Moontower #87

Friends,

All sensible policies must contend with trade-offs between equality and efficiency. There’s a tension between between optimal resource allocation and, well, basic fairness. Textbooks call it positive vs normative economics. Progressive taxation, honors classes, pre-existing conditions. These topics are neck deep in these trade-offs.

Housing Policy Cage Matches

Housing policy debates are a pure form of this polarity between economic and social fairness. Unfortunately, these debates become charged cartoons pitting Nextdoor superposters who pay $500/yr in property taxes on their 5 bdrm peninsula homes against tech-worshipping YIMBY Nudgers.

It’s understandable that housing discussion dispenses with nuance. There’s no room for hedged statements when you have a book to talk. And everyone has a book to talk. Especially near expensive cities where the stakes are high because shelter is either your largest expense or biggest “investment”.

Even if I pretend that incentives don’t dominate your stance, housing is still going to be a charged issue. Humans value proximity to one another. And shelter is known as an “excludable good”. You physically cannot stand on the GPS coordinates that my body occupies. We should always expect the means of allocating proximity to a nucleus of human activity, ie cities, to be a rilesome topic.

More Of A Puzzle

I’ve recently become a renter again, but I’ve bounced back and forth between owning and renting for the past 15 years. The only thing I have allegiance to is telling people they should not organize their life around trying to own because “it’s something an adult is supposed to do” or “rent is throwing away money” (see my post The Homeownership Fetish).

Still, when you live in the Bay Area, you cannot avoid the NIMBY/YIMBY discourse that surrounds you. I’ve always struggled to form a coherent opinion on it as any extreme stance capsizes the efficiency/equality ship while a sensible middle stance is a paradox in practice (and in practice is what matters).

I recently discovered a post that articulated the pudding of contradictions that is housing debate better than I understood them. The bummer is its conclusion is basically a shrug. Something I’ve come to accept about shrugs is they usually mean range of policies that reasonable people can agree to is fairly wide. The good news is we can feel more confident dismissing strong views. The sanguine news is that the local maxima is not a single point but a line of unsatisfying compromises.

On to the post (thanks to Taylor for sending it)…

Home Is Where The Cartel Is (Interfluidity)
Steve Randy Waldman

On the contradiction…

• There is a fundamental contradiction at the heart of housing capitalism. We encourage people to take on highly leveraged, undiversified exposure in homes with promises that they are good “investments”, meaning they will increase or at least retain their values over time. We also claim that housing is a consumption good that should be efficiently provided, a good for which competitive markets should expand supply to drive prices down to a technologically declining marginal cost of production. Housing cannot be both of those things at once. Much of the work we have to do if we wish to increase housing supply is to deemphasize the housing-as-investment narrative in favor of housing-as-consumption-good.
• If you buy a home in San Francisco today, the last thing you want to happen is for the housing affordability problem to be solved next year. Residential property is expensive in power cities because it includes the capitalized value of the large incomes streams one can earn from accepting tenants.

On homeowners ironic position as anti-capitalists…

• Existing homeowners bought into particular neighborhoods in large part because of their “character”, which includes nice-sounding things like walkability or “charm”, as well as not-so-nice-sounding things like access to exclusionary education. “Zoning reform” is an anodyne way to describe an expropriation of those customary rights. It amounts to diminishing residents’ ability to preserve or control the evolution of their neighborhoods, in order to challenge the exclusivity on which the value of existing neighborhood amenities may be based.

On the YIMBY case…

• Housing supply constraints are to blame for high rents in powerhouse cities, and may constitute an important drag on productivity growth and a cause of macroeconomic stagnation.

On the YIMBY pro-market framing…

• “Market urbanists” present themselves as capitalist deregulators but I think they can be described with equal accuracy as radical redistributionists.

On the futility of this framing…

• Homeowners understand their actions not as monopolizing the housing market but as protecting their homes and neighborhoods from the market. Telling people to think of their homes as a commodity upon which market forces should be brought to bear in order to ensure production of housing services at competitive prices is obtuse. People purchase property, rather than renting, largely to gain security and control, to escape the vicissitudes of the market. The worst place to emphasize “deregulation”.
• People experience individual not aggregate outcomes, and individual outcomes are usually riskier than aggregate incomes. it is rationally hard to persuade individuals to consent to policy changes that, in aggregate terms, would meet a return-to-risk hurdle but at an individual level might not. When market urbanists point to how much more productive and awesome the city as a whole might become, they are missing this point.

How misunderstanding rent-control exacerbates the already poor framing…

• If you frame your solution as being about “freeing markets”, you are likely to oppose rent control on naive and misleading Econ 101 grounds. Price controls, you have been taught, create scarcity, by eliminating the incentive to produce up to the market-clearing quantity…In the prosperous cities where we perceive housing crisis, market-rate housing is already priced at levels that would attract further development, if only the polity could be persuaded to allow it. New construction is market-rate housing: It is almost never subject to rent controls. The existence of rent controls on older buildings does suggest a danger that housing built today might someday be placed under rent controls too, sure. But that risk is already priced into market-rate development. If market-rate apartments sell for substantially more than their physical cost of replacement, then the market deems the risk of future value-impairing rent regulation to be sufficiently small, or sufficiently distant, or the present demand for housing to be sufficiently acute, as to cover that risk. The Econ 101 case against rent controls only holds if the threat of controls prevents the market value of newly produced rentable properties from substantially exceeding the cost of development after regulatory hurdles have been overcome. This is not what we observe in real life. Impaired prices are simply not the binding constraint on new development.
• Market urbanists unnecessarily make enemies of a critical constituency, tenants in rent-stabilized apartments who have extraordinarily much to lose.

Ending with a shrug…

• I don’t advocate trying to impose price ceilings on existing market-rate housing. That would be an expropriation at least as unfair and politically challenging as eliminating zoning restrictions. Plus, maximizing the quantity of housing supplied cannot be our sole, overriding objective. There is much to be said for encouraging “neighborhood capital” production, incentivized in part by the prospect of rising home values, as a means of increasing quality of life and sheer aesthetic joy, despite the “NIMBY-ism” it rationally provokes. There are trade-offs.
• Urban housing is a really hard problem. We’ll need lots of inspiration. That economics textbook might help a little, but don’t try to use it as a cookbook.

The Money Angle

I just finished reading Trading Volatility: Correlation, Term Structure, and Skew by Colin Bennett.

The free pdf is here: http://trading-volatility.com/Trading-Volatility.pdf

The book is a broad reference on basic option theory, dispersion, and exotic options. It includes practical insight into managing a hedged book with a focus on correlation, term structure, and skew.

In addition its appendix includes the following topics and more:

• a taxonomy of historical vol computations including and how they rank on “bias” and “efficiency”
• shadow greeks
• cap structure arbitrage theory

It’s an outstanding reference so I took notes. For public sharing I re-factored them by topic and tied some back to my own investment writing.

You can find these edited notes in my public Notion page. (Link)

Last Call

• BetterExplained is a beautiful blog that simplifies difficult math concepts (Link)
• 2 Tim Ferriss episodes you should check
  • Jamie Foxx (Link)

    This is almost 5 years old but I just discovered it. One of the best interviews I’ve ever heard. Foxx is a ridiculous story-teller.

  • Dax Sheppard (Link)

    This interview just came out. Sheppard is just an open book and freakishly relatable. I didn’t know much about him other than he was married to Kristen Bell. That should have been enough to tell me he must have special gravitas.

• More chess tips for kids. This time by 2019 Chess Educator of the Year, Elizabeth Spiegel. (Link)

  I’ll highlight why she finds chess an effective teaching tool:

  • reaches a level of complexity that other subjects don’t reach until later

    “With chess kids are really pushed to do their own thinking and figure out their own problems and it’s really a whole level more difficult [than equivalent subjects in elementary school].”

  • doesn’t require advanced verbal (or reading) skills, and so it reaches populations who are lacking them
  • directly rewards thinking with winning, and kids take to it even if they are not generally excited about school
  • “[Chess] is so hard and it’s so devastating emotionally when you lose and you just have to get over it right away and play the next round, and I feel that’s a really valuable character development lesson.”
  • provides immediate, authentic and accessible feedback (like music and maths)

From my actual life