Showing posts with label #realestate. Show all posts
Showing posts with label #realestate. Show all posts

Tuesday, April 18, 2023

Economics and the Mona Lisa Smile.

"Mona Lisa."
Leonardo da Vinci.

The Economist this morning observes that economic forecasting has become increasingly unpredictable, with analysts struggling to accurately forecast many key international measures. Contributing to the confusion are challenges in data collection and interpretation due to Covid-19 disruptions and declining response rates to official surveys. The pandemic caused significant fluctuations in growth, complicating seasonal adjustments in economic numbers. Also, reduced response rates to surveys may have led to increased data volatility and potential bias, as non-respondents tend to be less prosperous, which could distort income statistics. The article uses the ambiguous "smile" of Mona Lisa, painted by Leonardo da Vinci via the sfumato technique, as a metaphor for the difficulty of discerning the true state of the economic environment given this unpredictable data. 

One source of confusion arises from the discrepancy between "hard" and "soft" data—objective indicators such as unemployment rates, and subjective variables like individuals' future expectations. Typically, these two classifications of data are congruent. However, at present, they exhibit a stark contrast. "Soft" measures indicate a recessionary trend, while "hard" measures suggest a reasonable economic expansion. This divergence may be attributed to the public's discontent with inflation. In affluent nations, prices continue to escalate at an annual rate of 9%.

Economic measures really matter for government budgeting, as California's Legislative Analyst's office (LAO) relies upon that data in planning future budgets. Necessarily, many of the points the Economist makes about uncertainty get resolved by the LAO in the "negative" (that is, they accept the more dire forecast). As the LAO (accurately) writes in their 23-24 budget analysis, the U.S. economy experienced rapid expansion from summer 2020 through 2021 due to pandemic-related federal stimulus. However, this growth was (as far as the LAO is concerned, and many others) unsustainable, leading to record low unemployment and supply chain challenges, causing consumer prices to rise 8% year-on-year. To combat inflation, the LAO points out that the Federal Reserve has enacted large interest rate increases throughout 2022. The LAO interprets the hard data it sees, that California is experiencing decreased home and car sales and falling stock prices, as well as weaker state tax collections, and concludes there is a slowdown in the economy. 

The LAO, though, is looking at some of the same data as the writers of the Economist, and thus notes that while overly optimistic projections could result in future shortfalls, an excessively pessimistic projection could lead to premature cuts to public services. Further, despite all the foregoing, the LAO points out that "the state can afford to maintain its existing school and community college programs and provide a cost-of-living adjustment of up to 8.38 percent in 2023-24," which would essentially meet the rate of inflation for educational funding in California. Despite the economy's sfumato, at least that is clear. 

Tuesday, April 11, 2023

Carriage Court in Santa Rosa.

"A mobile home park in West Miami, Florida"
By Dr Zak 
https://tinyurl.com/22c4uctp
In Wikipedia, CC BY-SA 3.0
https://tinyurl.com/2y9chhga 


Carriage Court, a mobile home park for seniors in Santa Rosa, it is reported today by the Press Democrat's Marisa Endicott, is being converted to an all-ages park by new management company Harmony Communities. The company claims that the change is necessary for the park to stay afloat and make a profit. However, residents are concerned about potential displacement and culture shift, as many of them rely on fixed incomes and have limited options if costs increase. The change comes in response to Santa Rosa's new mobile home rent control ordinance, which limits how much park owners can raise rent, according to Nick Ubaldi, regional manager for Harmony Communities. 

Residents are also worried about Harmony Communities' track record of litigation over evictions and rent increases. The company is involved in multiple lawsuits across the state and has a reputation for strict rule enforcement and eviction attempts. The Golden State Manufactured-home Owners League has noted that Harmony's "reputation is terrible." The director of communications for Harmony Communities identifies as a crude epithet, Heywood Jablóm, a false name and a classic sign of a bad actor. Indeed, Mariah Thompson, a staff attorney with California Rural Legal Assistance, noted that Harmony Communities will "often just see what they can get away with[.]” 

Mobile home parks, especially in American culture, are stereotypically viewed as lower-income housing for occupants living at or below the poverty line who have low social status. As Wikipedia notes, despite the advances in trailer home technology, the image survives. Residents, especially the elderly, can be targets for unscrupulous business practices. 

Here, Ubaldi is contending that an updated rent control ordinance, designed to protect senior citizens, is in fact the source of senior citizens' distress. This is an obvious attempt to reverse victim and offender, which is harmful to the democratic process, beyond the specific harm it inflicts on the residents of Carriage Court. Sowing confusion and undermining accountability only weakens the norms we all rely upon to effectively address our housing crisis, which is bad and getting worse. Ideas, like housing, are more of a public good, like a forest, than a commercial context, like a marketplace.  We all must recognize that public discourse is vulnerable to the same damage that can be suffered by the woods should the balance between individual advantage and long-term sustainability be violated callously.

Monday, April 10, 2023

Attendance, Housing, and Basic Aid.

 Sonoma County's 40 public school districts continue to see attendance declines. The lack of housing and a steadily declining birth rate are among the factors contributing to the decline. Sonoma County is predicted to experience a 16.9% enrollment drop by 2031, the fourth worst in California, as reported by the Press Democrat. In the past five years, Sonoma Valley has already experienced an 18.9% decrease in attendance, and as a trustee, I am familiar with the very profound changes that can cause. 

The article elides past some distinctions that are worth noting. First, school funding in California is based on attendance (the so-called "ADA," or average daily attendance), not enrollment (ADA is usually about 90% of enrollment, although there is a lot of variation).  Paying attention to the attendance figure will be the more reliable indicator of the state of school finance going forward in Sonoma County. 

Second, and related to the first point, is that as of November 2022, 16 of the 40 school districts in Sonoma County were "basic aid" districts, whose revenues do not change with either attendance or enrollment. In 2021‑22, the state had 118 basic aid school districts (about 13 percent of all districts).  As attendance continues to drop, more and more Sonoma County districts will become basic aid. Basic aid will increasingly be the default rule in Sonoma County. These districts (like Sonoma Valley) will ironically end up with more money per student given declining attendance, which is why many of these districts may very well not be interested in district consolidation intended to cut costs, as such consolidation would in fact reduce per-student funding.  There are a number of these districts in San Mateo, Santa Clara, and Marin counties, those counties having had many of the same housing issues as Sonoma County for a longer period of time, and the trend in those counties has generally been against consolidation of districts.   

A final point, which comes up here from time to time. "Affordable Housing" is a term of art in many respects, and while there is a shortage of housing that can be afforded in Sonoma County by most people, that is different from "Affordable Housing." Sonoma County just lacks housing, period. Narrowing the issue using the term of art is probably not the most helpful, because it obscures the fact that the response to the crisis needs to be comprehensive.

Wednesday, April 5, 2023

Housing, a Public Good.

Wikipedia contributors. (2021, September 15).
Public housing.
In Wikipedia, The Free Encyclopedia.
Retrieved April 5, 2023

Yesterday, the Sonoma County Board of Supervisors held a first reading of a proposed "camping" law, which seeks to ban unhoused individuals from sleeping in specific public areas, such as the Joe Rodota Trail. Sonoma County has a huge challenge on its hands, with a 2022 countywide census finding 2,800 homeless people, of which only 800 were living in shelters. More shelters, transitional housing, and affordable housing are needed, along with social services such as mental health care and substance abuse treatment. 

But I think the core of the problem is different. I think we need to see housing as a public good, and not as a market. Vienna (60%), Singapore (80%), Sweden, Hong Kong (50%), Finland (20%), and the Netherlands (30%) have all managed to house very significant parts of their population by recognizing that housing is a public good and should be the object of concerted action. 

Sonoma County should prioritize the provision of more housing to effectively address homelessness. By repurposing sites, our County could become a "net zero" employer itself, setting a powerful example. As the county's largest employer, this initiative would have a significant impact on the housing crisis and substantially benefit working and middle-class families.

Encouraging government and employers to adopt a "net zero" position in how their operations impact the local housing ecosystem would be a good start. By taking responsibility for the housing needs of their employees and community, government and employers can play an active role in addressing homelessness and providing equitable access to housing for all. We need to focus on creating long-term solutions, not just temporary fixes.

Tuesday, May 15, 2018

The Return of #Cash.

Image available at http://tinyurl.com/yaxw3y5g
Just a brief note today, regarding reporters who are pointing to an economic and financial shift.  Extraordinarily low interest rates have had a significant impact on asset prices in Sonoma Valley (as I blogged about here, here, and here).  In 2015, Robert Shiller pointed out that in the San Francisco Bay Area, that most people expected annual home price increases over the next decade of 5%. However, more than a quarter of respondents thought prices would increase each year by 10% or more. Many of the second group leveraged (and profited impressively) as real property prices have continued to rise over the intervening 36 months.

courtesy the Board of Governors of the Federal
Reserve System (US), retrieved from the Federal 
Reserve Bank of St. Louis [FREDMay 15. 2018. 
 May 15, 2018. Excel data and graph available here.
Today, though, there is evidence that change is afoot, as the yield on "cash" (short term Treasuries) now exceeds the dividends on a broad range of stocks (the S&P 500).  The Financial Times' graph, courtesy of John Authers, is on the right.  I extended the graph back a bit (to 1933) just to get a longer perspective, via FRED and multpl. For about a thirty year period, dividends were generally always higher, until some point in June of 1963, when the rule flipped. Cash was king, more or less constantly, for the following ~2,335 weeks, until February of 2008. There are periods where these two measures briefly "invert" from the norm in both eras (e.g. 1959 for dividends, 2002 for cash), but it's unusual.

What does it mean? Stanford economist Bob Hall (who continues as chairman of the academic panel that dates American business cycles) notes that, economic syncopation being what it is, “[t]he next recession will come out of the blue ... just like all of its predecessors.” However, the Economist has pointed out previously that this economic cycle is already running exceptionally long at ~105 months, and it is now more than a year past the average of the last three (the longest ever, March of 91-March 01, was 120 months).  Meanwhile, valuations continue to be particularly rich (the Shiller PE is at 32.33, in excess of the '29 crash and only matched by the dot-com bubble). My sense is that the financial columnists pointing to this data are wondering how "out of the blue" a contraction could be at this point. Which is an interesting point to consider, when one reflects on the power of narratives in financial markets.

Wednesday, February 1, 2017

Casa Del Maestro, Pt. 1. #teacherhousing #sonoma

"Casa Del Maestro"
3380 Lochinvar Ave, Santa Clara, California
image available at http://tinyurl.com/htm8n2z
On Monday, the Press Democrat’s editorial board described a “brewing fiscal crisis” for Santa Rosa's schools, who must, as of their first interim report for 2016-17, implement a ~2.2% budget cut going forward.  SRCS is confronting flat enrollment coupled with declining rates of return on pension funds, that will increase budget pressure over the next four years. At least one board member’s suggesting a parcel tax in response.  

The editorial describes a problem familiar to Sonoma Valley Unified. SVUSD will implement a ~5% budget cut in a similar fashion to SRCS. While Santa Rosa must deal with a 1.6% reserve reduction due to an accounting error, and Sonoma Valley's audits have consistently been clean, it is the medium-term funding squeeze, with costs rising substantially faster than revenues, and an increasing inability to make up the difference via one-time funds, that’s driving concerns. SRCS' potential pursuit of a parcel tax is one solution that certainly appears to be on the table, but it could cause voter confusion, if not outright fatigue, given Santa Rosa's successful $229 million bond in 2014. As Jenni Klose, president of the SRCS board noted in a letter to the editor today, "[SRCS], as with all California districts, is simply wrestling with how best to meet its increased pension obligation while continuing to fairly compensate staff[.]" 

Sonoma Valley, grappling with the same situation, should investigate creating structural, long-term advantages to ensure our teachers and staff aren’t crushed between stagnant funding and our ever-rising cost of living. Housing remains the single largest expense for many teachers and staff, whether laterals or new graduates. Meanwhile, those further up the step-column need salaries that can pay for mid-life expenses, such as children starting college. Addressing one issue means more’s available to deal with the other. Much as our schools confronted rising power prices by getting on the supply side of the equation with solar panels, so too should our district pursue construction of high quality, reasonably priced teacher and staff housing, an advantage in recruiting and retention independent of state funding.

2.83 acre Sonoma Valley Health Care District Property
432 W MacArthur, Sonoma, California
image available at http://tinyurl.com/joonh66
Serendipitously, Sonoma Valley’s health care district must make a decision regarding 2.83 acres on West MacArthur in the next 18 months. The land is four houses from Sassarini Elementary, and down the street from the SVHS/Adele/Prestwood campus.  Due to some (very) recent changes in the law, SVUSD has an opportunity to pursue a teacher housing project there, before the main front of the financial storm hits our budget.

The model for such housing is Santa Clara Unified’s Casa Del Maestro. Commenced in 2002 on a previously closed middle school, the project utilized certificates of participation to fund construction of 70 units, subsequently rented out to teachers and staff via a functionally integrated public charity. Construction was done at market rates. No subsidy was involved. One bedroom apartments rent for ~$900, and a large two bedroom for ~$1,450 (typically $2,390 for one in Santa Clara, $2,930 for two).

The cost advantage has four parts. First, the District owns the land, and thus land costs are not included in the cost of ownership or operations. Second, the capital structure allows for tax-exempt finance. Third, the land and construction are both property tax-exempt. Finally, there is no profit -- rents are set at a level sufficient to pay back costs of construction, financing, maintenance and operations, and to fund a long-term reserve.

Former Cal. State Sen. Mark Leno
image available at http://tinyurl.com/zbw9tum
Despite such success, few K-12 housing projects have gone forward since, due to an aura of legal uncertainty. Is restricting residency to teachers and staff consistent with California’s Unruh Civil Rights Act? Can land held in educational trust be used for teacher and staff housing? Can Certificates of Participation be used to fund construction? Can schools cooperate with other agencies on projects? Are there legislative findings that the housing crisis is hitting teachers and staff?

We got our answer January 1. Mark Leno’s SB 1413, known as the “Teacher Housing Act of 2016,” codified at Health & Safety Code § 53570 et seq., provides the express authority to proceed. The law’s factual findings and statutory language gives the same type of guidance for K-12 districts long available at the junior college, CSU, and UC levels. Doubts regarding limiting the rentals to teachers and staff, about the use of lands held in educational trust, and the availability of innovative financing and intergovernmental cooperation were all addressed.

2.83 acre Sonoma Valley Health Care District Property
432 W MacArthur, Sonoma, California

image available at http://tinyurl.com/gtmavhq
And this brings us back to the 2.83 acre parcel. Ideally located, the site is nearly identical in size to the Casa Del Maestro. It’s within walking distance of supermarkets and the Sonoma Square. The neighborhood already has several master planned facilities (Village Green, Sonoma Hills, Pueblo Serena, Moon Valley). Further, the school district has broad powers available to support the project, given the financial flexibility of the authority granted by Health & Safety Code § 53573.

What of the hospital, the current owner? Hospital sites must be “multi-decade,” allowing new buildings to be constructed as others pass from use, like a wave traversing the property over decades. For now, the MacArthur parcel is surplus to requirements. But the two districts could allow for a future exchange of land with fair compensation. The Andrieux site could become housing and MacArthur a hospital, when contemporary structures reach their end of life.

There are any number of problems that could interfere with teacher housing at this site (or another), but the rough contours are clear.  Making sure teachers and staff can afford to live in our community was the first item I discussed when walking Sonoma door to door this past fall. There are few more effective proofs of the power of small-town cooperation, especially in the face of discord we now witness washing over our small valley.  Let’s get our government agencies talking about working together, and let's set an example, by having our health care and school districts discuss how they might make this land continue to serve the public interest for decades to come.

Tuesday, May 24, 2016

What Do Bubbles Look Like, Pt. 3.

Today, I'm revisiting a post from last November, and a followup from March of this year. I had blogged about a property for sale on Austin Avenue, in the Prestwood neighborhood of Sonoma. The asking price was $2,295,000; the house was a little under 1,900 square feet. There was some disbelief at the listing, given the property had sold in November of 2010 for $407,500. But it duly sold for $2 million. 

Zillow advertisement, May 24, 2016.
image available at http://tinyurl.com/zae624d 
I'd speculated that this market could continue for another summer, and perhaps even two. Today is just a small update; I was browsing Zillow for unrelated reasons and saw the image at the right. 348 Patten, which had sold for $725,000 in November of 2013, is now at $2.8 million; Zillow estimates the house is for sale for about $994 per square foot.  To put that in perspective, the most expensive zip code in the USA (10007, also know as Tribeca, New York) has prices per square foot of about $2,829 (yes, the source is Business Insider, but bear with me).  Atherton, at #2, is $1,669 per square foot, and there are four more above $1,000 (33109, Fisher Island in Miami, $1,586; 92662, Balboa Island in Orange County, $1,443; 90401, Downtown Santa Monica, $1,304; and 02108, Beacon Hill in Boston, $1,290). The next on the list is actually below 348 Patten, and that 92118, Coronado, in San Diego, at a mere $866 per square foot. 

Board of Governors of the Federal Reserve System (US)
Multiple Series
retrieved from Federal Reserve Bank of St. Louis [FRED]
May 23, 2016, available at http://tinyurl.com/p4cmzyv
The one thing that all those locations have in common is access to an extraordinary job market; whether it's downtown Manhattan, Palo Alto, Miami Metro, The OC, LA's Westside, or Greater Boston, there is a nexus of price and productivity evident in each instance. Sonoma, though, is much different; the economy is orders of magnitude less intense.  Perhaps the most striking contrast is the property Zillow listed immediately below; a George Ranch home, 4,500 square feet, on 8 acres, with 5 bathrooms, for (only?) $2.3 million. 

I've turned from time to time to the graph on the right as an illustration of where markets have been moving since June of 2009. Since I first posted this graph, the situation has actually gotten more extreme. I continue to think that prices may hold up through the summer, but expecting real estate to continue to appreciate along this trend line increasingly strains credulity.

Friday, March 18, 2016

Regarding Roundabouts.

A brief post today, about what can be a surprisingly vigorous debate.  Speaking with Ron Willis on Thursday, we discussed Sonoma Valley's issues with affordable housing, which turned into a conversation about traffic congestion.  The two are more closely linked than they may at first appear. As many are aware, the traffic problems Sonoma experiences are exacerbated by so many employees of local businesses who cannot afford to reside in the community they serve, and must commute 90 minutes or more (a topic that has come up on this blog before) to find affordable housing for their families.  Reform of local housing policy could help unlock the consequent roadway snarls.

Ron and I also touched on the physical layout of Sonoma's roadways, noting that increasing capacity isn't really consistent with the previously expressed preferences of local voters, but that roadway improvements have made a difference in mitigating congestion. We agreed that a nice example was the construction of a roundabout by the County of Sonoma on Arnold Drive, a project that was, at times, controversial.

The intersection had been a notorious problem for years.  One of the nice features of Google Maps is that it contains a time series of photographs of the roadway. The earliest images (from 2007) actually show two CHP officers trying (in vain) to clear the traffic backup -- Google's Maps service allows users to see just how bad the situation was prior to the County's efforts.



While the cost of the project surprised some (~$2 million), and was considered larger than expected, it eliminated the daily backup of twenty to thirty cars turning right onto Agua Caliente Boulevard that frustrated so many drivers, and that disjointedly interrupted the otherwise rural tenor of Sonoma Valley with a mess of cars more reminiscent of the MacArthur Maze. The improvement has since received wide acclaim. Advancing the map from Google to 2015 illustrates the complete transformation of the intersection and the restoration of the pastoral character of the area.

Arnold Drive Roundabout, 2015.
Image available at http://tinyurl.com/gw5gl4f
The takeaway, for me, is that persistent efforts to improve the quality of Sonoma Valley's infrastructure is a key part of the strategy necessary to address Sonoma's affordable housing crisis. The evidence shows that the situation continues to worsen, and indeed to become more extreme as the months pass. Perhaps the roundabout solution points the way to other ideas that might help resolve the situation, with Sonoma borrowing even more ideas from the Garden City movement than just Ebenezer Howard's traffic innovations.

Wednesday, August 12, 2015

What Do Bubbles Look Like, Pt. 2.

Today, I'm revisiting a post from last November. I had blogged about a property for sale on Austin Avenue, in the Prestwood neighborhood of Sonoma. The asking price was $2,295,000; the house was a little under 1,900 square feet. There was some disbelief at the listing, given the property had sold in November of 2010 for $407,500.

As was expected, the property didn't sell, and was reduced in price in January of 2015, but only to slightly less than $2 million. And that's where it sold, on March 12th of 2015, for $907 per square foot. That amounts to about a 200% return on the investment, given the 14 months and three weeks the property was held. The turn of events produced a certain amount of amazement and head shaking; talk of a bubble would frequently follow.

Board of Governors of the Federal Reserve System (US)
Multiple Series
retrieved from Federal Reserve Bank of St. Louis [FRED]
August 11, 2015, available at http://tinyurl.com/p4cmzyv 
I kind of fell into a trap of presuming that rapid appreciation automatically meant a bubble exists.  However, I wanted to get an idea of what asset prices in Sonoma look like contrasted with other assets.  And once again, I turned to the St. Louis Federal Reserve Bank's excellent data analysis tool, FRED, to give me some perspective. 

The electric blue line through the center of the graphic is the Case-Shiller Home Price Index for the San Francisco Bay Area. I indexed it on the trough of the last US recession, June of 2009.  I also put in the same index for Cleveland (the dark blue dashed line) and Las Vegas (light blue dashed line). 

I chose Cleveland as a comparison because its residential real property prices were basically increasing at a modest fixed rate for years, which is what you'd (more or less) expect of a heavily regulated market dominated by government lenders.  Las Vegas, in contrast, is one of the more heinous examples of the real estate bubble; the pronounced rapid rise around 2006 is clear.  Prices in Cleveland have now been declining-to-flat for nearly a decade, and while Las Vegas has seen a recent increase, the change is nothing like 2004-06. But in San Francisco prices have nearly returned to their peak.

There's something of an obvious culprit, of course.  While the increase in house prices is remarkable, the increase in stock market prices is even more striking.  White the sharp rise in gold-and-oil prices (the yellow and black lines, respectively) during Obama's first term are clear, those markets have gone through serious corrections in the last 24 months.  But the NASDAQ's rise (solid green line) continues unabated, and unlike the dot-com era, the broader markets have followed (the dashed green lines are the S&P 500 and the Wilshire 5000).  

Sticking the label "bubble" on this situation, though, requires clearing one more hurdle. Bubbles aren't just mispricing, where people think something's valuable and, after time, it becomes clear they were wrong. Instead, bubbles, as Noah Smith nicely explained in a column back in March, depend on greater fool speculation–that someone else will pay an even higher price for the same asset tomorrow.

When it comes to home prices in the San Francisco Bay Area real property market, no less an authority than Robert Shiller himself argues such extravagant expectations (and market inefficiencies) are indeed what's driving prices, creating the potential for a Minsky moment. His point (distilled) is that the lack of short selling and the difficulties associated with increasing supply are behind the problem:
"In San Francisco, for example, we found that while the median expectation for annual home price increases over the next 10 years was only 5 percent, a quarter of the respondents said they thought prices would increase each year by 10 percent or more. That would mean a net 150 percent increase in a decade. These people are apparently not thinking about the supply response that so big a price increase would generate. People like this could bid prices in some places so high that eventually the local market will collapse. Yet the smart money can’t find a profitable way to correct such errors today ... [t]he bottom line is that there is no reason to assume that the real estate market is even close to efficient. You may want to buy a house if you love it and can afford it. But remember that you cannot safely rely on 'comparable sales' to judge that the price is fair. The market isn’t efficient enough for that."
Presuming that we are in a bubble, the hard question is, when do we expect it to end? For a way to think about how to answer that question, I point to the Economist.  In an article from last year, the newspaper noted that this particular economic cycle is already running long at 74 months; if it continues through May 2017 it will pass the average of the last three. Prices may very well hold in Sonoma so long as the expansion continues. Thus we may see a seller's market in the Valley of the Moon for another summer, and perhaps even for two.

It always seems odd to me, however, that given the regularity of booms and busts, that we all still struggle to remind ourselves that this time isn't any different, and these conditions will end as all such expansions do.  It is a truth Stanford economist Bob Hall (chairman of the academic panel that dates American business cycles) reminds us of when he points out that, economic syncopation being what it is, “[t]he next recession will come out of the blue ... just like all of its predecessors.” Perhaps we can take some comfort from our pattern of failing to constrain our expectations, even after three and a half thousand years of this stuff, and recognize it as a part of the human condition.

Knowledge of the problem, though, doesn't mean we should be sanguine about the consequences for individuals exposed to the volatility.  The family home is the primary asset of the vast majority of households. It is worth remembering that during each of the last three recessions, as the graph above shows, prices for San Francisco residential real estate have fallen. Sometimes, the collapse has been rather spectacular. It's food for thought, I imagine, for those in the Bay Area who are expecting ten percent appreciation per year for the next decade or more ...

Saturday, June 27, 2015

About Arnold Field ...

On Tuesday, Sonoma Valley's school board heard from some City residents with concerns that construction at the combined SVHS/Adele Harrison/Prestwood Elementary campus would hurt their property values. This is (of course) a common situation whenever a school district builds the regular improvements and expansions that their educational mission requires.  I think most everyone has sympathy for the neighbors' concerns. But empirical research shows that their fears aren't backed by the facts. Chris Neilson and Seth Zimmerman demonstrated (in their increasingly-widely cited research) that neighborhood school construction actually improves property values. "[B]y six years after building occupancy, school construction increases reading scores by 0.15 standard deviations relative to the year before building occupancy ... school construction raised home prices in affected neighborhoods by roughly 10%, and led to increased public school enrollment."

The proposed sports complex, in particular, has alarmed some nearby homeowners, who focused their concerns on the stadium. But the research, again, supports the District. Larissa Davies, a United Kingdom based researcher into the subject, conducted a thorough review of the US and UK literature on the impact of football and soccer stadia. Her internationally recognized study found that "proposals to locate stadia in urban areas often prompt a negative reaction from local communities, fearing a decline in property prices ... in contrast to this widely held belief, sports stadia can actually enhance the value of residential property ... stadia also contribute indirectly to property value through the creation of pride, confidence and enhanced image of an area."

Arnold Field
180 1st St. West, Sonoma, CA 95476
Image courtesy Google Pedometer

service available at http://tinyurl.com/oxzphxa
The neighbors did have an alternative proposal.  In listening to the different speakers, I noted that they brought up more than once the argument that Arnold Field was a fine alternative to a high school stadium.  On the surface, that argument looks good, but as a person who's been involved with the nonprofit that administers the field, and having played on it quite a bit myself, I know that the (generally undiscussed) truth is that Arnold Field isn't long enough to play football on safely, and it isn't in compliance with the law. A football field must be 360 feet long, surrounded by a further safety buffer of 15 feet. As the attached picture (created using Google Pedometer) shows, the length from fence-to-fence at Arnold Field is 116.3 meters, which amounts to ten feet short of the required space for the safety buffer.  The cramped quarters leave no space for accessible routes alongside the playing surface, a DSA requirement for California school facilities.

Spaulding Field
309 Westwood Plaza, Los Angeles, CA 90095
Image courtesy Google Pedometer

service available at http://tinyurl.com/oxzphxa
The safe and legal way to deal with that situation is a non-regulation size field; UCLA's practice field is a good example.  Rather than unsafely stretch the playing surface to a fence, the UCLA Athletics Department shortened the football practice field adjacent to Pauley Pavilion by 20 yards (a careful observer of the Google Pedometer image on the right will note there are no 40 yard lines).  By doing so, the University preserved the buffers and accessible routes required by statute. It would be great if Sonoma had the kind of alternative UCLA has to playing on their practice field, but the Dragons can't simply decamp like the Bruins to the Rose Bowl on Game Day.

But length isn't the only problem posed by Arnold Field. The baseball locker rooms at Arnold are probably too small for baseball; they're clearly inadequate for football. The beautiful, pristine baseball outfield often gets churned into a mudscape during football season, and to be back at its best for spring, it needs rest from December until mid-March, preventing women's soccer from relying on it for winter practice. Arnold Field has no track, and doesn't have space for one to be installed. And the location itself, which might have been helpful in Sonoma's railroad days, when adjacency to a Depot could have aided traveling teams, is a hindrance today, when 1st St W jams with traffic after home football games, adding to the already-unmanageable traffic congestion around the Plaza.

Meanwhile, SVUSD has specific requirements for a variety of sports that are consistent with its mission to ensure healthy minds in healthy bodies. California (and the nation) faces a physical education crisis.  Sonoma High's track is in such dilapidated condition that home meets had to be held at away locations this past spring. Women's soccer, whose schedule is planned to be moved to winter, will require a lighted field for play purposes, one that, practically, must be field turf given the sloppy, unplayable condition of grass fields in January and February.  Sonoma High's football team, meanwhile, still needs a safe and statutorily-compliant home field.

There have been some suggestions that SVUSD could "take over" Arnold Field and improve the facilities. That presents a lot of problems.  California educational facilities have higher than normal construction standards, just like hospitals and police stations.  State regulations prescribe that particular elements (things as mundane as the layout and size of walkways) conform to those standards. Bringing the facility into compliance would be far more expensive than moving a fence or building locker rooms, even if the baseball constituency would agree to replace the grass field with turf. And all that presupposes the property could be taken into trust as an educational facility in cooperation with the County.

The truth is that Arnold Field is a great baseball field. Mario Alioto, and all of the baseball supporters and boosters, have maintained it as a labor of love. Their hard work has caused the community to over-rely on the facility, and sometimes to over-use it. Arnold Field should be dedicated to baseball–a move that would be in keeping with the long term trend away from multipurpose civic stadiums to those dedicated to a specific use, from the San Jose Earthquakes amazing new Avaya Stadium, to the jewel that AT&T Park has become along the waterfront in San Francisco.

Arnold Field is a historical facility, steeped in the memories made there.  But physically, it is a product of another time. Easing the pressure on the facility will allow site-specific baseball improvements to be made, enhancing the experience for Sonoma's high school baseball team, as well as the Little League, Babe Ruth, and now the Stompers that call it home.  It will avoid the potentially serious legal liability the District, the County, and even the City could all face by allowing use to continue at a field we know doesn't meet contemporary safety guidelines.  It will mitigate traffic on and around the Square, and will ensure the women's soccer team will play in the appropriate facilities our Lady Dragons deserve.

Sunday, March 8, 2015

@RobertJShiller and the #EMRATIO.

There's been a tendency, every spring since the start of the Lesser Depression, for the business community to express, hopefully, that "this will be the year things turn." The first post I wrote noting this theme was on March 8, 2013. I thought this morning that, two years later to the day, I'd revisit the question.

Civilian Employment-Population Ratio
Federal Reserve Bank of St. Louis
I've been keeping an eye (thanks to Brad DeLong) on the Civilian Employment-Population Ratio from the St. Louis Fed for some time. It is generally the best measure of labor market conditions. If the economy rallies strongly, this is the ratio that should change substantially.

In March of 2013, the ratio was at 58.5. As of February 2015, it's at 59.3; the graph is on the right. There's essentially been no movement.

At the same time, though, the Shiller P/E Ratio, as of February 13, 2015, passed its pre-financial crisis high. This past week, the NASDAQ closed above 5,000 for the first time since the dot-com bubble. There is some local evidence of a speculative real estate bubble. Shiller himself recently released a new edition of his "Irrational Exuberance," where in the preface he expresses surprise at the events that have followed “the bursting of the speculative bubbles that led to the 2007-9 world financial crisis”:
"[E]vidence of bubbles has accelerated since the crisis. Valuations in the stock and bond markets have reached high levels in the United States and some other countries, and valuations in the housing market have been increasing rapidly in many countries."
So the data is there to support a narrative of asset price inflation unsupported by fundamentals, rather than the hopeful mantra of Main Street.

It is, of course, the why of this situation that is so puzzling to so many. If the economy presents meager prospects, shouldn't prices adjust to reflect? It is always tempting to fall back on Thomas Sargent and simply say that in an economic equilibrium, people are satisfied with their choices, and to add Herbert Stein's observation that "[i]f something cannot go on forever, it will stop."  But Shiller himself offered a potential explanation on why this phenomenon recurs, and I found that his point resonated, and so I link to his piece in the New York Times from last month:
"When there is unusual uncertainty about the future, and if not enough new business initiatives can be found to increase the supply of good investments, people will compete to bid up existing investable assets. They may go so far in bidding up prices that even though the assets may have horrible prospects, people will still want to hold them because they feel they have to save somewhere."

Saturday, January 31, 2015

Nothing So Dear as #cheapmoney

Over the past few years, I've heard from time to time in conversation the desire to take advantage of "cheap" fixed-rate money, before inflation sets in. 

Board of Governors of the Federal Reserve System (US)
10-Year Treasury Constant Maturity Rate [DGS10]
retrieved from Federal Reserve Bank of St. Louis [FRED]
January 30, 2015, available at http://tinyurl.com/kmtq4sl
On the right is a graph (it's actually a composite of some screenshots) from the Federal Reserve Bank of St. Louis.  I've marked when I was born, and when I graduated from high school. At my birth and graduation, the yield on the 10-Year Treasury was nearly identical (~7.5%, ~33 basis points apart). Between those dates, the yield was almost always higher, often much higher; since then, it's almost always been lower, mostly much lower. As of 30 January 2015, the yield is 1.64%.

Everyone carries a memory of economic history in their head. As Owen Zidar points out here, it changes more slowly than the speed of circumstances. Brad Delong has consistently argued for the necessity of all of us to "mark our beliefs to market." He maintains a list of prominent economists and institutions who've argued inflation was the foremost concern facing the U.S. economy since 2007 -- and not for the purpose of congratulating them.

Like the economists Brad lists, our formative memories were constructed during a different time. Inflation expectations became anchored. But there are few atheists in foxholes during combat, and for similar reasons, I suspect that inflationistas in debt are rare during deflation -- for falling prices routinely bankrupt entrepreneurs. There is oftentimes nothing so dear as "cheap" money.

Sunday, November 30, 2014

Why Travel Matters.

Back in November of 2012, I ran across this article in the Economist, arguing that the United States was on pace to become the world's largest producer of oil by 2020, and would be able to produce enough energy to be self sufficient by 2035. I recall thinking how dramatic a change that would be -- and I saved the PDF, meaning to blog about it.

"Alberta Energy Firms Face Harsh New Reality"
Jeffrey Jones, Jeff Lewis, Carrie Tait
The Globe and Mail, November 28, 2014.
I wasn't quite sure what to say, though. But spending a little bit of time in Calgary really focused the issue for me. The Alberta business section of the Globe and Mail is on the right (the oil price was also front page news).  I've linked to the main article here.

The recent oil price slide will probably completely eliminate the Canadian federal budget surplus. That creates serious problems for a government that has fixed expenses (salaries, pensions, debt service) but falling revenues. Most of the world at this point has, or soon looks to have, the same problem as Canada.

A nice way to understand this situation is to read a brief blog post of Paul Krugman's from October 15, entitled "1937." He noted that markets are signaling that "once again the big risk is deflation or at least very sub-par inflation."  He measured deflation in that post by looking at the market for Treasurys, specifically the 10-year, showing the yield had fallen below 2%, potentially a sign of recession, deflation, or both.

When I tucked the Economist article away for future reference in 2012, I never would have thought that a falling nominal oil price could be a bad thing.  Today, though, I'm not so sure.

And I'm not the only one.

Wednesday, November 19, 2014

What Do Bubbles Look Like?

Sentinel Media Services
"Midcentury Modern in Sonoma"
 The San Francisco Chronicle, Nov 19, 2014
screenshot taken Nov. 19, 2014
The San Francisco Chronicle gets my attention today.  On a fairly regular basis, the paper features a particular piece of real estate for sale somewhere around the San Francisco Bay Area.

Today, they're publishing about a property on Austin Avenue, in the Prestwood neighborhood of Sonoma.  The asking price is $2,295,000. The house is a little under 1,900 square feet.

You can see the location here. One nice thing about Zillow is that it will show you the recent sale history of the property.  I took a screenshot of that, and that's on the right, too.  

The Zillow history shows that William Grecian tried to sell this property back in November of 2010 for $445,000; he couldn't find any takers.  He dropped the price to $420,000 in April of 2011, but still didn't find a buyer.  He dropped the price another $12,500 -- and that's when Laura and Richard Tackett made their offer, for $407,500 on July 15, 2011.  

Zillow.com
"826 Austin Ave, Sonoma"
 screenshot taken Nov. 19, 2014
available at http://tinyurl.com/krxbtzh
Laura and Richard held the property for 872 days.  On December 3, 2013, they listed it for sale at $648,000, a 59% price increase.  Laura and Richard figured the change in the real estate market meant that they'd just made an investment with approximately a 20% annual rate of return.  Of course, Richard and Laura were wrong; the property didn't sell for $648,000. 

Instead, it sold 17 days after listing for $730,000. 

More like a 26% annual return.  

The property was purchased by an LLC, which is more or less the general practice in California with real estate projects that are expected to appreciate significantly.  The registered agent for the LLC is Patrick Doyle of Petaluma, who's a general contractor and is the manager of the LLC. The Deed of Trust on the property (which I checked) reveals the equitable owners. The Deed of Trust is a public record and if anyone's particularly excited to find out who put up the money for this deal, feel free to head to the County of Sonoma's Recorder's office -- they're open 8-5 Monday through Friday.  

The LLC listed the property for sale on November 5, 2014.  The LLC held the property for 320 days.  I can't calculate the annual rate of return, because the calculator I use presumes that the values change monthly; here, the ∆ in the price is so substantial that the number of days included can change the implied rate of return.  But it looks like about a 215% presumed annual rate of return.

Comments, "Midcentury Modern in Sonoma"
Sentinel Media Services
The San Francisco Chronicle
screenshot taken Nov. 19, 2014
There are a great many things I could say about this situation. I'm going to hold those observations, and I think I'll revisit this blog post in a couple of years (months?), perhaps updating it with the transaction history of the address.  

At this point, though, I do want to draw attention to the comments about the house on the Chronicle's web site.  

One poster thought the property looked like a good "flip."  

Another wrote that "I can't believe anyone would pay over 2 million for this toy house."

Interesting.