Tuesday, November 25, 2008

Sierra Club = misdirected energy

I'm not sure about the Sierra club's ventures into urban planning.

There are more serious environmental issues for this region where the Sierra Club could be a natural leader (lets start with endangered species and salmon runs), yet it seems focused on where Spanos builds apartments as its top cause.

More on San Joaquin County homebuilding in the coming weeks.

Friday, November 21, 2008

Unemployment Friday

The dismal news from the EDD is here.

San Joaquin County data is heading the wrong way fast. Stockton has been amazingly resilient through the housing collapse, with strong growth in Ag-related sectors and a vibrant wholesale, transportation, warehousing sector holding up the local employment picture. However, these two sectors are going to be hit hard by the U.S. consumer recession and global downturn. This months data shows those sectors declining and it will likely accelerate. After being one of the last metros to lose jobs on a year over year basis, Stockton is now down 1.2% year-year.

The Sacramento area has had a dismal 6 months in employment. This month wasn't as bad, as there was real strength in education at all levels (private, public, higher ed and K-12), even more than the typical fall surge. Retail continues to be weak, and there will be less than the usual holiday surge next month.

The East Bay (Alameda, Contra Costa) continue to be the biggest job losers in the region, down 2.1%, over 22,000 jobs in the past 12 months. This is bad news for commuters from San Joaquin, Stanislaus and Solano counties.

San Francisco and San Jose continue to be the top performers in the state. They are still slightly positive on jobs year-year, but may turn negative in next months report. The financial market crisis and stock market crash will be felt in these high income areas.

Thursday, November 20, 2008

Water Summit Notes

Some thoughts from listening to the panels at the San Joaquin Business Council Water Summit

1. A good case was made for Regional Self-sufficiency, most notably by Tom Zuckerman. See this plan.

2. Dino Cortopassi was the only person I heard raise the point that higher water prices could be part of the solution. It is the proven best way to encourage conservation and reduce waste, and needs to be a bigger part of the conversation.

3. Two weeks after the election, and I saw my first political ad of the 2010 Governor's race. Lieutenant Governor John Garamendi brought a video bio to introduce himself. His speech was actually ok, but I'm tired of political ads.

4. I picked up a nice Restore the Delta bumpersticker.

5. Kern County Supervisor Ray Watson made an interesting comment to the effect of "We have oil, you have water" in the context of regions working together. I couldn't help but wonder about the reaction in Bakersfield to the proposed oil severance tax. I'm not surprised that they don't think it's fair. However, it seems it is ok to take water from the Delta as long as the export users pay the cost for conveyance. If we pay for a pipeline to Bakersfield, does the Delta get a right to the oil?

Monday, November 17, 2008

State Budget Proposals

There are a lot of tough choices on the table. Long-term solutions should be preferred whenever possible. I expect a new federal stimulus plan for Washington will provide some short-term money.

Taxes and Fee Increase Proposals (not a full list, in order from best to worst):

Expand Sales Tax to Services: A good long-term policy. I would go further than the Governor's proposal and add even more items such as movie tickets. Helps local governments too.

Alcohol Tax: Proposed increase is modest and good policy.

Oil Severance Tax: Yes.

Community College Tuition Increases: Yes. These fees are incredibly low in CA compared to other states. I would go beyond the LAO proposal and double and triple these fees, which will still leave them at half the level (or less) of other states.

Temporary Increase in Sales Tax Rate: No. A temporary solution, and the rate is already too high.

Temporary Income Tax Surcharge: No (although less bad than the temporary sales tax).

Cut State Holidays: Yes, this is a reasonable concession to ask of state employees.

Furlough Days for State Employees: A temporary budget solution that is tough on morale and has long-term impacts on performance. If the state payroll must be trimmed, I would prefer to strategically cut the state workforce but this is slower to implement than furloughs.

Increase vehicle fees: No. I prefer to increase the marginal costs of operating a vehicle (gas tax, toll roads) than the fixed costs of owning one (registration fees). Severin Borenstein has an interesting proposal in the today's Sacramento Bee.

Friday, November 14, 2008

FDIC Foreclosure Plan

The FDIC releases their plan today.

Marginally better than the FHFA plan released earlier this week (described below) in that it reaches more problem loans and provides some carrots and sticks for lenders to participate.

However, it still doesn't focus on principal reduction. "Principal forbearance" is different in that you are still required to pay the entire original loan balance in full if you sell or refinance. This is going to result in lots of short sale issues down the road, and still leaves too many families with an incentive to default.

I think principal forgiveness with shared appreciation mechanisms can be much more effective. The % by which future appreciation is shared with the lender who helped you out can be a function of the amount of principal forgiven. Before embarking on yet another plan, why not modify the plan passed this summer.

Thursday, November 13, 2008

Foreclosure Prevention Plans

We have been waiting for weeks to hear the new plan for preventing foreclosures, and we get this?

If you don't have a plan that is actually going to help, do us a favor and don't bother with a news conference. Among it's many problems...

1. Only applies to Fannie and Freddie loans. (Doesn't apply to most subprime loans.)
2. You have to be 3 months behind to qualify. (Great incentive to default.)
3. No principal reduction, and the payment is set to a % of your income. (Doesn't change your upside down mortgage status, thereby not eliminating the root cause of long-term default.)

A real loan modification program is very important for the Valley.

The Frank-Dodd FHA refinancing bill passed this summer isn't getting much business since it started October 1. This is the one that would put people in a new fixed rate FHA loan at 90% of homes value if the lender agreed to accept 85% of the home's current appraised value to pay off the original mortgage. It's funny to think this was criticized as an overly generous taxpayer bailout this summer. Things have certainly changed. Why would anyone be interested in this program now, when the bailout plans are getting more generous by the day. I still think this original plan had the basics right, and would prefer to see it modified to be more attractive to borrowers and lenders - inevitably increasing the risk of loss for taxpayers.

Rather than refinance the loan at 85-90% of current home value as in the original plan, why not set the refinance loan at 95-100% of current home value. Rather than have future appreciation shared with the government (if house is sold at a profit in the future), have this future appreciation shared with the lender who wrote down the principal. Of course, the borrowers would still need the income to qualify for their new fixed mortgage and it would only be available to owner occupants.

This greatly increases the incentives for lenders to participate. It is a better deal for most homeowners than mailing the lender their keys. For any loan modification program, dealing with the securitization of mortgages (multiple owners) and 2nd mortgages continues to be one of the toughest issues.

See these links for better explanations of shared appreciation mortgages (SAM)
Brookings Institution and see Rescuing Main Street in this essay

A Bet

I offer to bet the authors of the canal PPIC report $10,000 that desalination costs will drop below $1000 per acre foot before the state’s population reaches 46 million. Following the style of the PPIC report, I propose that both the amount of the bet and desalination costs be adjusted by changes in the Engineering News Records’ price index.

If they stand behind their report, they would be foolish not to accept.
The PPIC results hinge on the following 2 assumptions about the world in 2050.
1. California’s population will be 65 million.
2. Desalination costs will be $2072 per acre foot (in constant 2008 dollars)
As explained here and here, I think these assumptions are both way too high and drive their result endorsing a peripheral canal. They make some other bad assumptions too, but these are the worst.

I think a much more likely scenario is:
1. California’s population will be 55 million.
2. Desalination costs will be $1000 per acre foot or lower.

There is a lot of space between these two scenarios. If the PPIC team really believes their assumptions, they should be very willing to bet against my predictions. Since there is a pretty good chance that none of us will still be alive in 2050, some adjustment is necessary for this to be any fun. To make it to 65 million in 2050, the California population would need to get to about 46 million by 2020. Note that this really skews things in their favor, since I should only have a dozen years for this desalination technological advance to occur. If the PPIC team believes in their research, my offer should look like a sure thing to them, and they should be eager to accept.
This proposed wager is inspired by the famous Simon-Ehrlich bet.

December 1 update: I have posted an alternative bet here.

Peripheral Canal Economics

The PPIC report is the most influential economic study on the peripheral canal. This is unfortunate, because it is poorly done.

Read my assessment here. http://forecast.pacific.edu/articles/peripheral%20canal%20PPIC%20review.pdf This review assumes the reader has a working knowledge of the PPIC report.

In Short: The key assumptions underlying their cost calculations are undocumented, and greatly exceed all reputable forecasts. When it comes to future population growth, they made up a huge number, then fabricate a reference to justify it. On desalination costs, they provide no references, and when I asked the authors if they could provide some - they were unable and said the costs reflected their professional judgement. There are plenty of references on desalination costs, it's just that they are all well below their assumptions.

If it were not for these phony numbers buried in Appendix F, their entire argument supporting the peripheral canal would collapse. A study that is very impressive in many ways (approach, detailed models, some impressive researchers, nicely produced) is built on a foundation of rotten data.

Update: Even worse than the desalination cost assumption is their assumed cost of water recycling. They put this at over $1400af, when new facilities are operating at less than half this cost. Finally, I should point out that the approach of evaluating the costs for only a single, far distant year (2050) is not considered sound economics (they should evaluate the stream of costs/benefits over time), and tilts their analysis in favor of a peripheral canal.

Saturday, November 1, 2008

Welcome to the Valley Economy

Welcome to this blog. Most of the posts will be about the economy, including many local issues in the Central Valley. Most local posts will be about the Stockton and Sacramento regions. I'm also interested in issues regarding natural resources, growth and the environment from a business and economic perspective.