News

Landmark Links October 24th – Hitting the Wall

 

Lead Story….. When a vibrant economy’s housing market gets too expensive the economic impact isn’t always instantly obvious.  Sure, there are increasing rumblings about the skyrocketing cost of rent and buying a home but the true economic implications can be disguised for a period of time for a relatively simple reason: compromise.  What do I mean by this?  A priced-out worker who once would have lived in her own apartment moves in with roommates until she gets priced out again and moves to further out location, again with roommates.  A family gets priced out of their well-located rental property and decides to move to a smaller unit and have their kids share a room.  Then they get priced out again and begin to move further away still, eventually commuting 90 minutes plus to get to work.  Some even go so far as to seriously entertain absurd living arrangements like this example of hypothetically moving to Vegas to commute to San Francisco in order to save money.

Most young people living in coastal California know someone who is coping with some level of this housing compromise.  Speaking from my own experience, I lived with roommates for 9 years when I purchased my first home in order to make ends meet.  California is a tremendous economic growth engine but that opportunity comes with a high cost and there are increasingly fewer desirable housing alternatives for those that wish to benefit from it.  As a result many workers end up compromising but even that has it’s limits.  When those limits being hit reach a critical mass, economic consequences that could once largely be swept under the carpet begin to rear their ugly heads.  Take the Bay Area for example.  The most vibrant economic region of California is starting to have issues related to job losses.  George Avalos of The Mercury News reported on some recent dismal jobs numbers in an article entitled Bay Area hammered by loss of 4,700 jobs (emphasis mine):

For the second straight month, the Bay Area lost thousands of jobs in September, making it the worst month for employment locally since February 2010.

The setback for the local economy comes as the crucial holiday shopping and hiring season draws near, and contrasts with a strong hiring picture statewide.

Taken on it’s own, two months of job losses aren’t the end of the world.  The key issue is why it is happening and that is where things aren’t looking so good for the Bay Area economy (emphasis mine):

The Bay Area’s job losses stem from two distinct phenomena: Some employers are slashing positions, and others are unable to hire. Some economists attribute this second problem to structural barriers posed by skyrocketing housing costs. The lack of affordable places for workers to live appears to have hobbled the region’s ability to fill jobs as briskly as in prior years.

“Housing is the chain on the dog that is chasing a squirrel,” said Christopher Thornberg, principal economist and founding partner with Beacon Economics. “Once that chain runs out, it yanks the dog back.”

…….

The lack of housing also makes it tough for employees to live near their workplaces, forcing many into lengthy commutes on roads choked with traffic. Some prospective employees decide they’d rather not bother.

“The economy in the Bay Area has pushed up against the physical limits of a lack of housing and a lack of places for workers to live,” said Jeffrey Michael, director of the Stockton-based Center for Business and Policy Research at University of the Pacific.

The “unable to hire” group is what should be of concern here since it implies that companies are trying to grow but can’t attract workers since there is nowhere for those workers to live.  As I’ve said before and will reiterate again: it is impossible to run a vibrant economy with white collar executives and their families alone.  Every geographical region needs teachers, postmen, servers, bartenders, trash collectors, bus drivers, etc.  The pay for these professions is indeed better in the Bay Area but at a certain point, that extra economic opportunity just isn’t worth the financial and quality of life sacrifices that come with long commutes or living in a tiny apartment with roommates in a sketchy part of town.

The rest of California is still growing a a healthy clip despite the hiring slowdown in the Bay Area.  However, this is partially because the rest of the state is in an earlier stage of housing compromise and the cost of living is not quite as extreme as it is in San Francisco and Silicon Valley.  If Bay Area hiring troubles continue it should serve as a cautionary tale to the rest of the state: falling behind your housing supply needs is a long term economic risk that should be dealt with sooner rather than later.

Economy

As Stupid Does: There is a proposal floating around Washington to cap the amount that Americans can contribute before taxes to 401(k) plans and IRAs at $2,400 per year.  Clearly this is needed since it’s well documented that Americans are dramatically over-saving for retirement which is hurting the economy.  End sarcasm here.

Spillover: There’s an interesting argument in this Bloomberg View article by Connor Sen that high financial asset values could lead to long term economic benefits:

If stocks are cheap and bond yields are high, businesses will tend to buy financial assets or pay down debt. Conversely, when stocks are expensive and yields are low, financial assets aren’t as tempting, so those with capital are more inclined to expand a business or start a new one — which means hiring people and paying higher wages.

Made to be Broken: Why a strictly rules-based Federal Reserve is a dangerous thing.

Commercial

Called Out: Co-working startup WeWork is now valued at $20 billion but critics contend that it’s little more than Regus with a hipper paint job and a valuation fueled by Silicon Valley pixie dust.

Thirsty: US cities are falling all over themselves in an effort to land Amazon’s second headquarters……but will it be worth the price?  See Also: Here’s a list of some of the lame and embarrassing things that cities have done to court Amazon.

Residential 

Shrinking: Newly constructed American houses are increasingly getting larger while private outdoor space continues to shrink.

Not Just a Labor Issue: Lumber prices are at an all time high, leading to higher home building costs.

Profiles

Ulterior Motives: The war to sell you a mattress is an internet nightmare where the lines between reviewers and advertisers are increasingly blurred.

Paying Up: Established tech companies are paying massive salaries for artificial intelligence talent, crowding out start-ups.

Chart of the Day

WTF

Gotta Hear Both Sides: A New Jersey man is suing United Airlines, saying a passenger who was allowed to board despite being clearly intoxicated urinated on him right before takeoff.

Thanks But I’ll Pass: McDonalds is coming out with a McVegan Burger that it’s currently testing in Finland.  I tried but was unable to come up with a worse idea than combining my two least favorite things about food: McDonalds and vegans.

Seems Like a Reasonable Response: Meet the British man who ran away from his home and lived in the woods for 10 years to escape his nagging wife.

Cross That One Off: Meet the Iowa man who started a police chase because it was on his ‘bucket’ list’.  He can now cross incarceration off as well.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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