The Housing Bubble

“… one chopped down all the trees.”

Reminds me of something I read about years ago:

A guy bought an acre-or-so of land mostly due to the promotion of buying into an outstanding view of a large forest.

Then the forest, the forest that offered him the view, was clear-cutted by a lumber company.

Volusia County, FL

529 properties owned by Federal NMA
443 currently owned by major banks: Deutsche, Suntrust, B of A, Wells, Fifth Third, among others.

437 sheriff’s sales scheduled for October.

Same old shacks for sale that were listed two years ago. Some fell off the radar during the summer, but most will show back up again when the snowbirds arrive. Private equity seems to be sapping up everything that doesn’t already have granite and stainless.

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/13/being-poor-changes-your-thinking-about-everything/

Being poor changes your thinking about everything (article is an interview):

Sendhil Mullainathan: We’re really trying to do two things. As you know, I’ve been interested in poverty for a long time. This book is an outgrowth of me simply trying to understand U.S. poverty, poverty in the developing world, and another form of poverty, which we don’t really call “poverty” but you might want to call just “financial distress,” which many Americans are actually feeling because of this recession.

As our introduction discusses, there’s been a left turn in my thinking. That left turn was the realization one day that, maybe, when I’ve been looking at poverty, I’ve been looking at it too narrowly. Maybe poverty is a special case of something else. That something else is scarcity, and anyone who has the experience of “having very little” experiences the same psychology.

…..

To take another example, consider the big financial recession we just had. Here we really saw individuals’ behavior and choices meet up with the macroeconomy. Here are people sitting on houses that might or might not be foreclosed. They must take loan modifications. They have to make decisions. They must do all of this under conditions of financial distress.

Some people examine the situation solely in terms of interest rates and bailouts. Yes, these matter, but so does the behavior of these millions of homeowners. It’s very hard to reach people when they are in conditions of financial distress. That is a fundamental problem. I think it is something that we’ll face again and again.

….

There is a lot more. And there is something in the New York Times about this book too. It may be a while before I find it and post it.

http://opinionator.blogs.nytimes.com/2013/09/25/escaping-the-cycle-of-scarcity/?_r=0

Escaping the Cycle of Scarcity
By TINA ROSENBERG

“Scarcity” is a new book that does something that I didn’t think possible: it says something new about why people are poor — and what to do about it.

Here’s what’s not new: Poor people have more self-destructive habits than middle-class people. The poor don’t plan for the future as much. Compared to middle-class people, the poor have less self-control and are quicker to turn to instant gratification. These habits perpetuate a cycle of poverty.

This is proven. The controversy is why it is the case. For conservatives, roughly speaking, these behaviors cause poverty. For liberals, also roughly speaking, poverty in many ways causes these behaviors. It is easy to see how the stresses of poverty weigh in. With eating habits, for example: fruit and vegetables cost more that many unhealthier foods, and might not be available in a poor neighborhood.

But there are behaviors the liberal view struggles to explain. Even when healthy foods are available and made cheap, for example, poor people take advantage of them far less.

Now Sendhil Mullainathan, a Harvard economist, and Eldar Shafir, a psychologist at Princeton, propose a way to explain why the poor are less future-oriented than those with more money. According to these authors, one explanation for bad decisions is scarcity — not of money, but of what the authors call bandwidth: the portion of our mental capacity that we can employ to make decisions.

Worrying about money when it is tight captures our brains. It reduces our cognitive capacity — especially our abstract intelligence, which we use for problem-solving. It also reduces our executive control, which governs planning, impulses and willpower. The bad decisions of the poor, say the authors, are not a product of bad character or low native intelligence. They are a product of poverty itself. Your natural capability doesn’t decrease when you experience scarcity. But less of that capacity is available for use. If you put a middle-class person into a situation of scarcity, she will behave like a poor person.

The authors and two colleagues had a team of researchers approach shoppers at a mall in New Jersey. People were asked about their income and then classified (without their knowledge) as either poor or rich. Then they were asked a question: your car needs a repair that will cost you $150. You can take a loan, pay in full, or postpone service. How do you go about making this decision? After they answered, the subjects took tests that measured fluid intelligence and cognitive control.

Poor and rich people did equally well on the test.

But then the researchers changed one thing: instead of needing $150 for the repair, they would need $1,500. The rich subjects did as well on the intelligence and willpower tests as they had before. The poor group did not.

Their scores dropped the equivalent of losing 13 or 14 IQ points — larger than the drop experienced by people who had just stayed up all night. Thinking about how to come up with $150 didn’t affect them. But thinking about coming up with $1,500 eroded their intelligence more than if they had been seriously sleep-deprived.

This result isn’t particular to New Jersey. The same team studied sugar cane farmers in India, testing their intelligence just after the harvest, when they were flush with cash, and before it, when they were poor. The same farmers got 25 percent more questions right on the intelligence test when they were rich, and made 15 percent more errors on the executive control test when they were poor.

Isn’t this just stress? We know how harmful stress can be. But Mullainathan and Shafir argue that the effects of scarcity go further. Its capture of our brains leads people into a tunnel; your only focus is solving the emergency of the moment. If the rent is due, you use money that would have gone to the car payment. The fact that this will end in getting your car repossessed, and therefore losing your job, doesn’t really register. You take very little notice of what’s outside the tunnel.

In this way, scarcity creates a vicious circle. Tunneling leads people to borrow to deal with the emergency expense. For the poor, borrowing is very costly. They take high-interest payday loans, buy on installment, pay large credit-card fees and interest. They “borrow” by paying bills late, which means they pay a substantial portion of their income in late fees and reconnection fees. These consequences, however, lie outside the tunnel — until paying those bills becomes the new emergency.

The authors designed complicated games to simulate conditions of scarcity. One was a version of the TV game show “Family Feud,” played by Princeton students assigned at random to either have a lot of time to answer questions or just a little. When researchers allowed players to borrow time from their future rounds at high rates of interest, the time-poor players borrowed profligately, and their scores plummeted. When the loans could be rolled over — simulating real-world debt traps — the time-poor did even worse.

Mullainathan and Shafir write that the same mentality of scarcity that applies to the cash-poor also applies to people who are overly busy and those who are dieting.

People short of time also tunnel, borrowing time by postponing projects that are tomorrow’s emergency but not today’s. And being hungry captures the mind in a way similar to being poor. People who are on strict diets spend a lot of their bandwidth thinking about food.

The scarcity phenomenon is good news because to a certain extent, we can design our way around it. Awareness of the psychology of scarcity and the behavioral challenges it yields “can go some way toward improving the modest returns of anti-poverty interventions,” Mullainathan and Shafir write.

Here are some examples:

Automate good decisions. Since we can’t be counted on to make good choices when we’re in the tunnel, we can make them automatic. One decision to automate your choices will eliminate all those future opportunities to screw up. One way is to switch the default. For example, instead of making enrolling in a 401(k) savings plan voluntary, make not enrolling voluntary. This simple change has produced spectacular increases in usage of 401(k)s, organ donation and AIDS testing. It can be used for many outside-the-tunnel decisions, like building savings: sign up to have part of your paycheck automatically deposited into a savings account. You can still get at it, but you have to take steps to do so.

Provide better options for borrowing. Employers of minimum wage workers often complain that these workers are unprepared for their jobs, unfriendly to customers and distracted. Part of the reason may be that they are devoting little bandwidth to their jobs because they are worrying about how to live on their wages.

The theories in “Scarcity” support the idea that paying them a living wage would increase productivity. But since some employers may balk at this, the book proposes a smaller step: remove some of the penalties that come with borrowing.

Since poor people often have an urgent need for small sums, they take a lot of payday loans. These loans, some of which have interest rates of more than 300 percent, cost workers hundreds of dollars in fees. They are a scam designed to trap people in cycles of debt — 85 percent of payday loans go to people who take seven or more loans each year. (See this report (pdf) for a thorough explanation of their horrors, and this column by Tom Edsall.)

One solution is to spread credit unions. Another is to expand workplace-based financial counseling and services, like Neighborhood Trust‘s innovative Employer Solution.

Employers can help by paying weekly instead of bi-weekly, and by offering loans themselves with reasonable interest rates. Better yet, a portion of the repayment could go automatically into a savings account for each worker, so they could eventually borrow from themselves.

Internationally, we now know that microcredit loans are often used to cover personal emergencies, not to start businesses. They are not well-suited to this, as they are usually too large and take too much time to get. (This is why even people with access to microcredit continue to go to pawn brokers and loan sharks.) Dhanei KGFS, a financial services provider in Orissa, India, pioneered a successful new product: small, low-interest emergency loans that clients of their bank had pre-qualified for and could get at any time of day or night, nearly instantly.

Design services for the poor to take up less bandwidth. We know the poor are short of cash; we design for that (most of the time). But we don’t think about their scarcity of bandwidth, and that should influence services as well. One good model is Single Stop, which operates more than 90 sites around the country where low-income people can apply for benefits, do their taxes and get legal and financial advice.

Structure incentives to put them inside the tunnel. Since scarcity forces us to tunnel, and concentrate only on what’s inside that tunnel, incentives and penalties will work best when they can be inside, too. This means very short deadlines and quick rewards — perhaps in several installments.

Telling people they can be on welfare for only five years isn’t effective. That deadline might not become part of the tunnel until they hit four years and 11 months — too late to start looking for a job. Mullainathan and Shafir call this the worst of both worlds: “it penalizes but fails to motivate,” they write.

The same phenomenon explains why the death penalty, the three-strikes law and other harsh punishments fail to deter criminals. No matter how harsh they are, they are far enough away to lie outside the tunnel.

These design shifts — the authors and others propose more of them on the behavioral economics site http://www.ideas42.org — are a small solution to a very big problem. But the theory is a new one. It needs more study — but part of that exploration will be trying out different models of antipoverty services that take bandwidth scarcity into account. It is far from the only reason people are poor, of course, but what’s particularly useful about the idea of scarcity is that it is overarching; ease that burden, and people will be better able to deal with all the rest.