new-home sales. This statistic is upwardly biased by the tax credit deadline, which is at the end of this month, but what the statistic does tell us is that people are not as scared as many might have believed. And with the banks' purse strings tightened, it seems unlikely that the same disaster will strike again in the near future.

Consuming Health Care

The Obama Administration released a report the other day claiming that Americans must start to reduce their consumption of health care in order to avoid soaring budget deficits and further damage to the economy.  In a time when the government is trying to increase consumption in every other sector, why is consumption on health care considered bad?

Insurance: Using insurance to pay for health care consumption create moral hazard and inefficiency.  Moral hazard occurs when people take greater liberties in risky behavior because they know they are protected by the insurance.  Insurance is based on a set of data based on behavioral patterns in the absence of insurance.  When these people get insurance, their behavior invariably changes because they are now responsible for less of the burden if injury should occur. 

But this doesn't only make people more risk-seeking, it also makes them medi-holics. Americans consume an enormous amount of health care services.  We go to the doctor when we have a cold, we get flu shots every year, it's over precautious.  There is a certain level of precaution that is considered optimal but we are surpassing that level and it results in inefficiency.  

I suppose the argument against this is that it's the market-determined level of health care consumption so it is not bad that we spend so much on health care.  To that I would argue that the optimal level of health care consumption can only be found when insurance is not offered.  Insurance effectively subsidizes health care costs so the level of actual consumption is higher than the optimal level; again, resulting in inefficiency.

Medicare: It is a fact that people aged 65 + spend more on health care than those under 65 and that those older people are on medicare. This means that the government's health care burden is enormous.  Medicare accounts for 14% of the federal budget and we can expect to see this number rise as the elderly population increases. Though people 65 + made up 13% of the population in 2002, they accounted for 36% of health care consumption. Further, the relative size of the aging population has increased greatly since 2002 and will continue to increase for the next 10 years.  This creates an even greater burden for the government, especially in this recessionary time, since many of these medicare recipients will drop any outside coverage and rely solely of medicare for health insurance.

Since health care expenditures are subsidized our consumption is far above the level it should be.  There is no easy solution and I think the Obama Administration is not unjustified to ask Americans to spend less on health care.  Further, since our consumption on health care is inefficient, reducing the amount spent on health care and transferring it to other sectors would not only create a more efficient economy but also a more efficient household allocation of resources.

Fast Facts

Health care consumption per person

1980: $1,106

2004: $6,280

Health care as a percentage of GDP

1980: 9%

2004: 16%

Thanks to http://www.ahrq.gov/research/ria19/expendria.pdf and http://facts.kff.org/ 

"Irrational Everything"

A great piece was done by Guy Rolnik, the highly educated editor of Haaretz, on why economists use models if they don't work. As I've pursued my undergrad and graduate education in economics, I have been harassed, or at the very least agressively questioned, on why economists forecast the economy with models that can't even match the current trends. My default reply is simply that our job is not to change the economy, but simply understand it in its most basic form.

Today when I read Rolnik's interview of Professor Kahneman, the logic of modeling finally came to me. Kahneman relates the economy to the weather system - it's irratic, hard to forecast, but people still put their faith in the weather report.

I liken what is happening now to a system that forecasts the weather, and does so very well. People know when to take an umbrella when they leave the house, or when it will snow. Except what? The system can't predict hurricanes. Do we use the system anyway, or throw it out? It turns out they'll use it."

Okay, so they use it. But why don't they buy hurricane insurance?

"The question is, how much will the hurricane insurance cost? Since you can't predict these events, you would have to take out insurance against many things.

This brings us back to Law and Economics. The cost of precaution to guard against any possible negative outcome is prohibitively high and so we don't. It's like instead of carrying an umbrella on a 100 degree day, we take a chance that the weather report was right since the inconvenience of carrying the umbrella outweighs any expected benefits.

I'm glad I spotted this peice because even in a time where macroeconomics is falling apart, I need to have some assurance that what I'm studying is worthwhile.

Read the full article here!