I think one reason retail and a lot of other businesses in the real world will be killed by Covid is low interest rates. These have fueled several decades of rising real estate prices and rents. Cue a pandemic where they have to close for a while but still have to service debt or rent and they're done.
They've been cutting rates to stimulate the economy, but that's not sustainable and has led to fragility. We need rates in the 5 to 7 percent range IMHO to prevent this type of thing. In that range, banks may also make loans they can hang on to rather than securities, and people may actually save a bit and have that buffer.
> cities restrict supply in the face of rising demand
This isn't really a meaningful statement about the problem. Real estate and rent prices dramatically rose in the US, even in the cities where supply far outstripped demand, and even in cities that lost population this past decade.
While supply and demand are slightly an issue in a few specific metros (like San Francisco), US real estate in most metros is mostly a problem fueled by low interest rates and a ridiculous over-inflation in urban property values, as mentioned above.
One city can't "outstrip demand" by itself. If prices are cheaper in one city, demand will spillover from others. It's a national problem. Cities/states that do build have certainly done better, though. Compare the cost of living in Dallas and Houston to San Francisco and Los Angeles.
This isn't to say easy money and certain tax policies (like California's 2% taxable growth limit) haven't contributed to the problem, on top of zoning.
I would think it depends on the city. Portland Oregon is about 3 hours (at highway speeds) from Seattle, 7 hours from Boise, and about 9 hours from Sacramento (the next cities to the North, West and South). There is no demand spillover for cities that are as isolated as Portland.
"Real estate and rent prices dramatically rose in the US, even in the cities where supply far outstripped demand"
[Citation needed]
Prices being set by supply and demand can be seen in Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations (1776). More on our current predicament can be found here: https://www.theatlantic.com/business/archive/2012/03/the-ren.... Increase supply and demand will be satiated.
A moment's study of NYC real estate over the last thirty or even 300 years is sufficient to disabuse one of the explanatory power of supply and demand, except in a very broad macro trend sense that ridiculously oversmoothes the actual data.
Especially recently, right up to COVID times. There were hundreds of thousands of empty living spaces, even more vacant commercial spaces, and virtually no changes in prices.
An important insight is that there are very few markets in the world. Most transactions take place in a context where the players have been playing for a very, very long time, and the game is optimized for the repeat participants. These are mostly cartel games, private contracts among the heavies. Not markets.
In particular, real estate in New York is a subsidized game of capital and patience. It has been so since the 1700s. At this late stage there are only benefits and virtually no penalties for holding a property vacant. Property taxes are vanishingly low. Claims of loss from vacancy are used to reduce business taxes. I could go on but you really should do your own research.
It astonishes me that people can be so convinced by a model, especially such a facile one, as to disregard actual data.
Someone wanting to purchase and hold NYC real estate is still demand that would have to be outpaced in order to reduce prices. If you could somehow wave your magic wand and over night there could be 100x as many total units in NYC, do you believe prices would hold steady? Of course magic isn't real, it's just about questioning whether, in principle, there is some threshold past which the price would drop. If so, the model holds.
Sure- in the framing of- all models are wrong, some are useful- that sort of model may even be right, but it would fail to be useful. Fair?
I don't disagree in principle with supply and demand, my point was rather that as a model it explains very little about New York City real estate, and if one insists on it as an explanatory tool, one will have to throw out nearly all of the data, which what makes it interesting to study.
Various accounting fictions drive a lot of asset pricing. Not fictions in the sense of being false, but rather in the sense of being complicated narratives woven for various purposes that, at the end of the day, are just made up. Real estate is absolutely FULL of these, and they tell a much richer pricing story.
Taking the hypothesis of 100x increase in supply- if we are able to poke at that magical occurrence, put it into context, provide some facts and reasoning behind it- we can see circumstances under which it either lowers or raises prices. I mostly see ways in which it raises prices.
If the increase in supply was executed by adding to the inventory of one of the monster private owners in NYC- you can be damn sure there would be no sudden drop in pricing of the rest of their inventory, and dollars will go into tuning the machine- tax and reporting rules, interesting ways of structuring new inventory into new assets- so as to allow them to reallocate their ownership in ways that they deemed most advantageous.
If the supply increase were executed by magically growing the inventory of city-owned property- you would also probably not see much in the way of price decrease. Why? The city will have the additional burden of maintenance for an enormous new footprint, for water, sewer, public transportation, etc. Huge capital investment would be required, which would require more population, and some sales. But the city will not make that inventory available in any way that would impact prices for other owners. Fund it with debt, keep prices steady, set up special programs to grant the properties, locked in to prevent fast turnover, to new owners who have to move to the city, and look forward to growing flows in the economy in the future.
A way in which it might lower prices is if magically ownership of these new properties was distributed among existing renters or small property owners. This is closest to the behavior of an actual market, which describes NYC less and less as more and more of the footprint is held by large interests. But individuals would be forced with a choice of- leave their current space, or shed this new space, both of which would lead to various price depressions. But in the scheme of things, I see this as least likely. Even genies are lazy, and would prefer one large transaction to millions of small ones.
You describe a supply demand explanation of property as facile. But none of the reasons you give explain why keeping a property vacant is of no consequence to owners.
A business deduction due to losses will only reduce your losses by your tax rate. Mortgages on those properties must still be paid. Then of course there is opportunity cost.
Vacancy is tolerated to an extent by landlords in hopes of getting a higher rent and also a better renter. Especially in places like NYC where eviction can be costly and time consuming.
Most of these extra factors are due to government regulations that are in affect manipulation supply and demand economics.
I seriously doubt there are widespread cases of vacant properties actually being desirable or even tolerable for very long in places like NYC.
With respect, "government regulations" doesn't begin to capture the dynamics, and IMO is not the right way to understand the ecology.
An assumption underlying supply/demand from an economic and game theory sense is win/win- producers want to produce, consumers want to consume.
Supply/demand- or really any- mechanism design breaks down when there are vast discrepancies in "power" between the actors, when some actors can change the levers on the mechanism, when actors have substantial incentives for sabotage, when the interests of the actors are simply in opposition.
In real estate, owners and dwellers are, to a much greater degree, entities in opposition to one another, and only to a small degree, united in a common interest.
Just one example- much of NYC's population is elderly, on a fixed/unindexed income. They simply cannot participate in a dynamically priced housing regime. There is an extensive history of owners preying on this population. If one reads stories of old New York, one sees that the vignette in The Godfather II where the young Vito Corleone strongarms an owner into keeping on an elderly tenant was extremely well chosen.
Similarly, on a farm, children used to be a highly economic investment. In a city, children have become about the most uneconomic investment a family can make, to a degree because of de facto cartel behavior on the part of owners, where pricing per sq foot differs substantially by bedroom count.
The presence of elderly and children must be optimized for for a city to exist at all, as the income producing working adults have both in their vicinity. From a pricing perspective it used to be that rent control and rent stabilization kept prices low for certain segments of the population. Stable/low prices are, to put it mildly, not a desirable opportunity for owners.
This game was remachined with things like section 8 housing vouchers. Rather than prices being stable, they can "float" with the "market" (I use the term "market" loosely as there are a rich spectrum of techniques to shift what is considered market pricing). Tenants who pass through a gate are limited in what they have to pay to 30% of their income. The gap between 30% of income and "market price" is paid to owners by the federal government.
And so on. Much more could be- and has been, of course, by people much better suited than me- on evictions, or money laundering, or any number of other subplots.
Real estate is a balancing act, by governments, between the needs of what amount to predator/prey populations.
In regards to the latter point- doubts about widespread cases of vacant properties being tolerable/desirable- forgive me, you evidently have not been here. Just one point in time snapshot for one segment of the city:
Pervasive vacancy is a malignancy, a cancer, and for lifelong NYC residents- prior to COVID- was a source of deep personal sorrow. The system was broken, and not in any way that supply/demand offered any wisdom to fix.
As I suggested above, people who have the hammer of supply/demand often want to treat housing like a nail. It is not. There are lots of rich and intricate dynamics, and the language of supply/demand does not begin to be able to account for either the data, or the stories. Hope that's helpful.
Or do like Switzerland and not have a huge majority of your population trying to be homeowners because someone in the 50s thought it was a good idea for families to have it as an asset and created huge financial policies to foster that. Now we see the side-effects of it, coupled with some of the lowest interest rates ever and a growing demand caused by urbanisation.
Also doesn't help that it's been ingrained in people that having your own home where you can do your own improvements, renovations, etc. is seen as a dream to be achieved to prove you've made it.
the cascade to zero percent is this crazy farce of excessively consolidated capital not knowing what to do with itself. it's the antithesis of efficient allocation.
bankers create products for timid capital to pool in safe harbors. risk arbiters, like moody's, have been pressured into rating that risk down. then interest rates drop "rationally" because risk is "lower". except it's not lower and interest rates should rather never dropped at all.
we can't arbitrarily raise interest rates until we fix the systemic tilt of the economic system toward the wealthy who are increasingly risk averse because they can afford to be that way and still earn excess returns.
Low interest rates increase real estate property prices, but at the same time tend to reduce rents. The increase in rent prices is more likely due to an increase in demand for housing in cities, by people who want to move there, which is not balanced by a similar increase in available housing (and on the last point, low interest rates make building new housing more attractive).
Cutting rates doesn't have much of a stimulating effect on business spending like it used to. Large companies just funnel excess cash or issue debt for more stock buybacks + equity based compensation for the executives.
The correlation between rates and increased business spending has been weakening steadily for 20 years because of this.
yes the problem is not on the supply side. Drop the rates all you want, it mostly goes to inflate existing assets. If you are to drop billions of newly issued money on asset purchases anyway you better get some in regular people pockets. There was never a better time to experiment with helicopter money and UBI.
This kills the economy. If everyone saves then by definition spend goes down. And spend is what pays everyone, the cycle goes broken and and next year pay decrease. and if you keep saving, it keeps going down, until everybody is on survival mode and nothing else is consumed.
A healthy economy is dominated by debt that can be serviced, with a saving that is comparable. The larger them both are, the more healthy the economy.
Jacking up the rates to 5-7 percent today will cause the fastest collapse in economic history. It's like communism: Yes there's equality but it means everyone is equal in being dirt poor. You might be able to avoid volatility, but at what cost?
> "This kills the economy. If everyone saves then by definition spend goes down. And spend is what pays everyone, the cycle goes broken and and next year pay decrease. and if you keep saving, it keeps going down, until everybody is on survival mode and nothing else is consumed."
no, it doesn't just break, the economy readjusts. there's a practical lower bound to trade and consumption (we need food, clothes, shelter, energy, water, etc.) and prices for essentials would likely rise relative to non-essentials, as demand shifts around the economy and supply adjusts to match it. labor prices likely dip, as do capital returns, during the transition period. permanent savings would lower monetary throughput, but not necessarily velocity.
> A healthy economy is dominated by debt that can be serviced, with a saving that is comparable.
Not sure that you and gp are disagreeing. Whereas right now, statistics say that a lot of families don't have any savings. Need to save a bit to have comparable savings.
(The claim about interest rates is a bit more complicated than "set it at zero", too. The full claim from the linked article is "the natural, nominal, risk free rate of interest is zero". Most uses of interest in our economy aren't risk free.)
~55 mph is the speed where aerodynamic drag starts to exceed mechanical friction, becoming the primary negative force and it exponentially increases at higher speeds.
For traditional ICE cars, the amount of gas you burn is largely correlated to the RPM's of the engine when acceleration isn't happening.
Since ICE cars have gears, you'll have worse MPG efficiency while idling in 1st gear going 3 MPH, when compared to idling in a higher gear at a faster MPH. Most ICE cars can almost (but not quite) idle in a high gear at around 40MPH.
So yes, going too slow can hurt gas mileage.
Its a different matter for hybrids and EVs though...
My car can get best fuel efficiency when I drive between 40-60km/hour with constant cruising speed and no sudden acceleration. I am wasting a lot of gasoline in downtown traffic jam, speed below 20km/hour.
No. There is no speed* such that going slower will decrease mileage.
* Unless we're talking about some sort of pathological edge case in a vehicle without a properly specced transmission or something, or driving an automatic so slow it's just idling against the torque converter or something.
I guess for modern vehicles though you want to be in top gear. Otherwise it’s more revolutions of the engine for a given distance. So the minimum speed to get into top gear.
It's not a straight line. Brake Specfic Fuel Consumption (gal/hp-hr) is often higher in the lower 3rd of the rev band. Across the bulk of the RPM range the BFSC curves are basically flat for most engine. Throttle position matters much more than RPM.
according to henry george, the natural rate of interest is equal to the lowest productivity plot of available land. Which I think is an interesting perspective.
As usual, great stuff from Benedict. One of the better twitter follows I've picked up in the past few years.
> The ad market reset in 2008, and the visible part is the money leaving print, but the most interesting part may be the money that’s not captured in ‘advertising’ at all.
My thinking exactly when I look at this chart. The definition of "advertising" and the criteria for inclusion in each of the 4 buckets would be interesting. I can certainly think of other ways to capture consumers' attention than spend money on print, digital, tv, or radio.
As far as I can tell, one of the coronavirus sleeper success stories has been https://outshool.com for homeschooling (and unschooling) kids. We've been using it for my 12-year old and we see both offerings and usage exploding. There's really nothing else like it on the market that we know of...
Re television advertising: '...
As an ad agency head put it to me a couple of years ago: ‘subscriptions are down and viewing is down, but budgets are flat, so CPMs are up’
I suspect the demographic of people who still watch broadcast TV is aging out fast. TV was a 'sit back and watch at 9pm' experience for those generations, and aside from live events such as sports TV watching seems to be very short attention span if watched at all in the pervasive online video and streaming world. I therefore think TV advertising - and broadcast TV - is going to fall off a cliff soon.
There have still been recent popular TV series that release weekly, rather than all-at-once binges. Pretty much everything on HBO and FX, for starters. I don't think watching TV on a schedule has passed out of living memory. I personally remember very fondly the collective experience of watching things like The X-Files and Battlestar Galactica at the same moment as the rest of the country.
It hasn't passed out of memory, but it may have passed what people are willing to put up with. I'm old, and the only ads I don't regularly block are on cable TV in hotels, which I (used to) visit a few days a year. Even then, more than an hour becomes intolerable.
One of the great boons of the 21st century will be the elimination of advertising.
I finally burnt out completely on all television -- the programming, scheduling, content, advertising -- a few years back whilst travelling. Watched a film one night, flipped on the set and lost most of an hour simply looking for something to watch. Gave up, and didn't bother turning on the set for the rest of the trip.
Read The Martian instead.
And it's not even a commercial vs. noncommercial thing, I can't stand any of it.
Targeted advertising from FB & Google have completely changed advertising industry client media planning and buying.
Broadcast TV will survive for above the line brand reinforcement for a few more years but if prospective customer viewers dwindle (beer consumers watching live sports via online streams instead of broadcast TV for example, this has already happened with pay per view) I don't see there is much else left for broadcast TV, especially as 'news' from these big media companies has never had such a poor reputation.
The other reality is that a 4k screen is no longer a 'TV', it is the viewing device for any number of inputs
My grandparents are in their 80s and they watch cable 5-7 hours a day. I cannot imagine that they would cancel it, even if it cost 400/month. At the same time I don't know anyone under 50 that watches a lot of cable other than sports fans.
Just wanted to say that I found this fascinating. Don't know if Mr. Evans was already a household name, but I just discovered his writing right now (a win for HN) and got lost reading previous essays.
I'd be curious to see "junk mail" in these charts as a category of print advertising. In my experience, that's always been by far the biggest category. You can come to some mistaken conclusions when you ignore the elephant in the room.
They've been cutting rates to stimulate the economy, but that's not sustainable and has led to fragility. We need rates in the 5 to 7 percent range IMHO to prevent this type of thing. In that range, banks may also make loans they can hang on to rather than securities, and people may actually save a bit and have that buffer.