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Three Californias


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2006 Aug 4, 4:25pm   21,414 views  236 comments

by HARM   ➕follow (0)   💰tip   ignore  

Thanks to Hollywood's cultural hegemony, everyone in the world seems to "know" California and usually has a mental image of what life in the state is like. Sadly, the reality of the typical CA "lifestyle" today bears almost zero resemblance to the popular Baywatch glamor image slavishly promoted by the media.

For most working-class wage earners (especially for post-Boomers) that lifestyle generally ranges from spartan to awful, and seems to be trending worse by the day. Housing is only one part, albeit a very large one, in the overall progressive deterioration in the quality of life here for regular folks. The deterioration manifests itself in a number of ways: environmental degradation/pollution, overpopulation/urban overcrowding, traffic perma-gridlock, rapidly deteriorating physical infrastructure and schools, and --critically-- the inability of a working-class income to provide a middle-class lifestyle.

Ignoring the current housing bubble for the moment, the secular trend for at least the past 30 years appears to be California transitioning to a completely bifurcated economy and society, strictly divided between a super-wealthy elite "haves" and a permanently impoverished majority, mostly made up of illegal immigrants and marginalized citizens. The emerging reality is closer to what one might expect to find in Mexico or Brazil, not in the U.S. The housing bubble has greatly exaggerated and magnified this trend, of course. However, even when you remove it from the equation, this long-term trend towards housing unaffordability, overpopulation and overall lower quality of life remains.

I present you with three distinct visions of California.

California Past (pre-Prop. 13, SMUG/NIMBY, illegal flood):

Hollywood Fantasy California:

California Present:

#housing

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155   e   2006 Aug 7, 6:18am  

Why? We should only protect assets. Are seniors assets?

Doesn't matter. They're the ones who vote.

Isn't the AARP the #1.5 largest lobbying group? (they're either behind or tied with the NRA). I wonder what the AARP's position on Prop 13 is.

156   Peter P   2006 Aug 7, 6:19am  

PS - also, could there be hidden price support in the form of rising household income? The wives entering the work force could increase household income even while the individual incomes fell

But even HOUSEHOLD income has been stagnant.

157   Peter P   2006 Aug 7, 6:20am  

Doesn’t matter. They’re the ones who vote.

I know. This is why we should side with seniors. :)

158   e   2006 Aug 7, 6:20am  

AARP and Prop 13 - what a surprise, they only list the positive aspects of it:

http://www.aarp.org/bulletin/yourmoney/property_tax.html

159   e   2006 Aug 7, 6:21am  

I know. This is why we should side with seniors.

I will, once I own a place. :)

I love the idea of "get in early, get in low".

160   GallopingCheetah   2006 Aug 7, 6:25am  


I wonder if there is something else (invisible M3?) that is allowing them to do this.

SP,

Oversupply is probably the cause. An article that I read a while ago says that the state and local governments fund major goods producers; and the overriding goal is to get to the top instead of making money because the top dog will always be rescued by Beijing, sort of the "too big to fail" mantra. Therefore, the firms are always in a frenzy to expand production capacity to get to the top spot, with the cheap money from local governments or the state. The banks are happy to lend and incur bad loans.

This is where your invisible M3 comes in. Unlimited money supply and a permissive lending policy induce over capacity which depresses prices of finished goods.

161   astrid   2006 Aug 7, 6:33am  

DS,

Wow, you managed to write 122 words on Communism without answering what your ideal of Communism is. So I can't actually either be convinced that your position is right or argue that your position is inconsistent. Every social experiment has errors, but I haven't found any evidence that its methods fell too far astray from Communist orthodoxy.

If you say that Pure Communism has never been implemented, could it be that it just doesn't exist? The closest thing I can come up to a workable solution are Israeli Kibbutzes, but they operate more as extended family businesses than a REAL Communist society.

As for your busy schedule. Well, if you're too busy to write a summation (succinct would be nice) on your ideals about Communism (which, from your other posts appear to consist of unrealizable fantasies of going back to a state of noble savagery and the primitive unselfish man), maybe you shouldn't have started with a multiparagraph post full of tangential points.

On organ harvesting. Hmmm, I touched on some points about the economics of scarcity and hard choices (the peasant's left kidney or his family home), the problems of policing and moral hazards (dead v. live bodies), and moral hazards of organ donations. But rather than acknowledge the presence and interests of an organ market, you just go on (a paragraph after you said you're too busy to explain your position on Communism) about how the organ market is evil and then hold out some pie in the sky solution like organs from stem cells, which is at many many years away. So people suffering organ failure should just die rather than participate in something DS has called evil (without explaining why it is inherently bad or undesireable, to the point of elimination)?

Okay, let me say once more -- Huh?

162   Randy H   2006 Aug 7, 6:35am  

Astrid,

why hasn’t someone come in and arbitraged the buy v. rent difference? Could there be some hidden costs to landlord, ie worse quality tenants or higher vacancy rates?

Because that isn't "arbitrage", it might be a local market strategy, but it isn't arb because it's full of local market risk. I wouldn't recommend this strategy because I believe that knowledge/information about a local market pretty much always trumps all else.

163   skibum   2006 Aug 7, 6:35am  

astrid and DS,
Wow, Communism and the organ market - that's quite a bit OT!

164   Peter P   2006 Aug 7, 6:38am  

Okay, let me say once more — Huh?

Have you visited the Huh thread lately?

165   Randy H   2006 Aug 7, 6:39am  

I wonder if there is something else (invisible M3?) that is allowing them to do this.

"Capital Sterilization". As others have pointed out, Chinese concerns can get huge amounts of essentially free money from the government. A portion of this churn is related to China's effective "laundering" of USDs by injecting them into their own economy in a way which circumvents currency arbitrage. No one can really come in and borrow RMBs to put pressure on the peg because of capital controls. Further, any bad loans are just written off because the money is nearly free at the end of the long equation that includes rate differentials, inflation and balance of trade.

166   Randy H   2006 Aug 7, 6:40am  

It just occurred to me that China is effectively the mother of all Quant Hedge Funds.

167   requiem   2006 Aug 7, 6:41am  

skibum:

But just imagine, all the boomers, after cashing out their homes, can now plow their hard-earned winnings into the organ market, helping to create the boom in biotech that so many expect to be the Next Big Thing.

168   astrid   2006 Aug 7, 6:42am  

"But even HOUSEHOLD income has been stagnant."

Ouch! The Midwest really sucks!

I'm planning to vote against seniors in future cycles. There ought to be some loyal opposition when one over-represented demographic group selfishly pawns this nation's future for a couple more vi- (a) -gra filled years of golf and ambling around cruise ships.

169   GallopingCheetah   2006 Aug 7, 6:44am  


But just imagine, all the boomers, after cashing out their homes, can now plow their hard-earned winnings into the organ market, helping to create the boom in biotech that so many expect to be the Next Big Thing.

Yikes.

170   Peter P   2006 Aug 7, 6:44am  

I’m planning to vote against seniors in future cycles. There ought to be some loyal opposition when one over-represented demographic group selfishly pawns this nation’s future for a couple more vi- (a) -gra filled years of golf and ambling around cruise ships.

It is futile. No matter how you hate them, you have to side with them. How about a career in helping or lobbying for seniors?

171   e   2006 Aug 7, 6:47am  

http://tinyurl.com/lspd6

Supporters call them “stand your ground” laws. Opponents call them “shoot first” laws.

Thanks to this sort of law, a prostitute in Port Richey, Fla., who killed her 72-year-old client with his own gun rather than flee was not charged last month. Similarly, the police in Clearwater, Fla., did not arrest a man who shot a neighbor in early June after a shouting match over putting out garbage, though the authorities say they are still reviewing the evidence.

How long is it before we see the headline: "Man shot for lowering comp" ?

172   Peter P   2006 Aug 7, 6:55am  

This might actually be a bankable idea. With the seniors already being such a powerful lobby– and only getting more powerful as the boomers age– the best thing would be to figure out how to profit from them.

The Boomer generation is the future. If we cannot fight them we should join them.

173   astrid   2006 Aug 7, 6:56am  

skibum,

Sorry.

Peter P,

Well, I'm a contrarian.

I also don't want to be the one whom, when the revolution comes and I'm thrust against the wall with a gun to my head, yells "Hey, I was just following grandpa's orders!"

174   Randy H   2006 Aug 7, 6:57am  

They're essentially arbitraging US' consumer demand, open capital system and Fed policy. Unless the Fed drops rates to 0% and keeps them there long enough to break the peg, China isn't really taking any risk so long as they have GDP left to grow.

175   Peter P   2006 Aug 7, 6:58am  

I also don’t want to be the one whom, when the revolution comes and I’m thrust against the wall with a gun to my head, yells “Hey, I was just following grandpa’s orders!”

Just say that you were trying to fight them from within. To defeat the enemy, one must BECOME the enemy. :)

176   Peter P   2006 Aug 7, 6:58am  

Also, there will be no revolution.

177   skibum   2006 Aug 7, 7:10am  

requiem Says:

But just imagine, all the boomers, after cashing out their homes, can now plow their hard-earned winnings into the organ market, helping to create the boom in biotech that so many expect to be the Next Big Thing.

Problem is, between the old age, heart disease from bad eating habits, most of their organs will turn out to be unsuitable.

178   HARM   2006 Aug 7, 7:26am  

skibum,

I think requiem was implying that the Boomers would not be SELLING their own organs, but rather daytrading/speculating in healthy organs purchased from impoverished Gen-X & Y-Millenials, who have no other way to support themselves --largely thanks to the Boomers themselves. The steady supply of dirt-cheap X/Y organs should also allow Boomers to extend their lifespans far beyond that of their parents, as well as the donors themselves.

179   skibum   2006 Aug 7, 7:27am  

HARM Says:

I think requiem was implying that the Boomers would not be SELLING their own organs, but rather daytrading/speculating in healthy organs purchased from impoverished Gen-X & Y-Millenials, who have no other way to support themselves –largely thanks to the Boomers themselves.

Yikes! That's worse than I thought!

180   e   2006 Aug 7, 7:31am  

All this talk about Generations - here's a good table that outlines what years belongs to what generations:

http://en.wikipedia.org/wiki/Generation_Y#Generational_demographics

181   Peter P   2006 Aug 7, 7:39am  

All this talk about Generations - here’s a good table that outlines what years belongs to what generations

Just look at your pluto sign: Leo, Virgo, Libra, Scorpio.

182   e   2006 Aug 7, 7:47am  

At this risk of being labelled a troll (which I would hope not by this point) I'd like to make an observation - in previous threads, any time someone pointed out to the rent graph on patrick.net, and how rent was on the rise, the posted would be shot down saying "That's only the asking price".

I'm just glad to see that isn't being said anymore.

I'm not sure why people are in denial that rent is going up, anymore than FBers are in denial that prices are -not- going up (except in Palo Alto).

183   Peter P   2006 Aug 7, 7:52am  

At this risk of being labelled a troll

You are not a troll because you do not smell like one.

184   Peter P   2006 Aug 7, 7:56am  

I’m not sure why people are in denial that rent is going up, anymore than FBers are in denial that prices are -not- going up (except in Palo Alto).

My friend is looking in Palo Alto. Prices do not seem to be going up though. It does appear that inventory is building up even in PA.

185   HARM   2006 Aug 7, 8:12am  

At this risk of being labelled a troll (which I would hope not by this point) I’d like to make an observation - in previous threads, any time someone pointed out to the rent graph on patrick.net, and how rent was on the rise, the posted would be shot down saying “That’s only the asking price”.

eburbed,

No one who brings contrary data/views to the discussion automatically gets labelled a "troll" here. However, wild, exaggerated and unsubstantiated claims, such as "rent everywhere is going up 20-30% and I regret not buying last year" do come awfully close to gratuitous trolldom.

Technically speaking, the graph on Patrick.net main page does show ASKING rents, as Patrick Killelea pulls this data from newspaper classified asking rents (I asked him about this). Even if actual negotiated rent hikes exactly matched the roughly 12-15% jump on the graph since Feb (ignoring the Dec-Jan dip) and were certain to keep on rising at this rate (yet to be determined), it would still take at least 5-7 years for rents to balance out the rent vs. buy ratios for most areas.

Is it possible that the rent/buy ratio can be balanced solely through rental inflation? Sure. Is this likely to happen while renters' wages/incomes stagnate or even drop? Not really. The maximum % of income any renter can pay for rent is 100% of net income, and this can never be reached because people still have to eat, commute, use electricity, etc. I fully expect rental inflation to account for SOME of the balancing (and even this will require some amount of wage inflation), but not ALL of it as trolls/perma-bulls insist.

Of course, if all middle or working-class families are in effect forced out of CA, and replaced with a population mostly composed of 10-to-a-room illegals, then all bets are off.

186   Randy H   2006 Aug 7, 8:35am  

eburbed,

I generally not considered a troll around here, and I have argued consistently that rents would, are, and will continue to rise despite stagnant income.

I also seem to be locked in an eternal point-counterpoint with my good SoCal friend, HARM, of late ;)

He's a far better creative author than I though, so in the end he'll be happier, even if I am right (which I, of course, am).

187   Randy H   2006 Aug 7, 8:35am  

(man, I hate when the spell checker fixes spelling and ruins grammar)

188   HARM   2006 Aug 7, 8:57am  

Randy H,

Despite our occasional disagreements about the odds of a soft/hard landing or the accuracy of the CPI as an inflation gauge, I certainly do not view you as my nemesis. :-)

I have argued consistently that rents would, are, and will continue to rise despite stagnant income.

Given overall inflation (5-7%/yr, depending on your benchmark), and the fact rents have been stagnant or even falling (esp. in NCAL), I would agree they can and will rise to a certain extent. However, rents can only rise so far unless wages also begin to rise, which IMO is highly unlikely to happen in the near future, given that: (a) we are now staring a recession/mass layoffs in the face, mainly due to the housing ATM shutdown, and (b) the unabated pressures of global wage arbitrage and massive-scale illegal immigration.

Unless and until wages start appreciably rising for ALL classes of working people, not just the Google-aires (or until the banks create a new type of HELOCs for renters), I just don't see how average working-class California renters can possible devote even more of their net incomes to rent than they already do, plus pay more for gas, plus pay more for utilities, etc., etc. That is, unless (one more time) all middle or working-class families are in effect forced out of CA, and replaced with a population mostly composed of 10-to-a-room illegals.

(See, I'm not dogmatic --I hedged my position ;-) ).

189   Allah   2006 Aug 7, 8:58am  

The wives entering the work force could increase household income even while the individual incomes fell.

The wifes income has already been factored in long ago, perhaps the children will have to start working too.

190   Randy H   2006 Aug 7, 9:17am  

HARM,

We generally agree, it's just the effect on the "average" we're arguing about I think. A couple of points I disagree about:

- Global wage arbitrage. I don't believe it has near the effect on domestic wages as you do. If we're to worry about offshoring as a source of real wage deflation then we should be 50X more worried about simple automation. Automation is responsible for probably 19 of 20 jobs lost in the US economy. Remember, US mfg output has risen as a percent of global output, even as labor inputs have shrunk. This is the result of automation, not offshoring.

- What will give. I believe that the "average" American has quite a lot of "standard of living" that can give without real wages rising. In other words, real rent increases will displace conspicuous consumption. This will probably persist until people get pissed off enough to vote. And then, the result may not be pretty. I'm not so sure we'll get sane policy. It could as well be "hyper progressive" tax hikes, more social subsidies, and protectionism. We could run 10 more threads on how all that would play out.

Eventually, ignoring all the macro complications for the moment, people get pissed off and demand higher wages. But, this doesn't require more employment. In fact, it can actually prolong high structural unemployment (sticky-wage theory). So you get the effect I posted earlier: operating costs of landlords rise, rents rise, wages do not rise at first, and then later by not quite enough for enough people. Wealth is transferred at the cost of more socioeconomic "re-balancing", which just means more people are worse off. Of course, it's all hidden by inflation and not realized by enough folks until it's too late. (Their nominal wages may actually go up during all this, but their real wages drop).

191   e   2006 Aug 7, 9:36am  

The maximum % of income any renter can pay for rent is 100% of net income, and this can never be reached because people still have to eat, commute, use electricity, etc. I fully expect rental inflation to account for SOME of the balancing (and even this will require some amount of wage inflation), but not ALL of it as trolls/perma-bulls insist.

Everytime I think about rent rate hikes I shudder and think back to when I moved here in Summer 2000. And after a month of searching for an affordable apartment, was told by the broker my company hired for me that I had to respond to an offer in 2 hours or it was off the table.

Great way to start a life in California: locked into a 2 year lease for $2000 a month for a 1.5/1.5. (Fortunately, I was able to sublet the 88 sqft room for $800 a month, and later negotiate the total rent down in later 2002)

192   e   2006 Aug 7, 9:37am  

Timely!

http://tinyurl.com/ruwgk

Today, neither a college education nor computer literacy is enough to guarantee rising real wages. Some people are obviously doing better than others. Workers in the financial and health-care industries, for example, have seen their real wages drop by less over the past two years than those in retailing. But in no part of the economy are real wages doing well.

There are two alternative explanations for this broad-based problem. The first one has to do with globalization. Competition with low-cost workers in China, India, Eastern Europe, and the rest of the developing world may finally be taking its toll on American workers. With a surplus of labor around the world, real wages will stagnate, while returns to capital will rise.

Now, that's not bad news for everyone. If you own a home, you own a capital asset whose value has soared in recent years. If you have a 401(k) retirement account invested in the stock market, its value, too, has likely gone up since 2003. And if you are a taxpayer -- as most of us are -- it's a plus that state and local pension fund reserves have gone up more than 9%, or $245 billion, over the past year alone, in large part because of stock market gains. This makes it less likely that taxes will have to be hiked in the future to pay for government employee retirement benefits.

If the globalization answer is correct, then in general it's the young who are going to be hit the hardest. They don't have homes or other financial investments, and they have their whole working lives stretching in front of them, so weak real wages hurt them badly. For middle-class Americans aged 50 and higher, the math may be much different, since they likely own their own homes, which have greatly appreciated.

Boomers win!

193   Allah   2006 Aug 7, 9:41am  

All this talk about Generations - here’s a good table that outlines what years belongs to what generations:

http://en.wikipedia.org/wiki/Generation_Y#Generational_demographics

Left one out:

Housing Bubble Generation 2000-2008

I think I'll have to add that to wikipedia

194   Peter P   2006 Aug 7, 9:50am  

Great way to start a life in California: locked into a 2 year lease for $2000 a month for a 1.5/1.5.

Where was that? We were looking for a 1.5/1.5 a while ago.

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