Apologies for thin posting. Lots in the air, even more than usual, and this blog sits low on the priority list.
A few brief thoughts below. Maybe more on these later.
Stocks and homes look like an incredibly good buy. Price to earnings ratios for stocks and price to rent ratios for homes are around historic averages. But prices are a lot better than average because the opportunity cost, reflected in interest rates, are at historic lows. Put it all together an stocks and houses haven't looked so cheap in at least 60 years.
Housing and broader economic recovery. Prices are finally rising nationwide, as are housing starts. We appear to have a shortage of homes for an economy at full employment. Thus, we should expect building to resume to at least historic norms soon. That should bring back a lot of construction jobs. Add a modest multiplier, consumer confidence with higher home equity and portfolio values, could bring about a virtuous cycle that could have our economy humming in another year or two. This is the basic story Bill McBride's charts show, and he's been right on just about everything this past business cycle. It pays to pay attention to the data.
ARMs safer than fixed-rate mortgages. Conventional wisdom, past and present, has always been than a 30-year fixed-rate mortgage is safer than a variable rate mortgage. That may be true depending on your definition of safe. An ARM may seem risky given rates could spike and your mortgage payments could go up. But if you've taken finance and digested the basic lessons of portfolio theory, you know that you need to think about how risks covary with other investments. Then consider that the only way mortgage rates could spike is if we have real recovery in the economy (no, Greece is not a likely possibility for us [1, 2]). With real recovery, your wages, savings and home value are likely to go up with your mortgage payment and it should be easy to manage. Alternatively, rates could fall in the event the economy stagnates (see Japan). If this happens you could be stuck in your 30 year mortgage because your home value falls and you cannot refinance at the lower rate. I don't mean to give financial advice here---you have your own expectations---but I'm pretty sure an ARM is the less risky thing to do.
Nate Silver: Was awesome to behold this election. Sam Wang deserves a lot of credit too. Statistics wonks like me wonder why Nate Silver and Sam Wang had similar predictions but very different confidence intervals for their predictions. In my own experience, I find it very easy to underestimate standard errors and very hard to overestimate them. This, plus Nate Silver's occasional quips about the kinds of subtle error correlations he accounts for (e.g., parenthetical note in second paragraph below the map here), make me lean in his direction over Sam Wang. On the other hand, Sam Wang is a lot more transparent about his model. He evens posts his Matlab code. Hmmmmm...
Vacuum in the middle: With Tea Partiers displacing moderate Republicans and the Blue Dog Democrats retiring, we seem to have a vacuum in the middle. This seems to confound basic models of political economy. There would seem to be a big incentive for a small coalition of Republicans amass extraordinary power by thumbing their nose at Gover Norquist and taking a big step toward the center. After all, this elections proved that the power of money is limited and slapping backs with Obama can pay handsome rewards (Chris Christy's spike in approval). It's hard to see Republicans maintaining their tight coalition.
Fixed effects gone bad: It's fashionable in empirical economics to run regressions with giant data sets and a zillion fixed effects to control for unobserved factors or isolate a particular "source of identification." This is easy to do. But if it's done in a thoughtless manner, bad things can happen. This is an over-arching theme of our comment on Deschenes and Greenstone coming out in in the American Economic Review next month (finally).
Supply and Demand: My paper with Wolfram Schlenker wherein we identify global supply and demand elasticities for food commodities using weather and yield surprises was recently accepted as a full-lenth article in AER. There are some substantive revisions since the NBER working paper, but no major new insights. This is probably my best academic contribution to date.
Michelle and I have just adopted a son from South Korea. It's the best Holiday gift ever--we are in love already. No pictures because it really won't be official until the home study is done. The other big news item is that I've taken leave from NC State and have accepted a position at the University of Hawaii at Manoa.
Aloha and Happy Holiday.