Saturday, January 23, 2016

Does OpenDoor have an adverse selection problem?

Interesting post from our friends at Marginal Revolution on OpenDoor Labs, a company the provides liquidity (for an average price of 7-12% to homeowners) to housing markets by buying and re-selling houses.
An analysis of property records prepared by Michael Orr, a real-estate expert at Arizona State University, shows that, through mid-December, OpenDoor had bought and sold just over 200 homes. It paid an average $230,000, reselling them within 90 days for an average of $245,000.

However, they do hold an unsold inventory of houses:
But the records show OpenDoor also owned about 30 homes as of mid-December that it had failed to resell for at least six months

If the pricing model is estimated with data from ordinary transactions, and if homeowners posses information not available to the model, like the “feel” of the house, then we should expect that owners who think the model predicts a price too high will be more likely to sell. This might explain the unsold inventory.

If this kind of adverse selection is a big enough problem, OpenDoor may be forced to charge higher fees for its service, and that will discourage all but home owners with hard-to-sell houses from using the service, which is a kind of Adverse Selection Death Spiral (links here)

Tuesday, January 19, 2016

Green Bay should have gone for two

In last Sunday's football match, the Green Bay Packers scored a late touchdown, making the score 20-19.  They decide to try to kick an extra point (giving them a tie and the chance to win the game in overtime) instead of trying to gain two yards (giving them two points and an outright win).

The NY Times (and me) think this was a mistake:

Teams have made around 48 percent of their two-point tries in the last three seasons. If you factor in that teams made around 94 percent of their extra-point attempts this season; that home teams tend to win overtime games (by a slight margin); that favored teams tend to have an advantage the longer things play out (Green Bay was a 7-point underdog); the math is on the side of boldness.

Extra Point:
Probability of a win=Prob[kicking extra point]*Prob[winning overtime]=94%*45%=42.3%

Two Points:
Probability of a win=48%

NOTE:  I do not know how frequently away teams win overtime games, but assumed that it is 45%.  The article suggests only some number less than 50%.

Thursday, January 14, 2016

Why makes the Chilean salmon price fall while the Norwegian price rises?

ANSWER from the FINANCIAL TIMES:  its the exchange rates.

In Chile, the currency has appreciated against those of its trading partners, which reduces demand, which reduces price:

Chile ... has seen weak commodities hit the currencies of its two large export markets — Brazil and Russia. Brazil’s real plunged 34 per cent since the beginning of last year while the Russian rouble lost 25 per cent.

In Norway, however, the plunging oil prices have depreciated the krona against currencies of its trading partners, which increases demand, which increases price:

In Norway, the krone has weakened 16 per cent against the dollar since the start of 2015 and 6 per cent against the euro, increasing revenues in the local currency for farmers who were forced to cut prices in the wake of the Russian food import ban in 2014.

Saturday, January 9, 2016

Which five states are in fiscal trouble?

Once you add unfunded pension costs and retiree health care obligations to debt, we see that five states (Illinois, Connecticut, Hawaii, New Jersey, and Kentucky) would have to spend way more than 25% of state revenue.

They will either have to collect a lot more in taxes, or cut spending dramatically.

Tuesday, January 5, 2016

Beer Industry Structure

Mark Perry at AEI keeps generating insightful graphs. This one commemorates that the number of breweries in the US has increased to its highest level ever. There is more information about one of my favorite industries here.

To me, the interesting thing is trying to understand why we observe such a stark decline in the number of breweries for 100 years and then a rapid increase over the last three or more decades. Some insights from others' research include:

  • Before 1900, the minimum efficient scale had been quite small with average cost rising sharply. Most cities supported multiple breweries and, because the product spoiled quickly, most breweries only served a single city.
  • In the late 19th century, the geographic scope of the market increased when spoilage was reduced due to increased adoption of pasteurization, refrigerated rail cars, and national marketing. This led less efficient competitors to lose out to more efficient producers in neighboring cities.
  • Throughout the early 20th century, innovations in the canning process led to even greater scale economies. This also broadened the market because patrons could purchase for home consumption rather than at a bar.
  • Until the late 1970s, home brewing was illegal at the federal level. With legalization came rapid experimentation and the development of the requisite skills among enthusiasts. This led to the founding of a few new breweries and a rapid expansion in variety - both in types of beer and in perceived quality. It was learned that yuppie beer consumers would pay a large premium for this variety.
  • Craft breweries were initially tiny compared to the national brands with 2,000 generating a collective 5% share of the market until the 21st century. Again, before the turn of the 21st century, these were predominately local operations with few shipments beyond the city that was home to the craft brewer. It appears that the quality premium more than compensated for the absence of scale economies. 
  • Currently, over 4,000 craft brewers have over 11% share and a few brands, like Sam Adams and Sierra Nevada, have become national brands.
  • The trick for these brewers is balancing any dis-economies of scope (Sam Adams brews about 50 varieties) with scale economies from national branding so as to achieve scale economies and not degrade the perceived quality.

Sunday, January 3, 2016

Short Brazil and Ontario

From the Economist via Marginal Revolution:
At 70% of GDP, public debt is worryingly large for a middle-income country and rising fast. Because of high interest rates, the cost of servicing it is a crushing 7% of GDP. The Central Bank cannot easily use monetary policy to fight inflation, currently 10.5%, as higher rates risk destabilising the public finances even more by adding to the interest bill. Brazil therefore has little choice but to raise taxes and cut spending. ... 
A central target should be pensions. The minimum benefit is the same as the minimum wage, which has risen by nearly 90% in real terms over the past decade. Women typically retire when they are 50 and men stop work at 55, nearly a decade earlier than the average in the OECD (a club of mostly rich countries). Brazil’s government pays almost 12% of GDP to pensioners, a bigger share than older, richer Japan.

From Joe Oliver via Marginal Revolution:

...Ontario is the largest sub-national debtor in the entire world, just one alarming distinction. Its debt is more than twice that of California, a state with three times the population and one that has its own severe fiscal problems. Its debt is $294 billion, or over $21,000 per capita. Net debt to GDP is up 48 per cent in the past 10 years to almost 40 per cent, second only to Quebec. Last year’s interest obligations totalled $11.4 billion, about the same as the cost of community and social services. I doubt many Ontarians realize how much they are paying just in interest on the provincial debt. It averages $840 per person every year and rising. Not surprisingly, Standard and Poor’s downgraded Ontario’s bond credit from AA- to A+, citing a very high debt burden and very weak budgetary performance