The World according to Modesto

We have no appreciation for the Hun, our governor. We think he is a public embarrassment. But, in terms of the time-honored political phrase – the people get the government they deserve – the Hun is a tribute to the political idiocy of the California population, composed of people who all think state history began when they got here, either is immigrants from the US and elsewhere, or as babies.
 
But the Hun will surprise you every once in awhile and his act of leaving $1.000 in the fund to pay for millions of state subventions for Williamson Act contracts was, we thought, a reality-based decision. As the two articles from the Modesto Bee below show, developers and their handmaidens in local land-use authorities, planning ahead as usual. Below is a classically pious editorial about the absolute necessity of the county, facing one of the worst foreclosure situations in the nation and experiencing real estate devaluation cutting county revenues, plus state cuts to health and human services budgets. Basically, the Williamson Act is a gift of property tax reductions to prosperous farmers and ranchers and ranchette owners. Those whose farms will fail for lack of the subvention will probably be mainly smaller dairies that have been already gored by processor-distributor rigged milk prices since late last year.
 
Both the Modesto grown measures and the editorial remind us of why Modesto, along with Merced and Stockton, so regularly lead the nation in foreclosure rates and unemployment. Modesto’s leaders have been stupefied by greed for decades. But the level of idiocy in the town is worse than that, because the “elite” in Modesto have a creed in which they believe with utmost fervor. It is that they are smarter, more successful and even wiser than anyone else in the world – a world that never ventures beyond the city limits of Modesto. Even the Great Valley Center, allegedly encompassing all of Central California, has done nothing but spread the knuckleheaded worldview of Modesto throughout the San Joaquin and Sacramento valleys. Fortunately for Central California, many of us have been just too dimwitted to grasp the genius of the World According to Modesto.
 
The historical perspective on Modesto’s latest and biggest growth measures is provided by Ben Jones on his indispensible thehousingbubbleblog.com.
 
Badlands Journal editorial board
 

 
10-4-09
Modesto Bee
Modesto's biggest growth measures quietly head toward ballot...Garth Stapley
http://www..modbee.com/local/v-print/story/880459.html
The largest growth questions ever to confront Modesto voters are quietly heading toward the November ballot.
Remember Village I, the much-heralded vision that turned into a fiscal fiasco and, finally, ordinary subdivisions? That headline-grabber was little more than half the size of what Modesto voters will see Nov. 3 with nowhere near the fanfare.
Twelve years ago, voters again were asked to set up annexations for huge tracts on the city's fringe, again with heightened election fervor. That's when Modestans simultaneously updated their right to control the city's growth destiny and said "no thanks" to thousands more acres gobbling prime farmland. Yet this year's bevy of growth measures, most on Modesto's north edge and drawing almost no attention, has even more land at stake.
To be specific, the storied history of Village I centered on 1,775 acres, compared to 2,500 acres in 1997's Measures P and Q, compared with nearly 3,000 acres this year. But aside from scattered news accounts and editorials, Measures A, B, C, D and E are flying under the radar.
While the earlier votes produced mostly houses, this year's crop is much heavier on potential jobs. Three of the five measures have no residential component.
No campaign literature is known to have circulated yet on any of the measures. Supporters of two, Measures B and C, didn't bother to submit official ballot arguments.
It appears that only one growth camp, supporting Measure E, is actively putting out campaign signs, while failing to report its spending to the city clerk. One of its leaders, landowner Frank Bavaro, says he plans to file the documents immediately, and the campaign likely will spend about $24,000.
"Usually, with growth measures you hear a lot of buzz," said Sandy Lucas, who co-hosted a defunct talk show that focused on local politics. "I can honestly tell you, no one's talking about it (this year). It feels like a lot of apathy."
Some are more controversial
The League of Women Voters favors only one of the five areas, Measure C, by far the least controversial because it's already mostly developed with a row of car dealerships. The league opposes three of the others and takes no stand on the largest, Measure A.
The controversial North County Corridor, a future expressway from Salida to Oakdale, is referenced in analyses for four of the five measures. Supporters say their developments will help the freeway, while the league notes that a route hasn't been determined.
If eventually annexed, the four areas would give Mo- desto a huge leap to the north, erasing much of the current agriculture buffer between the city and Riverbank.
"Why wouldn't you build where you have infrastructure?" asked Brent Sinclair, the city's community and economic development director. "Why sprawl somewhere else?"
City Council members, who put all five measures on the ballot and gave themselves specific power to submit ballot arguments, ended up writing only two. Measures A and D show potential for creating jobs north of the city's current limit, they say.
The two furthest to the east, Measures D and E, would bring thousands of homes. Opponents seized on that aspect, writing in ballot arguments against both measures, "Modesto needs more houses like fish need bicycles."
By the way, council members, when it comes to advice from voters on growth areas, can take it or leave it. So whatever voters decide Nov. 3 may not signal the final outcome for any of the areas in question.
On the Net:
Background documents can be viewed at www.modestogov.com/urbangrowth.
Williamson Act vital to county...Editorial
http://www.modbee.com/editorials/v-print/story/880372.html
The true test of your belief in a cause is whether you'll support it with your wallet as well as your words.
That's the challenge facing Stanislaus and other counties now that the state has — at least for 2009-10 — eliminated reimbursement for Williamson Act tax breaks. For more than 30 years those tax breaks have gone to property owners who kept their land in ag use.
We've long considered the Williamson Act a critical component of the effort to save valuable farmland from development. Some farmers simply can't survive financially without the tax breaks they receive from the act.
It's become almost an annual battle to keep the Williamson Act in the state budget. This year, that battle was lost during budget cuts; funding status is unclear for 2010-11 and beyond.
Without the state reimbursement, Stanislaus County will have to absorb the cost out of its general fund, to the tune of about $1.4 million a year. That would mean having to reduce spending in other important areas, including the sheriff's department and parks.
As hard as those other cuts would be, the county needs to continue to support — and fund — the Williamson Act contracts.
It needs to make sure that the tax breaks are not going for land that is being used for ranchettes, for hobby farms or for anything other than true agricultural purposes. Monitoring compliance is no easy task, as currently more than 8,000 parcels involving more than 700,000 acres fall under the Williamson Act in Stanislaus County alone.
Supervisors will be wrestling with this issue later this fall. Three of the five board members have property within the act, so they'll apparently have to draw straws to see who votes.
When that vote comes, we urge the supervisors to put the county's money where its mouth has been — in support of this program that is so essential to our No. 1 industry.
 
The Biznestate Cycle
-by the Mysterious Flying Miser
I recently had a discussion with a friend about the difference between real estate cycles and real estate bubbles. I thought it would be a good idea to look a few of them up and perform an analysis that might provide some differentiating characteristics. Interestingly enough, what I came across were a few articles layering the concepts of bubbles and cycles in a completely unexpected way.
Firstly, I found the following at http://www.foldvary.net/works/cycle.html, by Fred Foldvary, an economist at Santa Clara University:
Table 1. The Real-Estate Cycle in the US

Peaks in Land Value (Years)

Interval

Peaks in Construction (Years)

Interval

Depressions

Interval

1818

1819

1836

18

1836

__

1837

18

1854

18

1856

20

1857

20

1872

18

1871

15

1873

16

1890

18

1892

21

1893

20

1907

17

1909

17

1918

25

1925

18

1925

16

1929

11

1973

48

1972

47

1973

44

1979

6

1978

6

1980

7

1989

10

1986

8

1990

10

2006

17

2006

20

2008!

18

“Real-estate values and construction have peaked one to two years before a depression, and have stayed at peak levels until the onset of the downturn. The historical evidence is consistent with the theory that speculative booms in real-estate prices and construction act as an impetus for the downturn itself. For an explanation, see my article: “The Business Cycle: A Georgist-Austrian Synthesis.” American Journal of Economics and Sociology 56 (4) (October 1997): 521-41. An updated explanation (2007) is in my booklet, The Depression of 2008, by the Gutenberg Press.
I was surprised to find this table (referenced by multiple other authors), since I have been so imbued with the mantra that “there is no national real-estate market”. According to this dude, not only is there a national real-estate market, but it has been tightly predictable and consistently linked to the US business cycle for about 200 years.
The thing about this table that immediately stood out to me is that our two great real-estate bubbles (today’s bubble and the one preceding the Great Depression) both occurred on time for a normal period of the real-estate cycle, indicating these bubbles were no more than exaggerated versions of a completely periodic event.
The second thing that stood out was that the normal 18-year interval between house-price peaks was only disrupted immediately following the Great Depression. Presumably, the long rise in prices was potentiated by the steep drop preceding it. So what does that say about prospects for future house-price moves in this country? Should people who invest in US real estate immediately following the current crash expect to enjoy steady, long-term appreciation?
Upon further investigation into the above blatant and simple dataset, I came across a 2007 paper, entitled “Housing is the Business Cycle“, by Edward Leamer of the Kansas City Federal Reserve Bank, the partial introduction and conclusion of which I have manually typed (you’re welcome) below:
Introduction

“Indeed, if you look up ‘real estate’ in the index to Mankiew’s (2007) best-selling Principles of Macroeconomics, you will find real exchange rates, gross domestic profit (GDP), real interest rates, real variables, and even reality, but no real estate. Under “housing”, you will find a reference to the consumer price index (CPI) and to rent control, but no reference to the business cycle. I have not been able to find any macroeconomic textbook that places real estate front and center, where it belongs
“But it’s not just a problem with our theory. The National Bureau of Economic Research (NBER) macroeconomics data miners have largely missed housing too. The index to Vector Zarnowitz’ (1992) Business Cycle, Theory, History, Indicators, and Forecasting has no reference to real estate or housing. (Actually, there are no ‘h’s in the index at all). Likewise, the index to James H. Stock and Mark W. Watson’s edited volume, Business Cycles, Indicators and Forecasting, has no references to residential investment or to housing. Housing is treated with the same level of interest that building permits has in the index of leading indicators: one of many things that might predict a recession, about as interesting as x7 in the list x1, x2, x3, …,x10.
“There is substantial, mostly older literature on the modeling of residential investment (e.g., Alberts 1962, Fair 1972, Ketchum 1954, de Leeuw and Gramlich 1969). This literature takes the overall business cycle as a given and explores the effects of income and interest rates on residential investment. By including interest rates as explanatory variables, this literature does explicitly explore the link (between) monetary policy (and) housing, but when Maisel (1967), for example, reports that residential investment is an important channel through which monetary policy affects the economy, that finding is treated like the discovery that alcohol (exerts its effects) by depressing the central nervous system, which is a mildly interesting fact that doesn’t at all affect how much we drink. Another round of grog, please.
“Something’s wrong here. Housing is the most important sector in our economic recessions, and any attempt to control the business cycle needs to focus especially on residential investment. But housing presents a special control problem because monetary policy affects mostly the timing of the building, but not the total building. After a surge of building, there has to be a time out, like we are experiencing today, before building can get back to normal and before this channel through which monetary policy affects the real economy is operative again. The Fed can stimulate now or later, but not both.
“The difference in the dynamics of inflation and housing create a problem for the conduct of monetary policy that is aimed at both inflation and housing-related employment. Inflation is very persistent, and needs to be fought every day. For housing, it’s the cycle that is persistent. Once the cycle starts, it keeps on going, like a pebble thrown into a smooth pond of water. The best time to fight the housing cycle with tight monetary policy is when the wave is starting to rise, not when it is cresting. The worst time to stimulate the economy with loose monetary policy is when the wave is starting to rise. That is going to make the crest all the higher, and the crash all the more catastrophic. You know of which I speak, I suppose.
“To put the point as clearly as possible, what I am advocating is a modified Taylor rule that depends on a long-term measure of inflation having little to do with the phase in the cycle and, in place of Taylor’s output gap, housing starts and the change in housing starts, which together form the best forward-looking indicator of the cycle of which I am aware. This would create pre-emptive anti-inflation policy in the middle of the expansions when housing is not so sensitive to interest rates, making it less likely that anti-inflation policies would be needed near the ends of expansions when housing is very interest-rate sensitive, thus making our recessions less frequent/severe.”

Conclusion
“The Pertinent Facts: It’s a Consumer Cycle, not a Business Cycle
“Housing makes an incidental contribution to normal economic growth. The average growth of GDP since 1947 has been 3.47% per year. Only 4.6% of that growth has originated in residential investment.
“Though unimportant in normal periods, weakness in housing is a critical part of US economic recessions. Excepting the DOD downturn in 1953 and the internet comeuppance in 2001, problems in residential investment have contributed 26% of the weakness in the economy in the year before the 8 recessions since World War II, and 11% of the weakness in the 2-year periods commencing with recessions.
“Most of the other leading weakness is also on the consumer side. In the years before recessions, 20% of the weakness is from consumer durables, 10% from consumer services, and 9% from consumer nondurables. Thus, consumers contribute a total of 65% of the leading weakness. In contrast, business spending contributes only 10% of the weakness before recessions, 8% is from equipment and software and 2% from business structures. Most of the weakness on the business side coincides with the recession rather than leading it.
“The first item to soften and the first to turn back up is residential investment. The temporal ordering of the spending weakness is: residential investment, consumer durables, consumer nondurables, and consumer services before the recession. And then, once the recession officially commences, business spending on the short-lived assets equipment and software, and last, business spending on the long-lived assets offices and factories. The ordering in the recovery is exactly the same.

Policy Targets

1. “Smooth the business cycle.
Happiness and well-being are much affected by the collective unwanted idleness we call recessions. It would be helpful if our monetary authorities could do something to make recessions less frequent, less severe, and more short-lived. Housing surely deserves attention in that enterprise.
2. “Keep us working productively.
Happiness and well-being can also be affected if our financial markets absorb too much of our productive time and energy, and if savings are diverted into unwise real investments. It would be helpful if our monetary authorities did what they could to limit the speculative bubbles that absorb our labor and time and that divert savings into low-yielding investments. Housing surely deserves attention in that enterprise.
3. “Limit the redistribution of wealth caused by financial market disruptions
The part of your wealth that comes deservedly from hard work and special foresight is not a problem for me, but I am made miserable when my wealth is transferred to you by unstable and uncaring financial markets. It would be helpful if our monetary policy makers could minimize the extent to which turbulence in financial markets causes redistributions of wealth from one group to another as, for example, when unexpected inflation transfers wealth from lenders to borrowers. Since housing price appreciation effects a substantial redistribution of wealth from renters (future owners) to current homeowners, housing surely deserves attention in that enterprise.
4. “Keep our balance sheets accurately reflecting reality.
Happiness and well-being can also be affected if we do not save enough to provide for the material needs of our elderly. The real assets on which our future depends are the factories and equipment and knowledge and homes that are needed to produce the GDP of the future. The numerical valuations of these assets that we record on our hard drives are only a shadow of those real assets, a shadow that is sometimes larger and sometimes smaller than the real thing. For us to do our planning correctly, we need these numbers to reflect reality. We want our measured asset values to increase when our investments and discoveries make us confident that future GDP will be greater than we had originally thought. We do not want a monetary system that allows us to put phantom assets onto our balance sheets and that signals to us that hard work and savings are not needed to prepare for our retirements. Housing surely deserves attention in that enterprise. Of particular concern is the fact that, absent a change in the technology for transforming residential land into housing services, the contribution of our residential land to GDP is about the same now as it was 5 years ago, but on our hard drives we are recording real values for this land that are double what they were.”
So, what do you guys think? Is housing the business cycle? If so, should the Federal Reserve try to balance out the business cycle by paying special attention to residential investments?