California’s Achilles Heel

Property Values adjusted

Foon Rhee puts his finger on the real Achilles Heel of the Golden State economy-high real estate prices.  He draws on a Metrocosm.com cartography to highlight the extreme disparity in regional property values, with California ranked among the five most highly valued states, along with New York, Florida, Texas and Pennsylvania.  These five account for “About 44 percent of the total property value of $33 trillion in the entire country.”

Although high property values are a boon to property owners, they also  increase economic risks, hinder growth and exacerbate poverty.

According to Barron’s, California is home to six of  the nation’s top 10 most overvalued housing markets in the nation: Sacramento (14.9 percent), Oakland (12.8), Anaheim (10.9), Riverside (10.6), San Francisco (7.7) and San Diego (6.6).  According to Rhee “home construction isn’t a sustainable strategy for long-term prosperity” and “There are signs… that another bubble is starting to form” like the one that preceded “the housing crash that plunged us into the Great Recession.”

The Sacramento Bee’s Phillip Reese estimates that “about two-thirds of the [Sacramento] region’s households would be unable to afford the median-priced home at $320,000.”

The United Way’s study Struggling to Get By  highlights the link between housing costs and poverty rates.  Even though California’s official 17% poverty rate isn’t much higher than the nation’s 15.9% rate, if housing costs are factored in to calculate a “real cost measure” then “1 in 3 households in California, over 3.2 million families—including those with income well above the Federal Poverty Level—struggle every month to meet basic needs”  with “most concentrated in the northern coastal region, the Central Valley, and in the southern metropolitan areas.”  Regional rate by this measure range from 80% in inner-city Los Angeles to 9 percent in the affluent suburbs of Contra Costa County.

It’s chronic shortage of affordable housing continues to be the Golden State’s chief economic drag.

United Way Real Cost Measure

Source: United Way

 

 

 

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Is Population to Blame for the Drought?

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The current drought has resurrected–and put a fine point on–the long simmering debate about the pluses and minuses of California’s population growth.  Is growth the problem in regards to water or do we just need better management?  This question could also be asked about another serious economic issue for California–housing supply and affordability.

According to Edwin Pattison, general manager of the Mountain House Community Services District, “When you increase a population significantly, you reach a point of what’s called ‘demand hardening,’ and you cannot conserve your way out of a situation where there’s just too many people and overcommitment of demand across the spectrum.”

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According to the California Department of Finance, by 2060 the state’s population will grow from  39 million people now to more than 51 million.

Californians for Population Stabilization want to blame the drought on immigration, “Virtually all of California’s population growth is from immigration. Let’s slow immigration and save some California for tomorrow.”  This reflects the public’s and economists’ mixed feelings about immigration’s effect on the economy, largely driven by the uncertainty-and subjectivity of-tallying up net gains/losses and the sorting out winners and losers.

“It’s totally the wrong question,” said Dowell Myers, a USC demography professor. “Without immigrants, California would be dead as a doornail. We don’t have enough children right now as it is to replace the workforce and the tax base … when Californians retire.”

Similarly, according to Heather Cooley of the Pacific Institute, the challenge is not the size of the population, but “how we develop, and the reality is we can be developing a lot better.”  Southern California water consumption has remained flat for 15 years, despite population growth.

“The notion that there’s too many people here is frankly absurd,” asserts Richard Sybert (former director of Gov. Wilson’s office of planning and research}.  “It’s frankly not borne out by the numbers … You could halve the population here – say we have 20 million instead of 40 million – and there would still be a drought.”

Since agriculture accounts for 80% of California water use, the solution could be a small shift of water from farm to urban uses according to Gregory Weber of the California Urban Water Conservation Council.  “I think there’s plenty of room for California to grow,” Weber said. “How it should grow, how big it should grow, these are I think some of the major pressing questions that are facing the state today.”

So is the key better growth management, better water management, or both?

The California Water Blog describes How To Manage Drought with five key prescriptions for better water management:

  • Get inside consumers’ heads – shift from engineering solutions to understanding human behavior.
  • Increase role of water markets – increased use of water transfers “would introduce further flexibility in managing water resources.”
  • Tiered water pricing works – consumers respond to higher prices.
  • Keep closer tabs on crop water use – use better water-use tracking and estimation.
  • Monitor and manage our groundwater – excessive groundwater pumping in dry years must be replenished in wet years.

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California jobs report; more shopping, more venture cap, more job seekers

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Beacon Economics provides a good roundup of mixed but generally positive May employment news for California.  The state’s nonfarm job growth outpaced the nation by  “expanding by 3.0% over the past year compared to a more modest 2.2% growth rate in the U.S. overall.”

A mixed signal came from a surge of  nearly 72,000 additions to the labor force–a  positive “sign of worker’s increased optimism about their employment prospects”–which ticked up the state’s unemployment rate from 6.3 to 6.4 percent in May.

With “consumers are growing more comfortable spending income and making larger retail purchases” retail trade employment added 8,600 positions.

Professional and Business Services employment surged, with strong growth in Scientific, and Technical Services, driven by “venture capital money” more of which “has been raised in the state than at any time since 2000.”

Despite losses in the farm sector, “to date, the overall California economy has yet to suffer serious setbacks from the drought.”

Check out Beacon’s full report including charts and talbes

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Gas price conundrum

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Foon Rhee’s recent editorial about California’s premium gas prices points to a true conundrum. High  prices are bad for the wallet but good for the environment.

Cal Gas price gapIn May Californians paid the highest premium for gasoline compared to the rest of the nation since the turn of the century –$1.03– that may have cost Californians an additional $1 billion at the pump.   But that premium has had long-standing benefits for the environment: greater fuel and energy efficiency. Relative to its economic heft, California has long left a smaller environmental footprint than most other states.  This is the result of factors including dense population clusters (less long distance rural driving), a moderate climate (lower demand for winter heating fuels), fierce regulators, and HIGH PRICES.

Arguably, that last item, in concert  with the regulatory environment, is the most effective driver of energy efficiency .  It’s a constant motivation that steers most people to make every day decisions in the name of their pocketbooks, such as preferring shorter commutes and more fuel-efficient cars.  Given these efficiencies, the total aggregate financial hit to the state economy is not as big as it would be otherwise or in other states.

According to Gordon Schremp of the California Energy Commission, the “blame” for the current spike in the gas premium was laid on several factors according to Gordon Schremp of the California Energy Commission:

  • California is an isolated gasoline market.  Pipes ship gas out, not in.  This means that gas can’t be easily imported to compensate for unexpected shortages.  Imported gas accounts for only 3-5 percent of gas supply.
  • Higher taxes including the application of  the state’s cap-and-trade system
  • Higher production costs for the transition from winter to summer gasoline mixes.

The good news from these high prices is that Californians will continue see value in fuel efficiency which should pay substantial, but generally unappreciated, environmental benefits.  In this case, what’s bad for budget is good for the soul.

Capture gas gap

 

 

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Rising tides don’t lift boats like they used to 

 
This shouldn’t be news to anyone paying attention.  Another bit of evidence of the increasing irrelevance of  standard economic indicators for the wellbeing of average everyday people.  According to Jon Ortiz, a recent Field Poll shows 

  • “The disconnect between attitudes about personal finances and larger economic conditions runs counter to conventional wisdom.” 
  • “More Californians have been negative than positive about the state’s economy for 13 years in a row.”

The article quoted Andrea Torain, a laboratory supervisor for UC Davis, “The jobs being added aren’t jobs you raise a family on.”

This disconnect has been evident for a while, especially following the popping of the dot.com bubble.  Most of the most watched indicators don’t clearly reflect the impact of rising economic insecurity, particularly those most relevant to middle class and aspiring middle class families. The standard output-job-income-inflation yardsticks don’t reflect factors such as skyhigh higher education costs, diminishing  pension and health benefits, unaffordable day care costs, the proliferation of part time and contingent employment, and so on.

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Droning On

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Can the emerging unmanned aerial vehicle (UAV or “drone”) industry lead to a turnaround for California’s aerospace industry that was decimated by the DoD budget cuts and industry consolidation that took place following the end of the Cold War.

Torey Van Oot in the Sacramento Bee’s article
California lawmakers look to regulate, attract drone industry to state” contemplates the implications of potential nonmilitary applications of Drones including its economic impact.

“An expected boom in the use of nonmilitary “unmanned aerial vehicles,” commonly known as drones, has California looking to regain some of the aviation industry swagger it enjoyed for decades”

“At stake for California and other states is a piece of $82 billion in economic activity the drone industry estimates it will generate between 2015 and 2025.”

California is home to many leading industries, such as such as computer and communication technologies, that are integral components of UAVs. Thus these developments offer the prospect of a resurgent California aerospace industry. However it’s seems unlikely that the Golden State can come close to restoring this sector of the economy to its past glory.

See The Man Who Invented the Predator for a brief history of the birth of this dynamic technology and its garage-based origins in Hacienda Heights in Los Angeles.

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The Real Problem

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The long-awaited recovery of California’s housing markets is welcome news. But it’s also time to reconsider that exorbitant housing costs are arguably the Golden State’s principal economic shortcoming.

Out of Reach by the National Low Income Housing Coalition compares and contrasts on a state-by-state basis “the gap between wages and rents across the country.” Unfortunately, California compares quite unfavorably with most states (and Texas in particular).

The collapse of the housing market in the wake of the Great Recession drove up the demand for rental units. According to the U.S. Census, in 2011, over one third of American households were renters. The nation’s rental vacancy rate dropped from 8% directly at the beginning of the recession to 4.5% by the third quarter of 2012. The, so far, inadequate investment in new affordable housing units coupled with the fact that nearly a third of renter households live in poverty has created a severe affordability problem.

The map above indicates the number of hours of minimum wage work would be needed to pay rent for a typical two-bedroom apartment. As you can see, California ranks as nearly the least affordable state, behind only Hawaii, Maryland/D.C., New York, and New Jersey. California is also notably less affordable than Texas, which largely explains the migration of middle and low-income households to the Longhorn State.

The map below estimates the full-time hourly wage that a household must earn to afford a decent apartment at the HUD estimated Fair Market Rent (FMR), while spending no more than 30% of income on housing costs.

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