Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

[Polish_Silver]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

Homeownership under 45 down to lowest levels in 50 years. A

I think many of the countries problems boil down to just 2-3 very prosaic issues:

1) Housing costs rising continually
why: because population is increasing but zoning is static.

2) Health care costs rising without limit.
why: the legal & insurance structure promotes profiteering, opacity and price collusion, prevents choice and competition.
A "free market" would act like cars: a viable car gets cheaper over time because there is so much choice and competition.
(witness my 1999 mitsubishi galant, still running great, at an incredibly low cost of ownership)

A real "free market" can have moral and equality problems, but seldom a cost/efficiency issue.

3) College costs rising without limit and insistence on a bachelor's degree for nearly every good paying job.

None of these issues aligns with party positions .
Do the parties even have policies anymore ?
None of them is prominent in public dialog.
None of them will inspire mass protests or propel election victories.

There is something called "Beumal's disease" which is the idea that the sectors which are the least efficient
always dominate the cost. The efficient sectors keep reducing cost, so by definition they will never dominate
the over all cost.

A political version would be " A democracy is destroyed by problems too abstract to be resolved by elections controlled by
typical human beings. " The problems which are amenable to solution via election & democratic process do get solved.

We might see more "occupy" style mass movements, with vague moralistic rhetoric, but unable to articulate practical solutions or even
understand the problem.

How do you vote against the high cost of housing, health care, and tuition?

If you protest against these things, what change are you asking for?

How do you vote against corporations expanding in areas already overcrowded and over priced?

[dcarrigg]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

I think we're pretty much on a similar page with the diagnosis. I'm less sure about the prescription. Guess I'll explain why I think so:

1. So zoning is very variable around the US. Basically non-existent in Houston. Probably most restrictive in NYC. All kinds of cities and metro areas somewhere in between. But Houston and NYC prices have gone up at a similar rate, even if NYC was more expensive to begin with. And Houston ain't a bunch of cramped islands, there's open land all around, and it still experienced a price run-up and didn't densify. So I'm not sold that there's a ton of latent demand for multi-family housing towers that ain't being met. I actually see with my own eyes lots of local luxury condos that sit empty for years, some for over a decade now. Maybe they're just investment vehicles. Maybe they're sparsely used pieds-a-terre. I'm not sure. Regardless, somehow we ended up in a place where we can't build middle income housing any more. More luxury housing (top 10% sale price in its zip code) goes up than ever, can't sell it all (vacancy rates are 4 times higher for units built in the last decade than old units), and even some low-income housing gets built (not enough to meet demand, but some). Middle income housing is simply absent. For some reason, it was totally possible to throw together a bunch of 900sqft to 1,200sqft ranches and capes in the 1990s. But now developers just will not build them. The old ones from the 80s and 90s--anything after 78 that doesn't have lead paint--sell like hot cakes around here. They fly off the market in days. I mean, Fairfield County's its own world, but just seems to me that's what needs to be built and never gets built. 55+ luxury golf community condos go up as fast as they can make them. Luxury condos in 'lifestyle centers' go up as fast as they can make them. But no basic simple single family home. Something's broken with developer finance. I'm convinced of it. There are bills floating around that would tackle the zoning issue. But this is a case where I think even if the issue gets tackled, it's not actually going to do much good. I don't believe in "filtering," the idea folks sell that mansions and luxury condos will one day trickle-down. Housing lasts a long time. Jay Leno's in the old house the Vanderbuilts lived in. I mean, has to be true round your parts, right? You know age doesn't necessarily devalue a home. And they ain't making more land. So I really disagree with guys like this, even if he at least realizes the problem. Developers look for high returns. They're not getting them out of middle income housing. So they just won't build it. Ever. Probably there is some kind of incentive structure change that would fix this. But I fear the focus is so tightly fixed on zoning that we'll be stuck with even more empty luxury condos nobody can afford, and get no actual middle income housing built.

2. Healthcare, I truly believe, is different. I really think the market model fails at being efficient and always will. You can't shop when it's time to take an ambulance ride or go to the ER. You can't choose what you want to buy when you're unconscious. And the demand to not die on the operating table is infinitely elastic. For the same reason Crassus' private fire companies turned him into the richest man in ancient Rome, the price won't go down here either. The profit motive just fails in these situations. I think that's why every developed country on Earth other than the US has largely abandoned it. And all of them including the US heavily regulate it. The market is a great analogy for some things, and a great model for running some things. But I don't think it's universally useful, efficient, nor applicable in every situation. This is an obvious one. The whole idea of the exchanges was that competition would drive down prices. It doesn't. Nothing does. There is opacity. And clearing some of that out might help some. But the underlying problem, I think, is that the incentives are all bad. Insurance companies have a base incentive to deny treatment. Hospitals have a base incentive to overbill and overprescribe care. Pharma has a base incentive to jack drug prices up to the moon, especially if they're life or death drugs. Consumers don't have the medical knowledge nor the administrative knowledge to figure all this bullshit out. Even with complete transparency, the idea of the average consumer understanding health insurance plans or how to shop for cancer treatment is more like trying to have a 10 year old source precision machine parts from China than haggling over a dinnerware set at a flea market. The information asymmetry is really off the wall. I really dig deep into this stuff, and even I couldn't figure out what the best-of-three choice was my wife was offered when they rehashed her plan last year. All of them sucked. So I ran through scenarios. What does that mean? I literally modeled different plans for different scenarios, each for in-state and out-of-state instances where we'd have to use healthcare. What did I learn? That in-state where you're more likely to be in-network (except for anesthesiologists), 30% coinsurance with a $2,000 deductible tends to be cheaper than 0% coinsurance with a $4,000 deductible because of the way the two-tiered out-of-pocket max hits. So you're talking maybe paying $17,500 in a car accident instead of $19,300 or something. But flip the script to out-of-state where you'll almost certainly be all out of network, and the winner is the 20% coinsurance with a $3,000 deductible plan, which would "only" cost you about $24,800 while the 0% co-insurance stays the most expensive at $27,800. If it's cancer, the math's totally different still. I do stupid shit like this to try to shop. And even I couldn't tell you which one you should pick. In the end, it's a ******* crapshoot it's so complicated. That's a choice I don't need or want, to be honest. I'd rather they just gave her one than let her pick 3 and make you do all this math based on hypothetical shit you can't control. The ways co-insurance, co-payments, deductibles, networks, and out-of-pocket maximums interact are complex enough they may as well be goddamn fluid dynamics problems. And I'm pretty sure all the price transparency and competition in the world won't fix that.

3. The college problem is actually cheap. Very cheap compared to the other two. And so I think it's the easiest one to solve. Several states are already moving to do it. It'd be about $75 billion per year to make public colleges tuition free. That's not all that much in the grand scheme. Even throwing half that much at it would take the edge off. We could do it at the federal level. We could do it at the state level. A mix of both would solve it well. It sucks for millennials, because zoomers will get the free college and genx got much cheaper college and they'll be the ones stuck with the debt. So that's why the student loan forgiveness stuff is starting to get popular. Even there, it's a profit center for the feds. They can lower the rate down off 6.8% or whatever it is and still do just fine without costing the taxpayers anything. And they really don't need to charge that 1.1% origination fee. It wouldn't take much to fix that either. Even refund it to people who paid it. The finance fees strike me as totally unnecessary money grabbing by the federal student loan system. It's functionally a tax penalty on people who took student loans.

Finally, I think your last question's a very good one. Because a lot of the problem goes away if the big new growth companies spread out more and don't jam tens of thousands of jobs into already over-crowded rich places that neither want nor need them. Especially while other places would kill for them. They play the state incentive game. But they tend to put the low-wage stuff in places that play that game, never the high-wage stuff. The whole state econ development incentives thing has gotten whacky. The Foxconn deal in Wisconsin is the worst deal I've ever seen a state do. And I've seen what Pfizer did to New London. A federal law that limited it or penalized companies for taking state tax breaks so it was no longer so worth it or something would help. But really, a way to incentivize them to spread the jobs out would help too. And I think the best way to do that is with the stick, not the carrot. Worse? I suspect they're gonna learn that the hard way. Most states have 0 google jobs. None. Their Senators got no political incentive not to try and cut their throats. The defense industry is smart. It puts plants in all 50 states. It's distributed. So it's safe. Pharma and biotech play that game too. But software's too loaded into just a couple of states and ignoring al the others. For now, their lobbyists and bundlers pay enough people off to safely do it. But if a popular backlash comes, there's not a hell of a lot of risk in using them as punching bags either. And I think they day one of the big boys really gets knocked onto the canvas will be the day they start spreading out of their cloistered enclaves. At least that's my guess.

[ProdigyofZen]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

I think we're pretty much on a similar page with the diagnosis. I'm less sure about the prescription. Guess I'll explain why I think so:

3. The college problem is actually cheap. Very cheap compared to the other two. And so I think it's the easiest one to solve. Several states are already moving to do it. It'd be about $75 billion per year to make public colleges tuition free. That's not all that much in the grand scheme. Even throwing half that much at it would take the edge off. We could do it at the federal level. We could do it at the state level. A mix of both would solve it well. It sucks for millennials, because zoomers will get the free college and genx got much cheaper college and they'll be the ones stuck with the debt. So that's why the student loan forgiveness stuff is starting to get popular. Even there, it's a profit center for the feds. They can lower the rate down off 6.8% or whatever it is and still do just fine without costing the taxpayers anything. And they really don't need to charge that 1.1% origination fee. It wouldn't take much to fix that either. Even refund it to people who paid it. The finance fees strike me as totally unnecessary money grabbing by the federal student loan system. It's functionally a tax penalty on people who took student loans.
.

Actually it is easier than that. Income Sharing Agreements or "ISAs" are really taking hold and the students obtaining it are eliminating student loan debt. Purdue University is offering ISAs for example.

Now you have startups like Lambda School, which is revolutionizing education and is putting a serious dent in new student loan formation PLUS providing people with extremely high paying jobs. It took a lot of upfront capital to make it happen but it is 100% the right way to go. Austen Allred has been amazing and probably has done more for regular joes/janes the last two years since launch than any politician.

The concept is, teach students a valuable skill (tech - full stack, front end, back end, data scientist etc), then align school incentives with actual job outcomes/prospects.

Students pay nothing to attend, Lambda works the entire time to teach them to be a software developer and on getting them hired when they finish in 9 months.

Once they are hired at a minimum of 50k salary, they pay 17% of their income over two years back to Lambda School, capped at 30k, through an ISA agreement.

After that they are free of any obligation. It is also "not a loan" so it doesn't show up on the balance sheet of the individual when applying for loans etc.

We have now solved the incoming student loan problem.

But what about the 1.5 Trillion in current student loan debt owned by 45 million Americans?

Fortunately, I may have solved that major problem. Raising capital to solve it as I type.

[jk]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

1. no middle income housing being built- "middle" incomes too squeezed to support the debt to build profitably? so build for gov't subsidies and rich people.

2. healthcare- single payer is the most likely long term solution. the only alternative i can imagine are kaiser-like systems in which the insurer and the delivery system are one and the same, and highly regulated. natural monopolies could be benchmarked agains systems in big enough pop. centers to have competition. but single payer is a lot more straightforward. the big issue is how to manage the transition.

3. once upon a time there was no free education. then there were tax supported primary schools. then there were tax supported secondary schools. it's about time for tax supported tertiary education, maybe 2-4 years of public u., maybe apprenticeship programs. and we've got to drop the idea that everyone is supposed to learn calculus. [if anything it should be statistics, anyway.] there are a lot of useful and well paying trades.

[dcarrigg]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

I can't quite put my finger on it, jk, but I think there's a confluence of other things happening besides the simple (and obvious) shrinking of the middle class. I mean, it's smaller than it was, but it's still there and big. How did we get to a point where over 80% of units built nation-wide have been luxury units in the top 10% of the market for a decade straight, with a good chunk of the remainder being government subsidized low-income units? I'm not a developer. But it seems obvious to me that something sharply changed in how they decide what gets built since the housing bubble popped. I mean, I see local stories everywhere, every state, always something like this. Or, on the other side of the country:

Between 2010 and 2018, the housing permits pulled for the San Diego region total 67,235 for high-income homes, 2,326 for middle-income homes and 8,174 for low- and very low-income homes.

This is obviously way out of whack, right? I mean, it's very very clear "the market" (read: developers) is sharply overproducing high-income units and under-producing middle-income units.

But it just occurs to me that zoning, building codes, etc.--all the things they blame it on--haven't changed all that much since the 1990s, when more than half of the units built were middle income. If you can find new middle income new construction today, often it is a tradesman building for himself. But the tradesman still has to deal with zoning and code. And it's not that different. Studs are still 16" apart. Foundations are still poured concrete. Ceilings are still 8 or 9 feet. Well pumps and pressure tanks haven't changed much. Maybe you got air source heat pumps instead of baseboard or something, but it ain't that much more. Some septic tanks get fancier, but most are essentially the same. Maybe you could have gotten away with 150 amp service and now they want 200 amp or something. And you gotta have CO monitors and hard wired smoke detectors now. There are a few things that have changed that do cost something. But it shouldn't be enough to nearly halt all construction of middle class homes. And yet, middle-priced home construction has halted in America, and for over 10 years now. BUT, it's not like there's NO development. Like I said, they've been clearing land all over the place to build high-end condos attached to country clubs, stores and restaurants.

I think there's a lot of things happening that brought us here. I think a lot of the middle-income developers were smaller, local guys who got wiped out in great recession and nobody has popped up to replace them. I think the 55+ communities are particularly attractive to town managers because it means no children, so property tax with no school expenditures, so that's free revenue. I think the luxury construction offers a higher theoretical ROI, and so it's easier to raise capital for it, even if things don't sell as fast. I think the lack of middle-income construction actually puts a floor under the luxury market and keeps them from taking a bath on unsold/unrented inventory, so big developers holding don't want to do it. I think both domestic and international demand for speculative investments or third or fourth homes in new America luxury properties with property management is probably much higher than most people think. Then I think there's just plain old inertia. Lots of developers have been going around building luxury condo communities for 10 years now, and it's what they know works, so they keep doing it. Basically, there's a lot of events conspiring to prevent middle income construction.

BUT, it ain't like there haven't been a lot of middle income mortgages originated. There have. They're just all for old housing. We lost a decade of middle income unit construction. I'm just afraid we'll end up losing a generation of it before we wake up and realize what's going on and stop dreaming that if we just abolish zoning and building codes the problem will solve itself magically.

[kbird]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

I can't quite put my finger on it, jk, but I think there's a confluence of other things happening besides the simple (and obvious) shrinking of the middle class. I mean, it's smaller than it was, but it's still there and big. How did we get to a point where over 80% of units built nation-wide have been luxury units in the top 10% of the market for a decade straight, with a good chunk of the remainder being government subsidized low-income units? I'm not a developer. But it seems obvious to me that something sharply changed in how they decide what gets built since the housing bubble popped. I mean, I see local stories everywhere, every state, always something like this.

I've been wondering about this question for years. In Chicago, where I live, the population is declining, and the millionaire population is definitely declining. At the same time, there has been a massive, decade-long building boom, mostly to create luxury units in downtown high-rises. Despite the seemingly large increase in supply, rents keep going up, year after year. How does this happen? It feels to me like the laws of supply and demand no longer apply.

My uninformed speculation is that the new units are being sold to Chinese or Russian foreigners as a store of value and a place to put laundered money. That would explain how demand has met the increase of supply. But the truth is I just don't get it.

[jk]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

when i spoke of a squeezed middle class i wasn't thinking about their numbers [population], but their finances. i was speculating that for developers to make the money they need or want to make, middle class housing would have to be priced above middle class affordability. easier to put in granite counter tops and better fixtures and flooring and call it a luxury unit.

[DSpencer]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

I've been wondering about this question for years. In Chicago, where I live, the population is declining, and the millionaire population is definitely declining. At the same time, there has been a massive, decade-long building boom, mostly to create luxury units in downtown high-rises. Despite the seemingly large increase in supply, rents keep going up, year after year. How does this happen? It feels to me like the laws of supply and demand no longer apply.

My uninformed speculation is that the new units are being sold to Chinese or Russian foreigners as a store of value and a place to put laundered money. That would explain how demand has met the increase of supply. But the truth is I just don't get it.

Is it possible that some of what is happening is that the middle class live in older versions of "luxury units"? Who determines what is considered luxury vs middle class in the first place? I also don't think that looking only at major cities is representative of the whole country.

[dcarrigg]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

Yeah, I mean looks to me like there's just over 600 new construction units on the market there right now, and of those maybe 230 or so are in the loop and their median price is about $2.3 million. I'm sure this has been the typical trend since the housing bubble popped.

I mean, the nation-wide numbers follow. In 2002 there were about 198,000 new construction units. Excluding land values, only 6% cost over $400,000 to construct in 2002. In 2018 there were about 119,000 new construction units. 27% cost over $400,000 to construct, excluding land costs. It's not just the underlying land value. The physical units are being built to high-end specifications.

Or, look at it from the other end. Developers built about 130,000 units in America that cost under $200,000 to construct (land not included) in 2002. By 2018, they only built about 30,000. And most of them were income-restricted units for low-income people. Middle income housing just fell off a cliff.

[dcarrigg]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

So the determination is simply by local market. E.g. they're selling for the top 10% of units sold that year in their ZIP code. Nationally, about 65% of new units in 2002 sold for prices less than the 90th percentile in their ZIP code. Now only about 15% do. All the new stuff coming online is being shunted to the high end, excepting the low-end government-subsidized units that come online at about the same rate as before the crash. I don't believe housing trickles down. My house is older than my great grandpa. It was a house for a middle class shmuck then, and it remains so. The fancier houses up on the hill built in the 18th century are still for the wealthier people. I mean, I'm sure there are some cases where a neighborhood goes to shit and an old mansion gets subdivided. But generally, looking around, I don't see a lot of housing trickle down (filtering). And at any rate, even if it did, I think it must take a good goddamn long time, as in two or more generations. Meanwhile, middle-income housing construction fell off a cliff for a decade.

[jk]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

does the shift in production date to the financial crisis?

also, i don't have the numbers at hand, but modern construction is producing houses which are much bigger than earlier generations. maximizing relative to lot cost?

[kbird]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

I'm an Eastham investor. I mention this because their target customers are middle-income renters. Over the past decade, they have consistently said the following:

1. Most of the new building taking place is adding to the supply of A-class building (luxury) units. Therefore Eastham isn't seeing as much competition for (middle-income) rentals as the high-end rentals are experiencing.
2. To the extent that a few of the buildings are being developed which are targeted at middle-income renters, the cost to build is much higher than what it would cost for Eastham to buy and fix up.

I think this supports the idea that it isn't profitable to develop middle-class housing anymore, for whatever reason. If true, though, I still don't understand the reason.

[dcarrigg]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

So it starts dropping in 04-05 and really slides off a cliff in 09-10 and never recovers. The worst year on record for under 400k unit construction was last year, and it's not the worst year on record for total unit construction by a long shot. Meanwhile the top-end stuff picks up in 2011-2012 and has never been higher than last year. Seems to me like a reasonable hypothesis to guess something changed and it had to do with the great recession.

They are bigger. You're right about that. But that has been trending up at a constant rate since about '85, largely because the top end was getting that much bigger, so I think the high-end is really skewing the averages. And, of course, when you're building 80% high end, is it the chicken or the egg? It might be a game of maximizing relative to lot cost. But why the sharp change over the last decade? Why weren't they maximizing the same way in the early aughts? I admit, I don't got all the answers here. The data just suggests to me that there's something more than just zoning and building codes at play. Maybe a lot of somethings.

[kbird]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

Maybe the cost to build has increased so much in recent years, for whatever reason, that you can only make a profit if it's subsidized or if it's targeted at the super high-end.

I don't know why the cost to build would have increased so much, but the two ideas that come to mind are regulations and the cost of materials.

[dcarrigg]

Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

Sure. I mean, here's the average contract price excluding the cost of land and lot improvements. And I think you're onto something with the cost of materials. But it's also a choice, right? They don't have to spring for oak floors and granite counters and stainless steel appliances etc. etc. But for some odd reason they do for every single unsubsidized unit they build these days, and they'd rather it take longer to sell for more than churn through cheaper units faster at higher volumes. Either way, when the base cost to build is over $350k, and you gotta earn a return and price in the land on top of that, you're talking a very expensive average new home.