Coyote Blog

When the government does not allow prices to float in real time in response to changes in supply and demand, then gluts and shortages are inevitable.  When shortages occur, due to prices that are capped or not allowed to move upwards sufficiently quickly, queues and/or spot shortages occur.  When the government decides it does not like this, the jack-booted thugs step in and we have government-enforced rationing.  California, famous for its stupidity in letting wholesale electricity prices float while capping retail prices and thus creating an economic disaster several years ago, is at it again in the electricity market:

What should be controversial in the proposed revisions to Title 24 is
the requirement for what is called a "programmable communicating
thermostat" or PCT. Every new home and every change to existing homes'
central heating and air conditioning systems will required to be fitted
with a PCT beginning next year following the issuance of the revision.
Each PCT will be fitted with a "non-removable " FM receiver that will
allow the power authorities to increase your air conditioning
temperature setpoint or decrease your heater temperature setpoint to
any value they chose. During "price events" those changes are limited
to /- four degrees F and you would be able to manually override the
changes. During "emergency events" the new setpoints can be whatever
the power authority desires and you would not be able to alter them.

In
other words, the temperature of your home will no longer be yours to
control. Your desires and needs can and will be overridden by the state
of California through its public and private utility organizations. All
this is for the common good, of course.

I can't think of anything that better illustrates the tie between free exchange and freedom.  And by the way, how long before the greenies in the legislature suggest using this mechanism even when there are not shortages to turn down everyone's air conditioner, just because they can.

Update: Exercise for the reader -- Figure out how, once this policy goes bad, the state of California will again blame Enron for their failure.

Here is a public service announcement for those of you who might be younger or who did not live through past housing bubbles (such as the mid-80's bubble in Texas).  Housing bubbles take a long time to sort out.  The typical pattern is that one sees a big build-up of yard "For Sale" signs around town, but no real movement or sales.  What happens is that people selling their houses resist accepting that a change in pricing levels has occurred, and list the homes at the old, higher price levels, particularly when any price cuts would put them underwater on their mortgage.

Eventually, the dam breaks, as sellers are forced to accept lower pricing because they can no longer bear the holding costs any longer.  In Texas, I had at least two friends who just left the keys in the mailbox and walked away, leaving it all to the bank to sort out.  But it can take a really long time for this to play out -- I am talking years, not months, depending on how inflated the bubble got.  From my experience (confirmed in the futures markets here) the bottom will not come until at least a year from now.  In Texas in the 1980's, it took as long as five years for the whole thing to play out and for prices to start recovering.

One of the things I have observed in the past is that our poorest 20% would be upper middle class in most countries of the world, and would be far richer than 99.9% of people who have ever lived.  Somehow the following burning concern in the LA City Hall seems to bring this message home quite clearly:

To protect the character of neighborhoods being dwarfed by the
construction of oversized homes, Los Angeles officials are weighing a
law that would radically limit the square-footage of new or remodeled
houses across the city's flatlands.

The proposed
anti-mansionization measure would stem a trend fueled by the meteoric
rise in home values and address a backlash from residents who complain
that the spread of large, boxy homes is spoiling the architectural
flavor of established single-family neighborhoods.

Somehow, I don't thing "mansionization" is a major problem in most countries of the world.

One of the recurring themes in my climate video "What is Normal?" is that despite the fact that we have only observed climate for about 100 years, and have only studied it with modern tools like satellites for about 30 years, we want to insist on calling some condition "unusual."  My favorite example of late was when a number of news sources claimed "Arctic Ice at All-Time Low."  Really?  The lowest in the 6 billion year history of Earth?  Well, no, "all-time" means since satellite measurement began ... 28 years ago.  (By the way, the simultaneous story that Antarctic ice hit an "all-time" high on the exact same date failed to be mentioned in the press for some reason).

TJIC has a great post (mercifully unrelated to climate, for all of you with climate fatigue):

http://www.boston.com/business/articles/"¦

As the price of crude oil approaches $100 a barrel, New Englanders are bracing for their most expensive winter ever.

May I suggest that the average family expended more hours of labor
to procure their firewood in 1650, and more hours of labor to procure
their coal in 1750, and more hours to procure their gas in 1850 than
they are spending, today, to heat their (much larger, much better
furnished) homes today?

I swear, whenever a journalist says the word "ever" I hear
"since I was in high school, or since 1990, whichever was more
recent"¦and I was drunk at the time, so I honestly can't tell you which
one that was".

LOL

Environmentalists are working to preserve another priceless natural treasure, one that has been on this earth supporting its habitat for, uh, decades.  From the Save the Salton Sea web site:

The
proposed transfer of water from the Imperial Valley to San Diego as
part of the reduction of California's Colorado River use, the possible
reclamation of New River water by Mexico, and the increased evaporation
from the Sea's restoration all threaten to reduce lake levels.  The
proposed transfer of the 300,000 acre feet alone, if inflows are not
replaced, is estimated to drop lake levels by over 16 feet, exposing
almost 70 square miles of sediments.  The result could be potential air
quality problems caused by blowing dust, seaside homes stranded far
from the Sea, and greatly accelerated concentrations of salts and
nutrients.

Of course its freaking drying up.  In a sense, this lake represents the United States' largest industrial spill, as early in the 20th century a couple of Colorado River aqueducts broke and poured water into the Salton basin, creating a brand new sea.  By usual environmentalist arguments, this lake is supposed to dry up, having been an artificial creation of man.  (By the way, as an extra credit task, I challenge you to find anywhere in the web site linked above where they mention that the lake is a man-made accident that is barely 100 years old).

HT:  Maggies Farm

Yesterday, I talked about my fondness for private conservation projects.  Today, the NY Times makes it clear that they are not so fond of private conservation.  In an article about environmentalist-triggered death of logging in the west, the Times observes that many rich folks are taking up the opportunity to buy large tracts of western forests for second homes and ranches.

William P. Foley II pointed to the mountain. Owns it, mostly. A timber
company began logging in view of his front yard a few years back. He
thought they were cutting too much, so he bought the land.

Mr. Foley belongs to a new wave of investors and landowners across the
West who are snapping up open spaces as private playgrounds on the
borders of national parks and national forests.

Cool, a win-win -- conservation without use of tax funds or government coersion.  But instead of being thrilled, the Times adopts their patented sneering tone they use with anything having to do with wealth.

The rise of a new landed gentry in the West is partly another
expression of gilded age economics in America; the super-wealthy elite
wades ashore where it will.

Hmm, I would have thought it an example of how increases in wealth in the US has always driven higher environmental standards and more conservation.  The NY Times tries to portray this as something like turning national parks into sprawling suburbs, lamenting the "increase in density," but this is just a joke and a product of a bunch of New Yorkers who have never really spent time in Montana.  There is zero danger of any kind of urbanization here, and their very story belies this fact when it talks about 640 acre lot sizes. 

The real problem for them seems to be one of access, and they lament that these new owners tend to put up no trespassing signs rather than allowing public access as private loggers used to.  But in so arguing, the Times is trying to have it both ways.  Eliminating recreation access from western lands is a HUGE priority for environmentalists.  In fact, though many in America don't know it, within a few decades it may be impossible to drive into national parks like Yellowstone and Yosemite.  I know and work with the management of the National Parks, and many of their leaders do not consider their job finished until they get all the visitors out of the parks.  So throwing up no trespassing signs to recreators is exactly what environmentalists want on these lands.  What they don't like, because many are openly socialist, is private ownership of these lands.  They know that increasingly, because they have gotten so good at filing lawsuits and forcing public lands officials to do their bidding, that public ownership means, effectively, ownership by the environmental groups. 

Virginia Postrel has a really interesting article in the Atlantic.com.  Often, home construction costs are disaggregated into the cost of land and the cost of the home.  She adds a third piece -- "the right to build" related to regulation and land use restrictions.  She cites a study that most of the cost of new homes in expensive markets like California are not building costs or even land acquisition costs, but the enormous costs involved in getting the government to let you build the house you want on your own land.

In a 2003 article, Glaeser and Gyourko calculated the two different
land values for 26 cities (using data from 1999). They found wide
disparities. In Los Angeles, an extra quarter acre cost about
$28,000"”the pure price of land. But the cost of empty land isn't the
whole story, or even most of it. A quarter- acre lot minus the cost of
the house came out to about $331,000"”nearly 12 times as much as the
extra quarter acre. The difference between the first and second prices,
around $303,000, was what L.A. home buyers paid for local land-use
controls in bureaucratic delays, density restrictions, fees, political
contributions. That's the cost of the right to build.

And that right costs much less in Dallas. There, adding an extra
quarter acre ran about $2,300"”raw land really is much cheaper"”and a
quarter acre minus the cost of construction was about $59,000. The
right to build was nearly a quarter million dollars less than in L.A.
Hence the huge difference in housing prices. Land is indeed more
expensive in superstar cities. But getting permission to build is way,
way more expensive. These cities, says Gyourko, "just control the heck
out of land use."

These differences cascade into a number of areas:

Dallas and Los Angeles represent two distinct models for successful
American cities, which both reflect and reinforce different cultural
and political attitudes. One model fosters a family-oriented,
middle-class lifestyle"”the proverbial home-centered "balanced life."
The other rewards highly productive, work-driven people with a yen for
stimulating public activities, for arts venues, world-class
universities, luxury shopping, restaurants that aren't kid-friendly.
One makes room for a wide range of incomes, offering most working
people a comfortable life. The other, over time, becomes an enclave for
the rich. Since day-to-day experience shapes people's sense of what is
typical and normal, these differences in turn lead to contrasting
perceptions of economic and social reality. It's easy to believe the
middle class is vanishing when you live in Los Angeles, much harder in
Dallas. These differences also reinforce different norms and
values"”different ideas of what it means to live a good life. Real
estate may be as important as religion in explaining the infamous gap
between red and blue states.

The Dallas model, prominent in the South and Southwest, sees a
growing population as a sign of urban health. Cities liberally permit
housing construction to accommodate new residents. The Los Angeles
model, common on the West Coast and in the Northeast Corridor,
discourages growth by limiting new housing. Instead of inviting
newcomers, this approach rewards longtime residents with big capital
gains and the political clout to block projects they don't like.

Apparently, we taxpayers gaurantee $645 billion in flood insurance so wealthy folks can build second homes on the beech, and have them wash away every few years at taxpayer expense.  USAToday, breaking from general habit, actually criticized a government giveaway in this article.  But I think that the John Stossel article linked by Q&O is better  (Memo to ABC web guys -- your articles stay online for years so it might be nice to add a year to that date in the byline).  Stossel points out that the tab for flood insurance understates the beachfront subsidy:  Costs for FEMA, disaster relief, Corps of Engineers projects, beech erosion abatement, etc. all are also government subsidies for living in dangerous locations.

But the outrage is that federal flood insurance exists at all. There is
a quarter-million-dollar limit on each payment, and as long as I build
my house in accordance with zoning laws and ordinances, there is no
limit on how many times the government will pay if a house keeps
washing away

From the USA Today:

In working-class areas here, homes for sale
have begun to move briskly. But in the ritzy Uptown district and other
well-to-do neighborhoods, the picture is bleaker. "New Price" and
"Reduced" signs adjoin grand Victorian homes "” symbols of a struggling
upscale housing market.

They're the lingering effects of Hurricane
Katrina. In coastal Louisiana and Mississippi, a glut of higher-end
homes points to soaring property insurance costs that are pricing many
people out of the market. It also speaks to the legions of doctors and
other professionals who have left the area and have yet to return. The
price of their exodus could be severe: Economic development experts
warn that if these professionals stay away en masse, it could cripple
the region's recovery.

For anyone with a stake in the region's recovery, the loss of
higher-income residents "” and their job skills "” is alarming. The
problem is compounded by the shortage of upper-income buyers willing to
put down stakes to replace those who have left.

So what is the problem?  I thought this would make New Orleans a progressive paradise.  No rich to get richer and create envy in the working classes.  No issues with income distribution.  Just a worker's paradise with no capitalist oppressors.  Huge portions of the populations dependent on the government and refusing to rebuild until they get government handouts to do so.  This sounds like everything Progressives are working for.  But...

Doctors, bankers and other professionals are "the backbone of the
community," says William H. Frey, a demographer at the Brookings
Institution, a Washington think tank. "They're the people who will help
the tax base. If they leave, they are going to be very hard to replace."

Oh, I see.  We don't really want them around, but we need milch cows we can tax so we can have handouts for everyone else.  It must be a hard tightrope for progressives to walk -- they hate rich people but need them to pay for their schemes.

Arizona is taking another typical step to protect incumbent businesses against new competitors:

"Arizona regulators have ordered a Seattle-based online home price estimator to stop doing business in the state." Zillow.com
has won wide popularity by applying algorithms to publicly available
data to come with rough estimates of the value of existing homes, which
it makes available for free through its site. The Arizona Board of
Appraisal says that Zillow should not be dispensing such information
without an appraiser's license.

Gee, we'd hate to give people the impression that a whole profession could be replaced by a few computer algorithms and some data base lookups.   I am not sure why, historically, but state governments have an incredible propensity to protect everyone in the real estate field from competition.  For years they have enforced licensing on real estate agents to help support that cartel that the Internet is only just now starting to break up.

By the way, here is another way you could write the headline for this news:  "Arizona Bans Giveaways.  Consumers Must Pay for Everything."  Oh, and my neighbor just sold his house.  The final price he got was within 4% of the Zillow estimate.  I will say that from the houses I am familiar with, they do a pretty good job (though I am sure they make mistakes, for example in neighborhoods with a lot of gentrification and a mix of old and new homes). 

Yet another weird SF fan points out this example of dueling Luddites.  Here is a particularly nice example:

My favorite definition of local comes from Columbia's Gussow, a
reporter for Time in the 1950s who went on to become a local-eating
pioneer. For 25 years, Gussow has lectured on the environmental (and
culinary) disadvantages of relying on a global food supply. Her most
oft-quoted statistic is that shipping a strawberry from California to
New York requires 435 calories of fossil fuel but provides the eater
with only 5 calories of nutrition. In her memoir, Gussow offers this
rather poetic meaning of local: "Within a day's leisurely drive of our
homes. [This] distance is entirely arbitrary. But then, so was the
decision made by others long ago that we ought to have produce from all
around the world."

It is hard to even begin with statement.  First, I am not sure anyone since Ghandi has really challenged the notion of division of labor, which in fact is what Gussow is lamenting.  Second, it would be interesting to ask Gussow what residents of Chad should do for locally-grown food.  Third, the last sentence is great, in that it works from the Dr. Evil Cabal theory of capitalism, positing that current trade patterns are based on "decisions made by others long ago."  And all these complaints don't even tought the silliness of somehow comparing food calories with calories of work from fossil fuels (unless Gussow is drinking Sterno at night, which might explain a lot). 

After years of getting grief, mostly from the left, for its eschewing of zoning and land-use ordinances that more "enlightened" places like San Francisco and Portland are so famous for, residents of Houston are reaping the benefits of their historical Laissez Faire approach:

Houston's gains are nothing like those seen in the past decade in
the Northeast and California, but that may be the secret to Houston's
success and the reason a bubble is unlikely to develop here. Land here
is abundant, and the city has some of the least-restrictive land-use
and construction rules in the nation. Those factors help supply to keep
pace with demand and keep prices within reach of a broad range of
potential buyers.

"We haven't had a bad year in the past decade," says Lorraine
Abercrombie, chairwoman of the local Realtors group and marketing
director for Greenwood King Properties.

Houston's model is in stark contrast to cities such as Boston and
San Francisco, which have strict zoning, exacting building codes and
laws governing historical preservation. Some economists, including
Edward Glaeser of Harvard University, say excessive regulation in such
cities has slowed construction to the point where demand has
outstripped supply, fueling a run-up in home prices.

In the once-sizzling markets where home prices are falling, housing
costs are double, triple or even quadruple those of Houston. The
danger, says Dr. Glaeser, is such places have priced out today's highly
skilled "knowledge workers," forcing them to live in a more affordable
locale where their contribution to the economy might not be as great.
"These are places where only the elite can live," Dr. Glaeser says.

This issue is one of those great examples of the statist game to enlarge government.  Step 1:  Progressives argue for having government restrict land use and implement tight zoning.  Step 2:  Housing prices skyrocket, enriching the elite and making it tough for ordinary workers to own housing.  Step 3:  Progressives decry that lack of affordable housing represents a 'market failure' that must be addressed with more regulation.  For example, builders in the SF Bay Area are required to sell X number of below market rate 'affordable' homes for every Y homes they sell at market rates.  Step 4:  Builders costs go up from the new regulations, further reducing supply and increasing prices.  And the cycle just repeats, as bad outcomes from government regulation are blamed on free markets, and used to justify more regulation.

Here is a trick to try -- every time you see the word "sprawl" in an article, replace it with "affordable housing."  It makes for interesting reading.

Hat tip to Tom Kirkendall, who runs a great blog in Houston.

At least one homebuilder is predicting doom and gloom:

"It would be difficult to characterize the position of
home builders as other than in a hard landing," says Robert Toll, chief
executive of luxury home builder Toll Brothers Inc., which reported yesterday that net income fell 19% in the third quarter ended July 31. (See related article.)

In his 40 years as a home builder, Mr. Toll says, he
has never seen a slump unfold like the current one. "I've never seen a
downturn in housing without a downturn in employment or... some
macroeconomic nasty condition that took housing down along with other
elements of the economy," he says. "This time, you've got low
unemployment, you've got job creation, you've got a stable stock market
and relatively low interest rates."...

In much of the country, property markets began cooling
rapidly in the second half of last year. Home builders were still
turning out houses at a rapid clip, and the surge of new and previously
occupied homes on the market convinced buyers there was no need to
hurry. Over the past year, the number of previously occupied homes
listed for sale nationwide has risen nearly 40%. In some metropolitan
areas, including Orlando and Phoenix, the supply has quadrupled.

I never got that excited about the run-up in the price of my home, so I won't worry too much if it falls again.   For the average homeowner, the paper-price run-up of housing prices doesn't really have much meaning unless they are considering moving soon to a lower-home-price area or they are going to retire and downsize.  My house supposedly doubled in value in the last four years.  We went out shopping for a home in the area, and you know what?  All the other prices doubled too.  I could trade my current house for about the same house I could trade it for four years ago.  The only really beneficial effect was that the increase in home equity made for useful collateral in a business loan I took out.

Of course, the home speculators may take a bath - there are several latecomers to the speculation / spec home business in my neighborhood who are holding houses that won't sell for the huge prices they are asking.  I posted that this was coming over a year ago, using a model for contrarian investing I learned at the Harvard Business School:  Do the opposite of what doctors and dentists are doing.

I write in this blog often on my frustrations with regulation, but last night I learned, if I did not know it already, that things could be much worse.  I had dinner with some friends in London who are in the middle of a home improvement and renovation project on their 1830's era townhouse.  Now, I just completed a renovation of my own (1980's era) home in Phoenix, and, while home improvement is always frustrating, I at least had few problems with the city.  Phoenix will let you do about anything you want to your home as long as you respect your setbacks and don't install a nuclear reactor.

My London friends were not so lucky.  Their home is rated a class 2 historic structure, which means it gets a bit less scrutiny than class 1 palaces and stuff, but it still comes in for a lot of regulation.  Their plans had to be approved in detail, and I mean in gory detail, with the local history Nazis.  And this is for a building that really has little historic or aesthetic value (the owners would be the first to admit this) in a neighborhood that was nearly blighted thirty years ago. 

My hosts pointed out the dining room lighting, which was really dim (you could not see your food very well) band told me that the authorities would not let them add lighting fixtures to the room.  No doorways, moldings, or walls could be changed.  The funniest example of this was a doorway cut in a wall 20 years ago.  The government inspector came through the house and said "well, that door is not historic but I like it so you can't change it."  They thought the inspector was joking, but, after a lot of effort to get approval to change the door, found out she was not kidding. 

The staircase to the top floor (originally the servant's quarters) was steep and unsafe for their children, but the inspector insisted it could not be changed because the "logic" of having the servant's quarters accessible by a difficult staircase needed to be maintained.  The homeowners rebuttal that they had no servants and were more concerned with safety than the history of class differences in Britain had no effect.  In several cases where the homeowners argued that the portions of their house they wanted to change was not original to the house (and therefore not covered by restrictions) it was made clear that the burden of proof was on them, the homeowners, and not on the government.

As one other funny sidebar, the basements and below grade areas of these homes apparently don't fall under this scrutiny or are exempted in some way.  As a result, everyone in his neighborhood seems to be tunneling out into their backyards to expand their house.  One homeowner bought three adjacent homes and tunneled out enough area for an indoor underground swimming pool.

Can you imagine if someday the US government decided that those 1970's homes were subject to such historic restrictions?  Suddenly, by government fiat, instead of being stuck forever with insufficient lighting and unsafe staircases, you might get stuck with orange shag carpet and gold-mirrored walls.  If you think this is ridiculous, read this.

Suffice it to say, I am tired of a relatively small group of people imposing their wishes on other people's property, a practice I call eminent domain without compensation.  If you want something specific done to a piece of property, then buy it and have at it.

Per the WSJ($):

The Internal Revenue Service dealt a serious blow to
organizations that provide down-payment assistance to home buyers in a
ruling that could curtail the ability of lower-income U.S. citizens to
purchase homes.

In the past eight years or so, a number of large
nonprofit organizations -- including Nehemiah Corp. of America, of
Sacramento, Calif., and AmeriDream Inc., of Gaithersburg, Md. -- have
doled out hundreds of millions of dollars of cash down-payment
assistance to mostly low- and moderate-income home buyers. According to
industry estimates, as many as 625,000 people were assisted by such
groups with their down payments between 2000-05. The programs have been
widely viewed as helping to increase the nation's homeownership rates,
which rose to 69% last year from 67% in 1999.

Why?  A lot of the tax code is skewed to promote home ownership.  So why is the IRS penalizing a program that seems to make a lot of sense?

In its ruling yesterday, the IRS said these aid groups funded largely
by home builders and other sellers no longer qualify for tax-exempt
status because the benefits of the programs are going to sellers and
profit-making entities. In its statement, the IRS said it has found
"that organizations claiming to be charities are being used to funnel
down-payment assistance from sellers to buyers through self-serving,
circular-financing arrangements."

Uh-oh.  Its those nasty profit making ventures again.  What's going on here?  Basically a home-builder gives the down payment for a home to a charity which in turn gives it to a buyer who in turn gives it back to the home-builder.  Let's say the down payment is 10%.  This arrangement acts as if the home-builder is giving the buyer a 10% discount, just circuitously.

So why is it so circuitous?  Why don't they just give the discount directly?  Is it some kind of tax dodge?  The answer to the latter is probably not.  From a corporate tax standpoint, the current circuitous charity method produces a 10% charitable donation on a 100% price sale.  The discount approach just produces a 90% price sale.  Tax wise, these are equivalent.  So why doesn't the home-builder, if it wants to be generous to low-income buyers, just give them the discount?

The answer is, because the government does not allow it! 

The majority of home buyers affected by this ruling are those who
qualify for mortgages insured by the Federal Housing Administration, a
federal agency responsible for aiding first-time and lower-income home
buyers. Under FHA guidelines, home buyers seeking mortgages must have
their own funds to use for a down payment or they can get assistance
from a relative, employer or a charity. They can't get assistance
directly from the seller.

The only argument against this practice made by the IRS is that the price of the house is increase by a fee added in the process by the charity that facilitates the transaction.  But this is one of those classic government regulatory jobs where the result that instead of getting a home with a bit of extra fee in the transaction, people will instead not be able to get a home at all.  No one points to anyone being hurt, and in fact the article points out that 35% of FHA loans depend on these charities for down payments.  (There is also some hint that this process may increase default rates, but the only evidence is that default rates for this type of transaction are up --  but default rates on mortgages are up across the board right now.)

And, by the way, what is wrong with charity by a business that, in addition to helping out a charitable cause, also helps out its business?  For example, my company gives coupons for free one-day jetski rentals at Lake Havasu all the time to charity auctions in our area.  We do it to support charity, but also because it provides us some free advertising and often people who win the certificate also show up with friends who become paying customers.  So what?  Is my charity tainted because I have created a win-win? 

Check out this very nice NY Times article (I think it is outside the firewall) on Harvard economist Edward Glaeser and his takes on urban economics and housing markets.  One study of his that resonates with me is his research about just how much modern regulation and zoning is contributing to the high cost of housing:

Glaeser and several colleagues considered two explanations. First, the
possibility that builders in the metro area were running out of land and that
home prices reflected that scarcity. The second hypothesis was that building
permits were scarce, not land. Had the 187 townships in the metro area created a
web of regulations that hindered building to such a degree that demand far
outstripped supply, driving prices up?

Almost as a rule, Glaeser is skeptical of the lack-of-land argument. He has
previously noted (with a collaborator, Matthew Kahn) that 95 percent of the
United States remains undeveloped and that if every American were given a house
on a quarter acre, so that every family of four had a full acre, that
distribution would not use up half the land in Texas. Most of Boston's metro
area, he concluded, wasn't particularly dense, and even in places where it was,
like the centers of Boston and Cambridge, there was ample opportunity to
construct higher buildings with more housing units.

So, after sorting through a mountain of data, Glaeser decided that the
housing crisis was man-made. The region's zoning regulations "” which were
enacted by locales in the first half of the 20th century to separate residential
land from commercial and industrial land and which generally promoted the
orderly growth of suburbs "” had become so various and complex in the second half
of the 20th century that they were limiting growth. Land-use rules of the 1920's
were meant to assure homeowners that their neighbors wouldn't raise hogs in
their backyards, throw up a shack on a sliver of land nearby or build a factory
next door, but the zoning rules of the 1970's and 1980's were different in
nature and effect. Regulations in Glaeser's new hometown of Weston, for
instance, made extremely large lot sizes mandatory in some neighborhoods and
placed high environmental hurdles (some reasonable, others not, in Glaeser's
view) in front of developers. Other towns passed ordinances governing sidewalks,
street widths, the shape of lots, septic lines and so on "” all with the result,
in Glaeser's analysis, of curtailing the supply of housing. The same phenomenon,
he says, has inflated prices in metro areas all along the East and West Coasts.

One of his other areas of research was new to me.  Glaeser argues that the long-lived nature of housing is part of what keeps cities like Detroit and St. Louis around long after the economic and demographic logic would have had them die. 

Glaeser and Gyourko determined that the durable nature of housing itself
explains this phenomenon. People can flee, but houses can take a century or more
to finally fall to pieces. "These places still exist," Glaeser says of Detroit
and St. Louis, "because the housing is permanent. And if you want to understand
why they're poor, it's actually also in part because the housing is permanent."
For Glaeser, this is the story not only of these two places but also of Buffalo,
Baltimore, Cleveland, Philadelphia and Pittsburgh "” the powerhouse cities of
America in 1950 that consistently and inexorably lost population over the next
50 years. It is not just that there were poor people and the jobs left and the
poor people were stuck there. "Thousands of poor come to Detroit each year and
live in places that are cheaper than any other place to live in part because
they've got durable housing still around," Glaeser says. The net population of
Detroit usually decreases each year, in other words, but the city still attracts
plenty of people drawn by its extreme affordability. As Gyourko points out, in
the year 2000 the median house price in Philadelphia was $59,700; in Detroit, it
was $63,600. Those prices are well below the actual construction costs of the
homes. "To build them new, it would cost at least $80,000," Gyourko says, "so
there's no builder who would build those today. And as long as those houses
remain, the people remain."

There's a lot more in the article, including a positive economic take on the role of roads and automobiles that he sets in counterpoint to the typical aesthetic arguments against sprawl. 

I found this next bit supremely ironic, though it matches my observations of these cities as well:

Zoning and housing supply ultimately determine not only who lives in a city but
also the very nature of these places. Boston, San Francisco and Manhattan are
obviously becoming rarefied destinations, mostly for America's elites (Glaeser
calls the cities "luxury goods"), with housing floating beyond the reach of the
young and the middle class. These cities' economies are in the process of
becoming boutique, too, accommodating only the most skilled and privileged.
Their desire to limit construction and grow not in buildings and population but
in prices has, in effect, begun to shape their destiny.

Residents of these cities turn up their noses at the aesthetics and red-state politics of places like Houston and Phoenix, piously believing that all the while they are the true friends of the poor, while at the same time putting in place a government-enforced housing system that only the rich can afford, driving those of moderate incomes to, well, Houston and Phoenix.

This last observation provides a fitting conclusion:

And what surprises him is that the changes in how we have treated property
rights for the last 40 years "” who gets permission to build, the size and
location of what owners are permitted to build "” have been the subject of
virtually no national dialogue, even as the effects on prices, in his view, have
been extraordinary.

I guess I avoided it when I was growing up in Houston, but there sure seems to be something in the water down there as first our Houston-raised president, and now Houston's police chief, seem awfully fond of surveillance.  From Tom Kirkendall:

Anne Linehan and Charles Kuffner are two of Houston's best bloggers on local political matters, and they have been covering an emerging story that amazingly appears to be flying below the radar screen of most Houstonians -- i.e., Houston Police Chief Harold Hurtt's
plan announced last week proposing to place surveillance cameras in
apartment complexes, downtown streets, shopping malls and even private homes to fight crime during a shortage of police officers.

Building permits should require malls and large apartment
complexes to install surveillance cameras, Hurtt said. And if a
homeowner requires repeated police response, it is reasonable to
require camera surveillance of the property, he said.

And the Chief's justification for surveillance cameras in private homes?:

"I know a lot of people are concerned about Big Brother,
but my response to that is, if you are not doing anything wrong, why
should you worry about it?"

H'mm. That is not the kind of reasoning that one would find in, say, The Federalist Papers, now is it?

If my blog was a satellite TV station, the following would be illegal:  Investigators Slam Katrina Response.  (hint - answer is NOT in the attached article, which is random)
.
.
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I'm sorry, did you miss it?  What did I do that was so wrong?  What I did was let you view content directly from a national content provider.  In the past, Reuters traditionally distributed its content through local distribution arms called newspapers.  This distribution model was required based on old technologies, where printing was a local not a national business.  Now that new technologies allow content providers to distribute their material nationally without these intermediaries, many have chosen to do so, as does Reuters at their web site.  This is one of the many reasons why newspapers today are struggling.

The TV business has historically had the same business model for roughly the same technological reasons.  National content providers (e.g. NBC, CBS) distributed content through local affiliates because broadcasting technologies were very local.  Today, with Satellite and cable, it is perfectly easy for anyone to access the national feeds, like you did in reading the Reuters site above.  EXCEPT, the US Congress has outlawed this practice.  Satellite providers, with a few exceptions for rural viewers, cannot provide viewers with the national feed -- it is illegal.  Unlike with print media, Congress has succumbed to powerful interest groups in the local TV market to protect their dying business model. 

As a result, DirectTV has satellites in space using up bandwidth by broadcasting 50 or more nearly identical copies of the same national feed, because it is forced to use the local affiliate's feed for each local market.   One of many adverse results is that while the price of print content has fallen to nearly zero, the price of broadcast content goes up.  And, from a personal standpoint, I nearly killed myself adjusting an old fashioned TV aerial on my roof last night because that is the only way I can get NBC's Olympics HDTV content, since my satellite provider can't afford to duplicated hundreds of local stations to get the networks on satellite in HDTV under the current asinine rules.  And I refuse to get cable because it was in large part for exactly this reason, to force customers away from satellite to cable, that the must-carry and related rules were passed, and I refuse to give them the satisfaction.

Postscript:  By the way, the Reuters article linked is worth reading too.  Take this snippet:

Richard Skinner, the inspector general of the Department of Homeland
Security, told the committee that FEMA purchased 24,967 manufactured
homes at a cost of $857.8 million to temporarily house Katrina victims.
But most of those homes are unused and the government is paying to
store them, he said.

Nearly 11,000 are sitting are sitting at a
government site in Hope, Arkansas, and are deteriorating because they
were improperly stored, he said.

I am on the Big Island of Hawaii today doing some business (yes, I know, lets hear all those violins).  I encountered a program here called Hawaiian Home Lands.  Apparently the state makes long-term leases of land for homes available at $1 a year to native Hawaiians.  Recipients of this largess may either get a lot with an existing home, or just an undeveloped lot they can build on (using special subsidized loans and with a number of special exemptions from building and development codes).  People may pass on the lease and the improvements they have built to their kids as long as their kids qualify for the program as well.

On its face, this appears to be one of those well-meaning government programs designed to deal with a problem that many resort destinations face, that locals who work in the resort communities often get priced out of the market for homes in the area where they work (Vail is the classic example of this problem).  Unfortunately, as with many government programs, this program has some perverse results.

Qualifying for the program requires that the recipient pass a strict racial test, which the HHL web site says is "50% or greater native Hawaiian blood".  Setting eligibility for a government program based on racial tests is pretty outlandish in and of itself, but it gets worse.  People taking advantage of the program need to think carefully about the race of their mate before they decide how much to invest in their home.  A 75% Hawaiian who marries a full-blooded Hawaiian will be able to pass the improvements on to their children (since the children will be more than 50% Hawaiian), and thus can justify a large home investment.  The same person who marries a full-blooded Japanese or African or Anglo-Saxon will not be able to pass their home on to their kids, since their kids will fail the race test.  So, not only is there a race-test for a government program, but the government is providing strong financial incentives not to "dilute" a certain race.  Hawaii über alles.

By the way, those who don't think that passing assets to one's kids is an important part of long-term investment thinking should compare the houses built by program participants who know their kids cannot inherit to those built by those who will be able to pass the investment to their kids -- there is no comparison.  This would make a very fertile ground for an economics graduate student trying to quantify the value people assign to the of passing assets to one's kids in long-range investment planning.

Gee, why isn't the Congress doing something about this price gouging in a scarce commodity post-Katrina?

Burger King is offering a $6,000 signing bonus to anyone who agrees to work for
a year at one of its New Orleans outlets. Rally's, a local restaurant chain, has
nearly doubled its pay for new employees to $10 an hour...

On any given day, contractors and business owners pass out flyers in
downtown New Orleans promising $17 to $20 an hour, plus benefits, for people
willing to swing a sledgehammer or cart away stinking debris from homes and
businesses devastated by Hurricane Katrina ...

"I'd say I'm paying two to three times as much as I would in normal
circumstances," said Iggie Perrin, the president of Southern Electronics, a
supplier in New Orleans, who has offered as much as $30 an hour when seeking
salvage workers on Canal Street...

I have hashed through my pain over the Supreme Court Kelo decision any number of times, including my post before the decision, after the decsion, following up on more New London antics, and following up on abuses in other locations (and here).

One of the first things I did after the decision was to write the CEO of Pfizer a letter, complaining about their role in getting the New London government to take peoples homes so their managers could have nice views of the water.  I was surprised at the time that more people, particularly those on the left who don't usually need a good excuse to bash corporations, didn't put more blame on Pfizer rather than just New London.  However, up until now, Pfizer has claimed that the redevelopment plan in New London had nothing to do with them, and they just came in later as a tenant.

Based on investigation by The Day ($), the New London paper (hat tip: Volokh), it is becoming more apparent that the Kelo takings were in fact driven mainly by specific requirements set by Pfizer, and that Pfizer was hip-deep in the redevelopment planning:

Pfizer's Fingerprints On Fort Trumbull Plan

Documents show the pharmaceutical giant was involved in the Fort Trumbull
project form its inception, even before announcing its research center would
expand into the New London neighborhood

In mid-July, as commentators and politicians around the country decried this
city's attempt to seize private homes for economic development on the Fort
Trumbull peninsula, a press release appeared on the Web site of Pfizer Inc.

The pharmaceutical company, whose $300 million research complex sits adjacent
to what remains of the neighborhood, announced that it wanted to set the record
straight on its involvement in the Fort Trumbull development project.

The project, the statement said, wasn't Pfizer's idea.

"We at Pfizer have been dismayed to see false and misleading claims appear in
the media that suggest Pfizer is somehow involved in this matter," the statement
said. The writers said the company "has no requirements nor interest in the
development of the land that is the subject of the case."

But a recent, months-long review of state records and correspondence from
1997 and 1998 "” when officials from the administration of then-Gov. John G.
Rowland were helping convince the pharmaceutical giant to build in New London "”
shows that statement is misleading, at best.

In fact, the company has been intimately involved in the project since its
inception, consulting with state and city officials about the plans for the
peninsula and helping to shape the vision of how the faded neighborhood might
eventually be transformed into a complex of high-end housing and office space,
anchored by a luxury hotel.

The records "” obtained by The Day through the state Freedom of Information
Act "” show that, at least as early as the fall of 1997, Pfizer executives and
state economic development officials were discussing the company's plans, not
just for a new research facility but for the surrounding neighborhood as
well.

And, after several requests, the state Department of Economic and Community
Development produced a document that both the state and Pfizer had at first said
did not exist: A 1997 sketch, prepared by CUH2A, Pfizer's design firm for its
new facility. Labeled as a "vision statement," it suggested various ways the
existing neighborhood and nearby vacant Navy facility could be replaced with a
"high end residential district," offices and retail businesses, expanded parking
and a marina.

Those interactions took place months before Pfizer announced that it would
build in the city, on the site of the former New London Mills linoleum factory,
and months before the New London Development Corp. announced its redevelopment
plans for the neighborhood and the former Naval Undersea Warfare Center next
door.

The paper concludes:

But in a series of recent interviews, several former high-ranking state
officials confirmed what opponents of the project have long insisted and what
the company continues to deny: The state's agreement to replace the existing
neighborhood was a condition of Pfizer's move here.

Current and former Pfizer executives, meanwhile, concede that the company
expected a major redevelopment of the area to occur and offered guidance, but
they strongly deny that they insisted on specific changes.

I read an interesting article in the NY Times, via Marginal Revolution, interviewing the CEO of homebuilder Toll Brothers about housing prices.  His assertion was:

"In Britain you pay seven times your annual income for a home; in the U.S. you
pay three and a half." The British get 330 square feet, per person, in their
homes; in the U.S., we get 750 square feet. Not only does Toll say he believes
the next generation of buyers will be paying twice as much of their annual
incomes; in terms of space, he also seems to think they're going to get only
half as much. "And that average, million-dollar insane home in the burbs? It's
going to be $4 million."

I don't necessarily buy this whole story.  For one, Mr. Toll has business reasons for taking a public position that prices will keep rising - after all, his customers buy his product in part as an investment, and would be leery about paying current prices if they thought prices might fall in the future.  Second, as I have talked about a number of times with petroleum, when prices of any product start to rise, observers always tend to underestimate market and technology responses that might bring supply more into balance.

However, the one exception I did make in my oil price posts was that government supply restrictions, both on lands that can be explored for oil as well as things like refinery permitting, may indeed put structural upward pressure on prices.  And in fact, this is where Mr. Toll puts the blame for high housing prices as well:

Toll agrees with Glaeser et
al. that the key force driving up prices is zoning and growth regulations. 
In New Jersey it now takes Toll Brothers up to two million dollars in legal fees
and ten years in time to get the permits necessary to build.

Which got me thinking that home owners (of which I am one) may be the worst rent-seekers of all.  Most people are already familiar with the very large tax breaks for home buyers, in the form of the mortgage interest tax deduction, that is not available to people who rent or to people who borrow for purposes other than home purchase.  However, it may be that a much larger implicit subsidy to home-owners is the government restrictions on new home supply.  By restricting supply, the government is keeping prices up for current home-owners and restricting new entrants who might compete with our homes in the resale market.

My liberal in-laws always give me this strange condescending look whenever it comes up that I have voted for a Republican at some point in time, that same look you might give the otherwise beloved family dog that keeps pooping on the front lawn.  As a libertarian, I seldom fully agree with any political candidate of either party.  Every election is a tradeoff:  Do I vote for the unelectable and perhaps truly odd Libertarian candidate?  Or do I vote for a mainstream party with which I disagree with about half of everything they promote?

So here is how I normally make the decision:  On pure self-interest.  Since, as a small business owner, I am much more likely to need strong protection of property rights than I am going to need an abortion, a gay marriage, or legal marijuana, I end up voting Republican more often than I vote Democrat.  For this reason, the Republican party has generally garnered a good many libertarian votes, and the two most identifiable libertarians in Congress (Flake and Paul) have both called themselves Republican, though I am sure with some reservations.

This relationship, however, may be at an end as Republicans are disavowing their libertarian wing, and returning to their large government tendencies of the 1970's.  Bush and his buddy Tom Delay are turning out to be classic Nixon Republicans.  The most recent evidence comes from the fact that the following is not from our Republican President, or our Republican Speaker of the House, but from the for-god-sakes Washington Post:

But this spirit of
forbearance has not touched the Louisiana congressional delegation. The
state's representatives have come up with a request for $250 billion in
federal reconstruction funds for Louisiana alone -- more than $50,000
per person in the state. This money would come on top of payouts from
businesses, national charities and insurers. And it would come on top
of the $62.3 billion that Congress has already appropriated for
emergency relief.

Like looters who seize six
televisions when their homes have room for only two, the Louisiana
legislators are out to grab more federal cash than they could possibly
spend usefully. ...

The Louisiana delegation has apparently devoted little thought
to the root causes of the Hurricane Katrina disaster. New Orleans was
flooded not because the Army Corps of Engineers had insufficient money
to build flood protections, but because its money was allocated by a
system of political patronage. ...

The Louisiana bill is so preposterous
that its authors can't possibly expect it to pass; it's just the first
round in a process of negotiation. But the risk is that the
administration and congressional leaders will accept the $250 billion
as a starting point, then declare a victory for fiscal sanity when they
bring the number down to, say, $150 billion. Instead, Congress should
ignore the Louisiana bill and force itself to think seriously about the
sort of reconstruction that makes sense.

The Republicans are lost.  Combine this kind of spending with their Patriot Act and Sarbabes-Oxley driven Big-Borther-Is-Watching intrusiveness, luke-warm committment to free-trade, and bizarre , and I find nothing at all attractive about the party.  Only the economic insanity of the opposition party continues to keep Republicans in power. 

More on the Louisiana money grab here.

After the Supreme Court's Kelo decision that effectively increases the power of local authorities to take whatever poperty they want and hand it over the private developers, a number of outraged politicians began reform efforts to limit takings in their state to true common-carrier public projects.  So what has happened to these efforts?  Virginia Postrel links to this update on California, but I will give you a hint:  They have had about the same level of success that every other effort to limit government power has had of late.

Predictably, local government and redevelopment officials reacted with alarm
that eminent domain could be severely restricted. The California Redevelopment
Association and other advocates geared up to kill the measures and in the
closing days of the legislative session, Democratic leaders ginned up a strategy
to cool off the anti-eminent domain fervor. They unveiled legislation that would
place a two-year moratorium on the seizure of private homes (but not commercial
property), and authorize a study of the practice, thus giving their members a
chance, or so it seemed, to side with the anti-eminent domain sentiment without
doing any real damage to redevelopment agencies.

Quietly, however, the moratorium bills were themselves put on the shelf as
the session ended - with Democrats blaming Republicans. "With every vote, they
tried to derail this prudent response," said Sen. Christine Kehoe, D-San Diego,
who carried one of the moratorium bills.

Kehoe's finger-pointing, however, was more than a little disingenuous since
the stalled bills required only simple majority votes and thus needed no
Republicans to go along. Clearly, this was a Democratic action, not a Republican
one, perhaps just a feint to pretend to do something about eminent domain
without actually doing anything to upset the apple cart.

She also points to this story in San Diego:

First came a report on the San Diego Model School Development Agency's push to
seize and demolish 188 homes in the thriving City Heights neighborhood to build
up to 509 town houses, condos and apartments more to its liking. The 30-acre
site is far from the decaying neighborhood normally targeted in redevelopment,
but blithe agency bureaucrats from the Soviet school of central
planning--knowing they could call the area "blighted" if they chose--didn't
care.

Then came yesterday's jaw-dropping story about National City's plan to use
its powers of eminent domain to force the Daily family to sell a parcel the
family leases to the Mossy family for one of its thriving car dealerships. After
the two sides couldn't agree on a sales price, Mossy representatives made plain
they would move their Nissan dealership--and the $1 million in annual sales and
property taxes it generates for National City--unless the city helped close the
deal. The City Council promptly caved in to Mossy's unsavory hardball tactics
and, in its role as the city redevelopment board, began looking into seizing the
land--after a mysterious epiphany in which members suddenly realized the site
suffered from a heretofore undetected case of "visual blight."

Yep, there's nothing like another large car dealership to fight visual blight.  Maybe San Diego should tear down the Del Coronado hotel and put a car dealership there too.

Note that this article is one in a series of articles on small business how-to's.  Past series have covered how to buy a business, labor audits, sales taxes, and workers comp.

I recently went through the process of obtaining an SBA (Small Business Administration) loan.  These are loans that are what I call "cash flow" loans, secured more by the companies earnings rather than collateral (though collateral may be required, see below).  SBA loans are written by private banks to standards set by the government.  If these standards are met, then bank loans under this program get a partial guarantee from the US government.

Before I go on to describe the process, I feel compelled to note that as a libertarian who does not believe the SBA should even exist and who believes that such loan guarantees are a subsidy program that should be eliminated, I was obviously conflicted by whether to seek out such a loan.  What finally made the decision for me is that this government program has crowded out all other private options.  Banks get about the same rate for an SBA loan as they would for a commercial loan without the guarantee.  Since the guarantee is out there and doesn't cost the bank anything, the bank has no reason not to insist on it?  Therefore, as a small company in the SBA size range, there just are not any banks willing to lend without the SBA guarantee.  This does not mean that in a free market without the SBA there would be no loans - it just means that when such a free subsidy program exists, banks are going to take it.

Types of Loans

The following is a gross simplification, but for a small company, there are basically two types of loans: secured loans and cash flow loans.  Secured loans are by far the most common for small businesses.  I, like nearly every entrepreneur I know, have had to pledge my house at various times as collateral for loans.  While it is fairly easy in today's market for a small company to get an equipment loan (typically lease-finance of a purchase) secured by hard assets, few lenders will provide loans for general business and working capital needs unless they are secured by something tangible -- homes, vehicles, receivables, etc. 

However, most businesses need capital for more things than just to buy hard goods.  Seasonal businesses may need loans to pay the rent in off-seasons, retail businesses need money to grow inventory and pre-pay for new leases, while opening new divisions may require paying salaries well in advance of first revenues.  Unfortunately, most businesses that claim to be business banks have no desire or talent to understand a business well enough to make a cash flow loan.  I am not talking about just Ethyl's Bank, but large banks like Bank of America and Wells Fargo who were stumped when I wanted to discuss some unique financing needs in my business.  I know people with a half million dollars a year in free cash flow out of their business who have trouble getting bankers to make unsecured cash flow loans.  And, as mentioned above, those who do make cash flow loans typically insist on having the SBA guarantee.

How an SBA Loan Works

I will not pretend to be an expert on all the intricacies and rules.  The SBA has a number of programs, offering loans of different lengths of time and for different purposes.  The SBA has programs for both revolving lines of credit as well as standard 10-15 year loans.  Each of these programs has different under-writing criteria, fees, and limitations, which your banker will have to explain to you.  Most SBA loans, including mine, fall under the section 7(a) program.  The SBA site tries to explain some of this.

As stated in the intro, an SBA 7(a) loan actually is issued by a bank, but to SBA underwriting criteria and with an SBA guarantee.  The SBA only guarantees a portion of the loan, something like 50-75% depending on the exact loan type, with the bank taking the rest of the risk.  These loans are issued at a floating rate of prime plus a percentage, and the SBA has rules that caps the rates as well as fees the bank can charge.  The SBA charges a substantial fee, in the 2-3% of total loan value, up front to the borrower for the guarantee.

Banks participate in the program in one of two ways.  Most any bank can originate an SBA loan, collecting all the (very substantial) paperwork needed by the SBA and forwarding it to the SBA for approval.  In addition to the underwriting time at the bank, the SBA can take many weeks to complete this analysis.   A smaller subset of banks have been pre-approved by the SBA to act as their underwriting agent - called a preferred lender or PLP.  This means that they can do the SBA's analysis for them.  This often greatly accelerates the process.  My total time form the bank's first data request to the final loan closing was less than a month, which is very fast.

Choosing the Bank is Critical

From the section above, it should be obvious that you should strongly consider working through a bank that has the preferred lender status with the SBA.  Note that having  or not having this status does not necessarily correlate with bank size.  The "expert" I was hooked up with at Bank of America (my main bank) was useless, and told me in so many words that it would be impossible for me to ever get an SBA loan.  I ended up working with Silver State Bank, a relatively new business bank out of Nevada.  They had the whole process automated, and when combined with a very knowledgeable banker on the front end named Jerry Woods here in Phoenix, the process was as smooth as silk and very, very fast.  In fact, I got the whole loan done in less time than it took BofA two years ago to do my line of credit.

Costs and Other Considerations

SBA loans are not cheap, and I would strongly urge you to pursue secured asset-backed loans as far as you can.  My total fees, including the cost of the guarantee, ran to about 3% of the total loan value.  In addition, I STILL had to put up collateral to back the non-guaranteed portion of the loan.  In retrospect, I think I did a bad job of negotiating with my banker on this.  No matter how good they are, bankers are still bankers and are going to attach every asset that can sit still for collateral whether they really need it or not.  I should have pushed back harder on this issue.  Overall, though, I am excited that I now have the capital to continue to grow my business.

PS-  If you want to enjoy some of this capital at work, come to Lake Havasu and rent a jet ski for a day!  All those other entrepreneurs out there are investing money in dead-end stuff like microchips and improved manufacturing --  Ha!  There is nothing like being able to tear around a big lake on 110HP to really make America competitive!