Tag Archives: economic crisis

Stockton, CA the first big US city to enter bankruptcy

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Stockton, California, home to more 291,000 people and over 685,000 people in the metropolitan area, is the largest US city to enter bankruptcy:

A judge accepted the California city of Stockton’s bankruptcy application on Monday, making it the most populous city in the nation to enter bankruptcy.

U.S. Bankruptcy Judge Christopher Klein said the bankruptcy declaration was needed to allow the city to continue to provide basic services…

Its salaries, benefits and borrowing were based on anticipated long-term developer fees and increasing property tax revenue. But those were lost in a flurry of foreclosures beginning in the mid-2000s and a 70 percent decline in the city’s tax base

The city’s creditors wanted to keep Stockton out of bankruptcy—a status that will likely allow the city to avoid repaying its debts in full.

They argued the city had not cut spending enough or sought a tax increase that would have allowed it to avoid bankruptcy.

An interesting case. I think the real question is whether Stockton is the last or biggest city to declare bankruptcy and whether there are more to come. Stockton is part of an area in California that was hit particularly hard by the housing bubble and a number of other cities have experienced financial difficulties. For example, several California cities have outsourced basic services.

Speaking more broadly, what punitive measures can be leveled against a community in such debt? Is it the taxpayers and creditors who end up being the real losers?

A rise in cooperative housing in the United States

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More American adults are living with strangers in order to make ends meet:

Two million Americans over the age of 30 now live with a housemate or roommate, and shared households make up 18 percent of U.S. households – a 17 percent increase since 2007.

One group of women sold their homes and bought a house together in Mount Lebanon, Pa., after they all got divorced…

McQuillin, Louise Machinist and Karen Bush call their home a “cooperative household.” Each woman has her own bedroom and bathroom, and they share the common areas of the house, chores and expenses…

In some co-housing communities, families buy smaller homes built around a common building that the entire community shares. Some include communal kitchens and recreation space.

There are more than 100 of the special developments across the nation. Some co-housing operations share housework and childcare duties.

This is a different approach than Going Solo – single-person households have been on the rise in the United States for years now. But, living with other people has benefits including economic sharing.

It would be interesting to ask those who are living in cooperative households if they would choose to do so if they had more economic resources. In other words, is money trumping common American concerns about individualism and privacy?

Illinois Governor suggests freezing money provided to local governments from Illinois income tax

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Economic times are tough so Illinois Governor Pat Quinn has floated the idea that the state limit how much income tax is shared with local governments:

Gov. Pat Quinn has proposed that the state bolster its own troubled finances by freezing the amount of state income taxes shared with local governments at 2012 levels, which could cost some towns hundreds of thousands of dollars.

Quinn estimates the plan would generate an additional $68 million for the state budget. Because income taxes are disbursed on a per capita basis, the impact to local budgets would be $5.30 per resident, according to the state.

But the Illinois Municipal League estimates the impact would be more than twice that — a $148 million payday for the state, but an $11.50-per-resident cut to local budgets…

Illinois’ income tax, enacted in 1969, was meant to be a shared venture between the state and local municipalities, said Larry Frang, executive director of the Illinois Municipal League. Both the state and local governments alike felt the effects of any dips or spikes in revenue, he said.

This is not a huge surprise given the issues of tax revenue facing various levels of government. To some degree, local governments should get used to this. Plus, if local government is at least partly about local control, then how much do some communities want to rely on money from higher levels of government anyway? On the other hand, raising property taxes and introducing new fees is not attractive to local governments.

Thinking more broadly about the connections between local and state government, does these ongoing economic issues suggest the relationships between the two bodies are more fragile than we might think? When times are good, this probably doesn’t come up much. What recourse do communities, or lower levels of government, have to fight back if the higher level of government, like the county, state, or federal government alter the existing relationship?

Big rise in suburban poverty since 2000

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CNBC highlights a Brookings Institution report on the growth in suburban poverty in recent years:

The number of suburban residents living in poverty rose by nearly 64 percent between 2000 and 2011, to about 16.4 million people, according to a Brookings Institution analysis of 95 of the nation’s largest metropolitan areas. That’s more than double the rate of growth for urban poverty in those areas.

“I think we have an outdated perception of where poverty is and who it is affecting,” said Elizabeth Kneebone, a fellow at the Brookings Institution and co-author of the research. “We tend to think of it as a very urban and a very rural phenomenon, but it is increasingly suburban.”

Simons’ situation is complicated by the fact she’s a single mom. Poverty and financial insecurity among single moms is far higher than for households headed by single dads or two parents.

The rate of poverty among single mothers actually improved dramatically through the 1990s, thanks to a strong economy, more favorable tax breaks and the success of so-called welfare-to-work programs. But two recessions and years of high unemployment erased many of those gains.

More and more suburbs now have residents with incomes near or below the poverty line. While suburbs have traditionally been thought of as wealthier places, this is not the case any more. One July 2012 report suggested the poverty rate in American suburbs could stay above 11% for a while. Similar factors that contribute to urban poverty are now also affecting the suburbs: a knowledge and service based economy that makes it difficult for those with less education; residential segregation where different races and classes live in more troubled communities. There are also unique issues contributing to poverty in the suburbs: the need for a car to get around and reach even low-paying jobs, a lack of affordable housing, and a lack of social services in communities that may not be used to providing such services.

New York governor says local governments, schools should save money by merging

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New York Governor Andrew Cuomo suggested one way local government can save money in this economic crisis: merge or consolidate.

Gov. Andrew Cuomo had tough words Friday for local officials facing fiscal crises and seeking more help from Albany, telling them they should consolidate services or whole governments and school districts rather than looking for relief from Albany.

“If it was really, really tough, you’d see that happen,” Cuomo said in his strongest comments yet on the local fiscal crises. “If you are a school district, or a city, or a town or a county, and you are looking for a fundamental financial reform, consolidation is one of the obvious ones.”

Cuomo said he believes local politics is standing in the way of mergers and consolidations that would save taxpayers money and improve efficiency of services. He said deciding to consolidate should be easy, yet “politically, it’s difficult … I get the politics.”

Despite years of hard times, Cuomo said you can count “on one hand” the number of consolidations among 50,000 local governments, school districts, fire and library taxing districts and more.

School districts and local governments say they are already consolidating and merging, but that’s not enough. They are asking for more laws than Cuomo has offered in his state budget proposal to cut labor costs, pension costs and more funding.

Advocates like Myron Orfield and David Rusk have been pushing for metropolitanization for decades – and if Cuomo is right, it might happen now because local governments will have little choice when faced with tough economic issues. However, there are three major issues standing in the way of government consolidation even when times are tough:

1. Local control and interests. This is part of the foundation of the American governmental system: residents should have some say in local government. Thus, local governments and residents will fight hard before they have to hand off decision-making to outsiders.

2. We could end up with situations where communities and governments that are harder off are pushed to consolidate while wealthier areas can hold out longer. This is then a different kind of inequality: wealthier residents would have more local control while poorer residents would have less control.

3. Consolidation might save money but what happens to the quality of the local services? Merging might lead to a reduction of services and some residents will not be happy about this. This is more of a quality of life issue that could influence crime rates, school performance, garbage pickup, and more.

Wait, “RIP, McMansion” or are McMansions making a comeback?

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Depending on who you read and what statistics are cited, McMansions are either returning or dead. Here is a new article in the second category:

The “McMansion” is dead.

That jumbo-sized, aspirational edifice, often with vaulted foyers, vast bathrooms and granite countertops, has become a relic of the housing bust in the Hudson Valley, builders and real estate experts say.

“It all boils down to the caution that buyers have adopted since the downturn,” said J. Philip Faranda, whose J. Philip Real Estate business is based in Briarcliff…

This is one way to interpret recent data: baby boomers and younger adult Americans, in particular, want smaller homes in more urban areas. Yet, there is also evidence that big homes are rebounding: Toll Brothers is doing okay and there are still a lot of big houses being built. So which side is correct? As I’ve suggested before, there may be two options. First, it will take some time to sort out the longer-term trends and whether the housing activity in the economic crisis continues for years. Second, it may be that both trends are happening: more Americans want smaller homes even as a decent segment of wealthy Americans can still afford supersized homes.

Quick Review: The Queen of Versailles

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I recently watched the 2012 documentary The Queen of Versailles which details the quest of David and Jacqueline Siegel to built the largest house in the United States. My thoughts on the film:

1. I’ll be honest: I’m disappointed more of the movie isn’t about the house. And, I hope the house is completed just to see what an 85,000 square foot house looks like.

2. The film ends up being a lot more about what happens when a wealthy person/family suddenly sees that money disappears. This is an interesting story in itself. How do they adjust? How much of their behavior really changes? Even if they say they can readjust to a lower income, which is closer to what they grew up with, it appears this is is a really hard process. This reminds me of recent research suggesting people feel losses more strongly compared to equal gains.

3. Jackie is a somewhat sympathetic character but David Siegel is the one to watch here. His mood gets darker and darker as his financial prospects dim. I felt sorry for him; he freely admits at several points that he can’t separate his family and work and it shows in how he lives. Is this what trying to hold on to money looks like? If so, it doesn’t look attractive at all.

4. The film does address at various points who is responsible for the situation the Siegels are in: banks who made money easily available or people who got addicted to this easy money? But, the film doesn’t go far enough in trying to resolve this. It would be interesting to see banks or financial institutions interviewed on this particular case, or even more broadly, to get their side. We see the personal fallout of the problem as the Siegel family tries to recover but the film only hints at the bigger picture.

While this is an interesting story, I wonder: if the outlandishly large house was not involved, how different is this from a number of reality shows or films about wealthy people? In the end, I do think the family is pretty honest about the changes they are experiencing and perhaps it is this authenticity that sets this documentary apart.

(Note: critics like the film. On RottenTomatoes, 98 out of 103 reviews were fresh.)

State of the housing market: spring here but inventory of homes for sale still down

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Even though spring is often the time when the housing market picks up, inventory is still down as we approach March:

But a return to healthy inventory levels could take years. Many homeowners can’t afford to sell because they don’t have enough equity to put into buying another house — or would have to write a check to sell. The supply of distressed houses for sale is thinning as the foreclosure crisis recedes, especially in some states. Home building, while improving, is still at low levels. And, after years of holding on, few homeowners want to sell when prices are just coming off the bottom, Realtors say.

“We’re making a painful transition from a market dominated by distressed sellers to a market in which the only people selling are people who want to sell,” says Glenn Kelman, CEO of online brokerage Redfin.

The nation now has a 4.2-month supply of existing homes for sale. A healthy market, defined as a six-month to seven-month supply, will arrive when home prices rise another 20%, estimates John Burns, CEO of John Burns Real Estate Consulting.

A jump that size will lure enough sellers to match demand pouring in from renters and investors, he says. Rising prices will also drive more home building, he says…

Nationwide, almost 28% of homeowners with a home loan owe more on their loan than their home is worth, data from market watcher Zillow show. That’s 13.8 million homeowners. They’d likely have to write a check to sell, especially if they have to pay a Realtor.

In other words, a housing recovery will still take some time. Even with foreclosures easing, prices have not recovered to the point where more people want to or can sell.

One thing I like about this article: it doesn’t engage in speculation about when the market will be back to “normal.” Too often, real estate articles are full of people making predictions about when the tide will turn. Shouldn’t years of more uncertainty like the last few years make us at least a little more conscious about making such predictions? Also, we might be closer to recognizing that perhaps times like this might be “normal” for a while.

I wonder how much this data/information is related to lower levels of mobility in the United States…

More companies hiring through internal referrals, online applications carry a stigma

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This might help explain why the ranks of long-term unemployed have risen: more companies are finding new employees through referrals from current employees.

The trend, experts say, has been amplified since the end of the recession by a tight job market and by employee networks on LinkedIn and Facebook, which can help employers find candidates more quickly and bypass reams of applications from job search sites like Monster.com.

Some, like Ernst & Young, the accounting firm, have set ambitious internal goals to increase the proportion of hirings that come from internal referrals. As a result, employee recommendations now account for 45 percent of nonentry-level placements at the firm, up from 28 percent in 2010…

The company’s goal is 50 percent. Others, such as Deloitte and Enterprise Rent-A-Car, have begun offering prizes like iPads and large-screen TVs in addition to traditional cash incentives for employees who refer new hires.

This sounds like a sort of Granovetter social network job hunt run amok: companies are looking for ways to minimize bad hires but in doing so, they are relying more and more on their current employees which freezes out people outside these social networks. But, it also suggests a job hunting strategy beyond Internet sites: people looking for work should look to impress their contacts who are currently working. This could be helpful to a lot of job searchers as it would cut down on online applications, cover letters, and the “black hole” (as it is called in the article) where applicants get very little feedback.

Here is a little bit about the advantages of companies hiring referred employees:

Referral programs carry important benefits for big companies. Besides avoiding hefty payouts to recruiters, referred employees are 15 percent less likely to quit, according to Giorgio Topa, one of the authors of the Federal Reserve Bank of New York study.

Social networks improve business efficiency…but might also leave certain people out in the cold.

More evidence for Canadian housing bubble?

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I wrote just over a week ago about a possible Canadian housing bubble and here is more evidence: Canadian housing is over-valued.

The distinction between higher prices and bubbly prices isn’t as subjective as it might sound. Like any other financial asset, there should be a fairly steady relationship between the price of housing and the stream of income — rent — it produces. Should be. The chart below, from The Economist, looks at the price-to-rent ratios across different countries, and measures how under-or-overvalued housing is, with negative numbers corresponding to the former and positive ones to the latter.
 HousingPrices.png…
Canada is quietly trying to deflate its bubble without any eye-catching headlines. And that means keeping interest rates low while making mortgages harder to get. Now, raising rates to pop a bubble sounds like the kind of hard-hearted long view central bankers pride themselves on, but it’s more hard-headed. Higher rates don’t just make housing (or any other asset bought with borrowed money) less affordable for new buyers; they make them less affordable for old buyers with adjustable-rate loans too. That sends prices spiraling down and savings racing up, as heavily indebted households, which Canada has no shortage of, try to rebuild their net worths. Higher desired savings outpaces desired investment — in other words, the economy collapses — and subsequently cutting rates, even to zero, won’t do much to reverse this, as houses and businesses are mostly indifferent to lower borrowing costs while they focus on paying down existing debts. It’s what economist Richard Koo calls a “balance sheet recession,” and it’s a good description of how an economy can get stuck in a liquidity trap.
But by keeping rates where they are and slowly tightening mortgage requirements, Canada hopes to engineer a more gradual price decline that won’t set off a vicious circle. In the best case, prices wouldn’t fall, except below the rate of inflation, so that real prices decline without hitting household net worths. This strategy is hardly unique — China has done the same the past few years — but it has the very Canadian name of “macroprudential regulation”.

This is something worth watching. I haven’t seen yet any speculation of how a downturn in the Canadian housing market might affect the United States. I don’t know how much connection there is between the Canadian and American housing markets. The Canadian market is certainly smaller than the US market; there was a big drop in Canadian housing starts from 2008 to 2009, a drop from 211,056 to 149,081, but housing starts in 2012 were back to 2008 levels at 214,827. In contrast, the US had 954,000 private housing starts in December 2012 alone. But, if a housing crash in Canada had a broader impact on the Canadian economy, then it may influence the American economy after all.