Basing mortgage modifications completely on income is a bad idea.

I have said all along that the foreclosure prevention plan was the least effective part of Obama's 3 part economic strategy: Stimulus, bank bailout, mortgage modifications.

Loan modifications in this plan are completely determined by income, and making the payment "affordable." This distorts incentives, rewards lying, is unfair in several ways, and does nothing to reduce underwater mortgages (the biggest cause of foreclosures). The cost to live in a house should be connected to the underlying value of the house, it shouldn't be income based like college financial aid.

I prefer mortgage modifications focus on principal reduction, preferably under a shared appreciation set-up so that the party that finances the principal reduction (whether lender or govt. subsidy or some combination) is at least partially repaid if the home is sold in the future. Principal reduction will likely be more expensive or require some heavy handed govt. action on lenders. However, it also will be much more effective preventing foreclosures (thereby improving social welfare) and more fair. Income verification matters for these modifications, but at the end of the process to determine whether you can afford the house/loan as it does for regular mortgages.

There were proposals for this kind of plan last fall, but the administration went with the income approach. Now that it isn't working that well, it isn't too late to try something new. The foreclosure problem isn't going away anytime soon.

A good article in the New York Times highlights some of the issues. Some clips below, but I recommend the whole article.

The banks, and the government, are soon going to have to decide what to do about borrowers who are making the modified payments but have not provided the documents (to prove their income) after repeated efforts to obtain them. Should the banks just take the money and let the preliminary modification turn permanent? Or should they foreclose?Those decisions will affect just how fair the program is seen to be. If the banks allow those who do not submit documents to get by without doing so, it will appear unfair to those who told the truth about their income, and paid more than they might otherwise have been required to pay. If they do not, the wave of foreclosures could devastate more neighborhoods.
The rules now being applied, in some cases clumsily, had a Goldilocks quality; to get a modification a borrower had to need it a lot, but not too much. If the home was “underwater” — worth less than the balance of the loan securing it — but the borrower could still afford the payments, there was to be no modification. If the borrower was in such bad straits that default was likely even with a modification, again that borrower was supposed to be turned down.

"Tunnel Conveyance": Why bore 2 tunnels?

The BDCP unveiled much anticipated new cost estimates for a peripheral canal, and the new proposal for a tunnel conveyance under the Delta. Here is a powerpoint of the proposal.

I am no engineer, but I can intuitively see how there would be big economies of scale in constructing a large capacity surface canal. However, it seems that when you are boring giant tunnels, the marginal cost of increasing the capacity would be relatively high.

Thus, it is interesting to me to see that only a 2 bore parallel tunnel (with the same total 15,000 cfs capacity as the surface canal) was presented. I would be interested in seeing a single bore tunnel proposal. It seems plausible that it the cost of the project would decrease by more than the benefits, if you had only 1 bore. It also seems that a physical constraint on export capacity would also go a long way towards building trust with Delta, Northern California, and environmental interests that freshwater Delta flows would be sustained.

I don't claim to know the answer, I would just like to see the 1 bore option evaluated. I have no doubt that others inside the process have asked the same question, and it will be interesting to see if it is answered.

Many people criticize desalination because of cost and other issues, and these are very legitimate issues. However, one of the advantages of desalination over a peripheral canal for improving water supply reliability is that you can buy desalination capacity in smaller increments rather than a single $10 billion chunk like a peripheral canal. Given the multiple uncertainties involved in all strategies, I think that flexibility is valuable. If tunnels are not wildly more expensive (as this BDCP presentation suggests) maybe it is possible to add alternative conveyance in smaller increments that have less economic and environmental risk.

How foreclosures screw up real estate price data

In my families' 2008 house hunt, it took 10 offers before we finally had an offer accepted.

Many of the offers that didn't work out were attempted short sales or owners who couldn't negotiate on price because of high mortgage balances. Ultimately, several of these properties were foreclosed and are now coming on the market as REOs for substantially less than what I offerred for them originally (I bet those banks wish they would have taken my original offers now.)

For research purposes (and yes a little nosy rubbernecking too), I have taken a peak at a few of these properties after foreclosure to examine the before and after condition of the properties. In many cases, these don't even seem like the same property. The foreclosure process is definitely destructive.

The nicest of these properties just came back on the market in Stockton for $100k less than I offerred 18 months ago. However, the entire kitchen (even the cabinets) were stripped from the house (this was its nicest feature as it was a very expensive custom kitchen), a new AC unit was stolen, some landscaping features are gone or dead, the pool is disgusting and green, and I probably missed some other stuff. I would estimate that about $100,000 of damage (maybe more) was done to the property in the foreclosure process in the past year. That property will sell at a big discount, and it will distort any type of quality adjusted price index.

What a mess. I mean that both as a citizen seeing destruction to the community and as an economist trying to make sense of the real estate data.

Nice neighbors

This article in the Hanford Sentinel was interesting. Imagine your neighbor sells his surface water rights for millions, because they plan to make up for it by overdrafting the aquifer under your property. Phillip Erro is angry, and has a proposed solution. I don't think this is the ultimate solution, but it is a first step towards the agriculture community recognizing that some regulation of groundwater is necessary.

Fresno County farmer Philip Erro is circulating a petition asking Kings County supervisors to pass an ordinance prohibiting anybody from pumping ground water after selling their surface water rights.The target of Erro's petition is no mystery: Sandridge Partners, a Bay Area business partnership with 50,000 acres of farmland in western Kings County. Earlier this year, Sandridge sold $73 million in state water rights to the Mojave Water Agency in San Bernardino County...

Sandridge plans to pool ground water supplies from its land and adjacent property to make up for the 14,000-acre-foot allotment it sold to the Mojave Water Agency, according to Sandridge partner John Vidovich.Erro, dependent on those ground water supplies, wants Kings County to make it harder for somebody else to do what Sandridge did."Without that ordinance, there's no penalty for the landowner to sell surface rights ... and deplete the ground water, too," Erro said.

NUMMI closure effects on San Joaquin County

I think Mike Locke has the employment impacts of the NUMMI plant closure on San Joaquin County about right in this Stockton Record article. We built in an additional 1% increase (3,000 more unemployed) in the County unemployment rate by Spring 2010 into our September forecast and will do the same in our December update. Locke's estimates are roughly the same.

Although NUMMI plant is in the East Bay, it has a proportionally larger impact on the Northern San Joaquin Valley than the Bay Area. The recession does not end in the northern San Joaquin Valley until NUMMI closes in March 2010.

Michael Locke, president and chief executive of the San Joaquin Partnership, said up to 3,200 county residents - about 1 percent of the civilian work force - could lose their jobs with NUMMI's closure.
"We have 1,200 employees employed in nine manufacturing plants here in San Joaquin who are component manufacturers," he said Wednesday. "At this stage, we believe all of them will close with the closure of NUMMI.
Also, there are more than 800 direct NUMMI employees living in the county, including an estimated 300 in Tracy, 200 in Stockton and 200 in Manteca.
Finally, Locke said there are another 1,200 area residents employed by other vendors and service providers, which as Valley Mountain Express, a Manteca trucking company that moves auto parts from various NUMMI suppliers to the Fremont assembly plant.
"As that business is eliminated, they're significantly impacted," he said.

Olive Oil Boom Coming to the Valley?

The AP reports on the Valley's small, but fast growing olive oil industry. In an earlier post, I noted how olives made their first appearance on the San Joaquin County crop report this year and are poised to grow. According to this forecast, they will grow a lot.

I don't know much about the industry, but I have my doubts that the grower interest in olives has much to do with it being "water sipping" and I'm not sure that there are tremendous water gains to be had here compared to nuts and grapes. I suspect a lot of the interest is driven by the mechanical harvesting innovation, and a desire for an alternative to planting even more almonds and grapes. [Update: I am told olives require 2 feet of irrigation water compared to 3 to 4 feet for most Valley crops. I still don't think water is the primary motivation, but if water prices were higher and transfers more common, olives would look even more attractive.]

Whatever the reason, I look forward to enjoying high quality, local olive oils that I can afford. I saw a great presentation from Corto Olive here in San Joaquin County, and have bought the Sacramento Valley based California Olive Ranch products in the grocery before. I think those are the two biggest operations now, and it will be interesting to see how many more enter the market over time.

In the past 10 years, roughly 7.5 million trees have been tightly planted on 12,500 acres, an experiment growers hope will make California olive oil cheaper and fresher than that of their competitors. State officials estimate that in another decade there will be 100,000 acres of hedgerow trees producing 20 million gallons of oil to help sate Americans' 75 million gallons-a-year thirst — 99.99 percent of it now imported.
"There's a promising future ahead for this crop," says Dan Flynn, head of the Olive Research Center at UC-Davis. "With the growth in olive plantings, California could emerge as a world leader in a relatively short period of time. It might take 20 years, but that's how long it took with the other crops."
The "other crops" are almonds and canning tomatoes, once the domain of Spain and Italy but now controlled by California growers, who have the economic advantage of producing on large-scale farms.
California's oil boom results from a convergence of events that coincided with the new plantings: a chronic drought prompting farmers to seek water-sipping crops, consumers' shift toward fresh foods, their focus on heart-healthy oils, and recent findings that some oil imported as "extra virgin" might be of a lesser quality — if it's olive oil at all.

Unemployment Friday

California Unemployment Rate is Up to 12.5%, but payroll report shows gain.

Don't get excited about the 26,000 gain in CA non-farm payrolls. It comes on the heels of a downward revision of 25,000 for September. Thus, we are still stuck at 14.2 million non-farm jobs, a 1 million decrease from peak. It is better described as a sideways move, and I still think we have a few more negative months in our future before we see consistent job growth. Sideways is still good news and suggests that we are getting close to the bottom.

In contrast, the household survey (used to calculate the unemployment rate) shows a different pattern. A huge decrease in employment for October after a small decrease in September. Thus, we are up to 12.5% unemployment, a level I didn't anticipate we would reach until this winter.

In the metros, Sacramento appears to be the worst performer - driven primarily by weakness in consumer driven sectors such as retail and hospitality.

Modesto had a strikingly large seasonal jump in unemployment, all the way up to 16.6%, whereas Stockton's report is not as bad. Fresno did not have a great month either. Some drought effects are now showing up in farm and food manufacturing, as well as budget cut impacts at schools, Fresno State and local governments.

In the Bay area, there are signs that the worst may be over for the tech. sector, and the Bay area looks like it could have a better than average recovery, after a very steep decline over the past 12 months. With unemployment still around 12% in Silicon Valley, it is a long, long climb back to normal.

Sometimes the legislature corrects its mistakes

Door closed on California tax credit for new homes

Say goodbye, finally, to hopes of extending that $10,000 tax credit for buyers of new unoccupied homes in California.
It's all but dead for this year, says one lobbyist who patrols the state Legislature on behalf of home builders.
"We were disappointed neither of those bills panned out this year," said Allison Barnett of the California Building Industry Association

I have posted about why this is a bad idea in the past. Most recently here.

There are positive things govt we can and should do to cushion the housing market and builders in the short-run and long-run: 1) aggressive actions to stop preventable foreclosures, and 2) cutting excessive impact fees that greatly increase the cost of construction and long-run cost of living for CA residents.

Sticking Up For Sacramento Regional Sanitation District

Phil Isenberg is off the mark in today's Sac Bee when he suggests that we just blame the water exporters "by tradition," and rails on the Sacramento Sewer District for whining about the cost of upgrading their wastewater treatment plant. As a Sacramento resident and former mayor, he should at least acknowledge the cost of these upgrades on poor people in Sacramento area and should consider the effect on local jobs and prosperity.

Yes, there are many stressors on the Delta (pumps, wastewater, etc.) and it would be great if we fixed all of them. And yes, I agree with polluter pays and beneficiary pays. But we won't address everything and perhaps we shouldn't, because the costs of the "solutions" (i.e. peripheral canal, wastewater treatment plant upgrades, less agricultural production, recycling water) are large.

It is a question of costs vs benefits, and who should pay.

We have been hearing constantly about the costs of reduced pumping on farmers and farmworkers. Those costs are real, but typically exagerrated as I have pointed out repeatedly.

Have we have treated the South Valley ag unfairly as Isenberg suggests? Let's see.
1. Taxpayers built them a water delivery system. They were supposed to pay the government back without interest (no interest is a huge subsidy). They haven't paid.
2. There is an enormous pollution, drainage problem that results from this irrigation. They won't clean up their pollution, and think that taxpayers should pay to clean up their mess.
3. Now they want new dams for their water supply, and they want taxpayers to cover the cost again through state general obligation bonds.
4. They refuse conservation mandates or groundwater regulation. They can't afford it.
5. Downstream diversions (through the pumps) are proven to cause serious damage to the Delta, but farmers don't think we should reduce those deliveries because of the cost to them.

Do you see beneficiary pays here? What about polluter pays? Are they complaining about the costs to them?

Now, let's look at Sacramento Sewer.
1. They have a wastewater treatment system. Their ratepayers paid for it. They repay their bonds with interest.
2. I'm no wastewater expert, but I am told that their secondary treatment satisfies all water pollution regulations at the moment (that could change). They could treat wastewater to a higher level, and it would be helpful to the Delta if they did (how helpful? we don't know.). If the peripheral canal is built to help exporters, the state's largest freshwater supply intakes will surround the Sacramento wastewater outflow and it will then certainly require the highest level of treatment. There will be large costs to the upgrades (up to a billion in capital costs, and lots of electricity/operating costs thereafter). The beneficiaries of that investment is the Delta environment, but also the downstream exporters who will get much better quality water as a result which will reduce their downstream water treatment costs. So who should pay? Isenberg says Sacramento ratepayers should pay (the polluters) and to suggest that downstream beneficiaries pay is whining.

I am NOT saying that Sac Sewer shouldn't clean up or that they should not be responsible for any costs.

We need to balance the costs with the benefits for all options. And we need to apply polluter pay and beneficiary pays principals for all options.

But Isenberg applies these standards inconsistently. His Delta Vision report never even mentioned increasing water prices and ending water subsidies as one of their strategies when it should be the #1 California water strategy. Apparantly, he favors continued subsidies for agricultural water exporters.

On the other hand, what does Isenberg have to say to a poor family in Sacramento whose sewer bill could now consume 10% of their income? Stop whining!

Reminds me of Phil Gramm, McCain's economic advisor who resigned after saying "we are a nation of whiners", and it's only a "mental recession."

[This post has been edited from the original. I accidently hit the publish button instead of save draft and the original had many more errors and typos than usual. It even fell short of blog standards.]

Good article on immigration and farm jobs.

Just read Philip Martin's thoughtful article on immigration and farm jobs in the UC-Davis ARE Update.

the U.S. farm labor market resembles a revolving door,absorbing newcomers from abroad and retaining them for less than a decade.
The National Agricultural Worker Survey (NAWS) found that a sixth of farm workers are newcomers, or living in the United States less than a year, equivalent to 100% turnover every six years.

I am not sure what is the best immigration policy. I do believe that immigrants in the Valley (legal or not) will benefit most when economic development efforts in the Valley focus on creating non-farm jobs (their future), and improving the quality of farm jobs (so that they may retain workers longer).

Those who have done well under the status quo (primarily landowners) will continue to push an economic development agenda emphasising reliable flows of of subsidized water and reliable flows of cheap labor through the "revolving door." Since the west side of the Valley is the poorest place in the U.S., it would seem that this agenda has been an economic development failure and a new approach is needed.

One Year of ValleyEcon Blog

It was one year ago today that I made my first Blog post. Since then, I have made 180 posts, one roughly every 2 days.

When I started, there were about 5 hits a day. Now, the blog gets about 30 visits on a typical weekday and is growing slowly. There are a small number of frequent visitors who are very interested in water posts, visitors from state and federal government who seem equally interested in water and economic outlook posts, and google search hits that span all topics but are very interested in housing/foreclosure posts.

The highest number of visitors was the evening a few months ago when Sean Hannity broadcast live from the Central Valley, which apparantly led to a huge spike in people around the world Googling Delta Smelt, some of which landed on this blog.

Although this is a general blog about regional economic issues, the most popular posts (in terms of number of hits) are about Delta water issues and the peripheral canal, so the blog has evolved where about 50% of posts are about water.

So, what was the topic of the inaugaural post on November 12, 2008? The PPIC study on the Delta, and my critique of it. I wish that events over the past year would have made this old post irrelevant, but that isn't the case.

We are all still waiting for the PPIC authors to show their pro-peripheral canal conclusion is robust to more realistic data assumptions and they have had plenty of time to rerun the models now. [Note: Even their original analysis didn't show a peripheral canal was the best strategy, just that it was the cheapest under a set of unrealistic assumptions. The key unrealistic assumptions are that desalination and water recycling technology will go backwards rather than improve over they next 40 years, and that CA population will grow much faster than projected. These aren't the only problems, the list of errors keeps growing.]

Mother Jones' Dustbowl Article

The brief bio of Javier Vaca in this Mother Jones article about the drought is a pretty good summary of the Valley's poverty problem.

When I meet Javier Vaca.. he's been walking for three days. The skinny 18-year-old is being carried along in a procession of 7,000 farmworkers and farmers as it crosses California's Central Valley... He's been told only one thing that matters: Marching 50 miles might earn him a job.
When the housing boom imploded last year, he lost a $14-an-hour construction job, a job that had allowed this son of farmworkers to drop out of high school, buy a car, and rent an apartment for his young wife and baby in Fresno. It took him a month to find more work, this time picking peaches at less than half his previous wage. Then the worst drought in more than a decade hit, a court order to protect an endangered fish cut off water to the valley's farmers... Vaca now works one day a week while his family survives on welfare and food stamps.

Vaca's story is all too common in the Valley. There are many problems for the local economy illustrated by Vaca's story and I will list them in my view of their order of importance.

1. High school dropout, teen age parent.
2. Construction industry has collapsed.
3. Farm jobs pay miserably (1/2 the rate of construction labor) are physically demanding, and provide only seasonal work and a life of poverty even when water is plentiful.
4. Water shortages (drought and environmental causes) have reduced the number of farm jobs in the Valley by 2-3% this year (less than the overall decline in non-farm employment in CA and the U.S. this year).

This article hits all the key points, but in my view, still leaves the misleading impression that more water is the solution.

Later in the article, it also visits a new build neighborhood in Mendota where half the houses are foreclosed, vacant, and being vandalized and stripped of fixtures. Then it visits an alley in the same town where people are illegally living in garages, a situation that isn't new at all in this area that was the poorest in the U.S. before the drought, and in even worse shape now.

I wish people would see the human toll of the collapse of the construction industry in the same way as the "dust bowls" human toll. It has caused far far more unemployment, hunger and lost wages than this drought, yet many view it as something that has just hurt property flippers and greedy real estate developers. Articles like this make it sound like construction has merely slipped back to a normal level after an unsustanable frothy period. In fact, the industry that has completely dried up in an unprecendented, historic collapse. And unlike places like Florida, there isn't much of a housing glut here, just a foreclosure crisis. Decent, affordable housing is still quite hard to find, and we could use more of it (especially multi-family homes).

Home building is down 90% in the Valley and has eliminated about 50,000 jobs, and water shortages have cut agriculture production about 3% in value and cost less than 10,000 jobs.

So, yes water is a problem and creating hardships, but there are lots of human tragedies here.

What the Valley needs most in the short-run (and what would benefit Javier Vaca the most) is a real solution to the foreclosure crisis and construction crisis. If construction could even return to 25% of its previous level, it would generate far more jobs and income than turning on the pumps.

What the Valley needs most in the long-run is improved education and workforce skills to match the needs of a 21st century economy. Another thing the Valley needs to support a 21st century economy is better environmental quality, that means less air pollution and rivers that actually contain water and fish. And it needs a healthy agriculture sector, but not necessarily a bigger agriculture sector.

Stockton is in a fightin' mood

I enjoy Michael Fitzgerald's writing at the Stockton Record. This recent article does a good job of capturing the local sentiment that the city is always getting screwed over by the state. The sudden prison hospital announcement (not 1 but 2!) and the Governator's celebration of the water package in Stockton (after ignoring the region through the whole debate) brought those feelings to a head. This city is riled up. Fitzgerald says its time for Stockton to fight.

In a staggering display of insensitivity, the governor of California last week chose Stockton as the spot in which to get goose bumps over passage of the state water package.

"Part of this package," gushed Arnold Schwarzenegger, "is to ... build a canal around the Delta. ... That was great news this morning."
Pause for applause. No applause...

May I suggest why? It's not the cynical subversion of the legislative process...

It's not the Quisling collaboration of certain big environmental groups...

It's not the 1950s plan for dams and canals...

It's the presumption that this region is such an afterthought that it really doesn't matter whether its residents swallow the transparent greenwashing and legislative charade meant to conceal this late-model Owens Valley water grab.

Same with prison officials…Without public hearing, they sent out a formal Notice of Decision...

Given all that, plus the prison system's history of shamelessly broken promises, I'm surprised they could keep a straight face. They must inject themselves with Botox.

I'll make a prediction about the other giant project involving this area, high-speed rail. I predict if that system ever gets built, the powers that be will renege on their promise to beef up traditional rail over the Altamont.
They'll shrug helplessly and say they have no choice: there's a budget crisis, a court order, unforeseeable new circumstances, a flat tire, their dog ate it...

But there is a point in all these endeavors when the fight moves into the courts. That, my friends, is a different kettle of smelt.

The law levels the playing field, more or less. Then beware, ye backroom boys; ye who rigged the political process; ye who funded the biased study; ye Astroturf; ye to whom the environmental impact report was no more than formality…

Maybe the city needs to imitate the water exporters get Burson-Marsteller and a comedian to get their message out.

[My apologies to Mr. Fitzgerald for chopping up his essay. click here to read the whole thing.]

Can anyone at state universities count jobs?

Since I have been so critical of inflated job loss estimates from UC-Davis and Sacramento State, I couldn't help noticing the news that California State University reported that federal stimulus saved 24,000 jobs in the CSU system this year.

Someone in the university system should have objected to reporting the numbers because "they don't make sense," California's stimulus watchdog official said Friday.
CSU reported late last week that federal stimulus dollars let them retain about 26,000 full-time-equivalent positions. That's more than half of CSU's work force, and it's more jobs than the state of Texas and 44 other states reported saving with stimulus money.
"If I were them, and I followed instructions to a T, and I came up with a number like that, I would have said, 'Whoa,' " said Laura Chick, the state's inspector general for Recovery Act funds. "Then I would have been on the phone saying, 'These numbers don't look right.' "

Someone also should have said "these numbers don't look right" when Sac State estimated over 1 million lost jobs from small business regulations, and UC Davis estimated 80,000 lost jobs from reduced water deliveries.

Fortunately, the people of California have an alternative to public universities for both their education and their job counting.

Legislature Passes Water Package

The $11 Billion general obligation bond is disapointing, and I expect there is a high probability that it will be defeated by voters next fall. Even if the state was in better fiscal health, I would still be oppossed to the bond as a matter of policy. The vast majority of the costs in this bond (whether dams or environmental mitigation costs) should be paid by water users, not general taxpayers.

Passing the bond is approving a government subsidy for consuming a scarce resource whose supply causes environmental damage. The subsidy keeps prices artficially low and discourages conservation. Similar subsidies for Central Valley Project water are largely to blame for the mess we are in now.

If anything water consumption should be taxed, not subsidized. Forcing water exporters to pay environmental mitigation costs in addition to the cost of the supply infrastructure is essentially equivalent to a proper tax.

My thoughts on the governance package are complex and incomplete, and I am unsure of the details of the final package. I can say that I am disapointed in the process, the make-up of the 7 member Delta council, and I am very disapointed that the peripheral canal is still not being subjected to a proper cost-benefit analysis. It isn't mine or anyone elses preferred bill, that's part of political compromise. Is it an improvement on the status quo? I don't know.