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The Three Reasons Why I don’t like the Upshot’s Young College Grad Age 25-34 Article

The thing I don’t like about articles like this is we try to come to some sweeping conclusion about what cities are doing things right, what cities are doing things wrong, and then we look at the winners and say that more cities should try to be like that and vice versa. In any case, here’s the Upshot article I object to.

Objection #1 — it ignores the change in the homeownership rate for the affected groups: Here are the age 25-29 and 30-34 homeownership rates for 2000 and 2012:

We’ve seen a huge drop in age 30-34 homeownership, so all else equal, cities that attract age 30-34 homeowners have lost out to cities that attract age 30-34 renters. While the current group of age 30-34’ers has been set back by the recession, I think it’s temporary, even if “temporary” lasts for many years.

Objection #2 — it ignores the change in the level of residential investment since 2000: This is similar to #1 above. Fixed residential investment as a percentage of GDP fell by about a third from 2000 to 2012.

That’s huge. All else equal, cities more reliant on construction have lost out to cities that don’t.

Objection #3 — There’s an unexplored racial component at work:

Here’s the table:

Looking at the list, Houston’s a special case because of the growth in the energy industry since 2000, but excluding Houston you can’t help but notice that the winners (Denver, Austin, Portland) have a fairly low share of African-American citizens while the losers (Atlanta, Cleveland, Detroit) have a fairly high share. I suspect this is because non-whites were hammered by the Great Recession more than whites — they took the brunt of the subprime/unemployment blow, and their access to credit remains much more restricted post-crisis than white access.

One final thought on this related to Atlanta because I’m always thinking about why Atlanta appears wherever it does on lists. Here’s Atlanta’s unemployment rate in 2000 and 2012:

Atlanta had a 3% — THREE PERCENT — unemployment rate in 2000, as it had one of the hottest economies in the country at the time. Then the financial crisis happened. Housing construction plummeted. Homeownership plummeted. Black households, of which we have a lot, were decimated financially. As a result, at the end of 2012 our unemployment rate was still at 8.5%, higher than the national average.

Over the next 10 years, homeownership and residential investment will recover, as will the financial fortunes of African-American households. Big Tech will run out of space in Silicon Valley and be forced to outsource jobs to cheaper metro areas. Millennial priorities will shift from living in the most dense neighborhood possible with the best bars to caring about schools and adequate square footage for their families.

Let’s not come to short-sighted policy recommendations based on an apples to oranges 12-year change.

2015: Waiting on the Economy, the Presidential Leadership Vacuum

This 2016 Presidential poll from the Washington Post and ABC News this morning showing a fairly big lead for Mitt Romney over the rest of the Republicans got me thinking about what next year could look like. Here’s where I am:

Waiting for the economic growth inflection point: Here are the changes in GDP growth and the unemployment rate starting with 2010:

2010: GDP +2.7%, unemployment falls from 9.9% to 9.4%

2011: GDP +1.7%, unemployment falls from 9.4% to 8.5%

2012: GDP +1.6%, unemployment falls from 8.5% to 7.9%

2013: GDP +3.1%, unemployment falls from 7.9% to 6.7%

2014 (through Q2 for GDP, Sept for unemployment, YoY in both cases): GDP +2.6%, unemployment falls from 7.2% to 5.9%

We’ve seen consistent subpar growth and a consistent decline in the unemployment rate, yet we’re still waiting for a moment when GDP growth, wage/inflation growth, housing construction growth, and loan growth all take off. And until (some would say if) that happens, the Federal Reserve is likely to keep rates at zero, through the end of next year if necessary.

A startling leadership vacuum: In 2012, I voted for President Obama. I generally like and sympathize with President Obama. That being said, after November 4th he’s going to pull out the George W Bush 2007-2008 playbook whether he wants to or not. At that point, the party’s goal will shift to winning in 2016 (with Hillary), and nothing President Obama says or does will help with that goal. If we get Russia/Ukraine, Ferguson, ISIS, or Ebola events, he’ll do the absolute bare minimum necessary to carry out the duties of his office. Otherwise he’ll be library planning.

Hillary’s situation is not very different. She’s a demographic/strategist’s dream candidate. Has the female vote locked up. Strong where Obama was weak, with heartland and older white voters. Shouldn’t meaningfully underperform with any part of the Obama coalition. The less she says and does, the better her chances in 2016. She’s going to run the most risk averse, uninspired campaign ever, hope to hit the fairways and avoid any lightning bolts.

And then we come to the Republicans. It’s much worse than casual observers can fathom, which is why Mitt Romney smartly isn’t taking himself out of consideration.

At this point in the 2000 election George W Bush was already polling in the high 30s with Republicans.

At this point in the 2008 election Rudy Giuliani and John McCain were both polling in the 20s and 30s with Republicans, a falloff from Bush’s polling but still respectable figures for top tier candidates.

At this point in the 2012 election Mitt Romney was the uninspired but presumptive favorite, having led most polling and capturing 20-25% of the vote since the end of the 2008 election.

Since the beginning of April, 2014, Wikipedia lists 14 polls for the 2016 Republican nomination. Two candidates have polled at least 20%, Rand Paul in a Zogby poll in June, and Mitt Romney today.

Thinking about winning Republican candidates since World War 2, Eisenhower was a non-partisan war hero who the Republican Party recruited. Nixon and Reagan ran multiple times before winning. And then the Bushes were carryovers from Reagan. There’s no evidence in 70 years of elections to suggest that some unknown Republican is going to take the nation by storm over the next 2 years.

Should we get a multitude of Fergusons and ISISes and Ebolas, an uneasy country will gravitate towards known leadership — Clinton, Romney, and perhaps Jeb Bush (though ultimately I think the Jeb campaign will be done in by him not being conservative enough, out of the game for too long, and/or his last name). Should nothing much of significance happen, a restless and bored country might give an always-evolving Rand Paul a harder look.

In any case, the political situation of the country at the national level over the next two years looks to be as rudderless and restless as it’s been over the last two, if not more so.

It starts in two weeks.

The Great Divergence: The Economy is Getting More Stable, Financial Markets Are Getting More Fragile

Still processing the bond market moves of yesterday…

Yesterday was really stupid. As have been the past few weeks, which increasingly feel like a “baby August 2011,” when markets were even more stupid.

The challenge for portfolio managers in 2014 is that you’d be hard-pressed to find a 5-year period in US history where the economic trajectory was more stable. Real GDP has generally grown between 2-3%/year. Inflation has been in the mid 1%’s. Job growth has been remarkably stable, averaging 150-225k/month. Profit margins have been stable for the past few years, and overall earnings growth has been, I don’t know, 5-8%/year. Monetary policy has been ultra accommodative. Fiscal policy has been…consistent in its level of frustration.

And it’s hard to argue we’re building up economic excesses, with the exception perhaps in the energy sector. Apartment construction has been booming, but rent growth keeps rising and vacancy rates haven’t yet risen. Single family residential construction remains in recession. Bank capital ratios are rising, and the biggest gripe about them is that maybe they should break themselves up to reflect the new economic/regulatory environment. Large cap tech/semiconductors have great balance sheets and cash flow, and subpar growth prospects are the concern. A bellweather industrial like General Electric continues to reduce its debt and spin off or sell tangential business lines. A major airline that wants to be treated as a high quality industrial company has reduced its net debt from $17 billion to $7.4 billion over the past 5 years, and is on pace to do $3.5 billion in free cash flow this year. Occupancy rates for hotels are at 14-year highs with a very modest supply growth pipeline. Financial obligation ratios for households are at multi-decade lows, as are homeownership rates for everyone under 50. Ask people from whence the next recession will come, and you get macro tourism potpourri, “Europe! China! The Fed! Congress!”

Yet the ecosystem surrounding our financial markets is getting more fragile. The two rising generations of investors, Gen-X and Millennials, are a combination of conservative and distrustful of active managers (either themselves or firms), preferring low-cost passive index investing. Baby Boomers are mostly crossing their fingers and hoping for the best with what they have.

Big banks continue to reduce their participation in order facilitation, and prop desks are mostly a thing of the past. The most prominent hedge funds are no longer trading shops like SAC or macro firms like Soros’s, but rather activist investors like Icahn and Ackman who agitate for corporate change and/or more buybacks. Twitter mostly serves to amplify the prevailing mood. Stabilizing mechanisms are absent.

That’s how you get a “mini 1987” in August, 2011, with stocks crashing despite no change in earnings trajectories. It’s how you get the taper tantrum last summer, or the tech growth rout in April/May, or the 7 point move in ultras yesterday.

I expect both of these trends — the economy getting more stable and financial markets getting more fragile — to continue for the foreseeable future, which creates an interesting environment for those hardy souls brave enough to attempt active management in 2014.

Why the 2016 GOP Nomination Strategy Will Be Like Hunger Games

10…9…8…

The countdown begins as the tributes ascend into the arena. Upon their arrival they see it, the cornucopia. Food, weapons, supplies, it’s all right there for those brave souls who get to it first. Of course, the cornucopia gambit comes with an enormous risk — it promises to be a bloodbath with many tributes getting taken out early in its pursuit.

That’s your 2016 GOP nomination process. Declaration season begins in December/January. For those who declare there will be a whirlwind of attention, and attention is the cornucopia of early campaigns. It’s how you get volunteers, money, media, and build your brand awareness.

But the 2016 nomination process will be particularly bloody. Rand Paul, Ted Cruz, a social conservative standard-bearer, and maybe a militant foreign policy standard-bearer will be in the arena with axes and booby traps waiting to cause bloodshed. They won’t win the competition early on, but they’ll create a lot of collateral damage. For the electability/establishment candidates this part of campaign season will be particularly tricky. They could go after the cornucopia or, like Katniss Everdeen, retreat into the forest and wait.

Mitt Romney’s appearance on Bloomberg TV today made me think of this. He mentioned the potential for 15 or so candidates to emerge, with one catching fire (c’mon, Mitt! The pun’s so obvious!). Mitt’s already in the forest.

If the establishment/donor class candidates are smart, they’ll wait too. Wait for the Paul/Cruz/SoCon/ForPol candidates to beat each other up. See what mistakes get made and what themes emerge. The GOP base will once again prove to be fickle with different candidates showing momentum early on. Donald Trump will say things.

Once July/August roll around and the field has been culled start leaking rumors to Fox News/WSJ/Politico about how you’d be open to maybe sorta seeing if the voters want you. The crowd will buzz. With the base dispirited ideologically and the more pragmatic part of the electorate engaged, step forward as the white knight. The donor class, anxious about not having a candidate for the first half of the year, will heave a sign of relief.

That’s the way to get the odds in your favor.

Why the Last Couple Months Has Made Me a Monetary Dove Again

I’ve been fairly hawkish on monetary policy for awhile. I’ve thought all along that the decline in the labor force participation rate was secular thanks to Baby Boomer retirements, the plunge in the teen rate, and the moderate decline in the 20-something rate as young people focused more on education. I’ve also been of the view that short-term unemployment was back to normal [here’s the unemployed rate for people unemployed less than 14 weeks]:

and that many of the [mostly long-term] unemployed would have a tough time finding work again regardless of monetary policy, perhaps from being stuck in a bad geography and being unable to move because of being underwater on their homes, and perhaps because it’s hard for some [older] workers who have done one job for one firm for 10-20 years to reinvent themselves and/or get an employer to take a chance on them. For this small but significant subset of workers, the cost of extraordinary policy outweighed the possible benefits [fiscal policy would be another matter — I would support some sort of program to address the long-term unemployed and people underwater on homes who can’t find a job close to home].

And I was of the view that the unemployment rate (U3), for all its flaws, was the best indicator for measuring the state of labor force slack, that we were rapidly approaching 6% where I thought inflation would become a concern, and between the deliberate wind down of QE and the additional stated language of “considerable period” we had created so much of a time buffer that inflation would emerge before the middle of 2015, which was essentially the earliest time the Fed could raise rates given the path they had laid out.

Inflation, I thought and still believe, when it comes, will be more non-linear than people think, with something like wage growth likely to go from 2.5% to 4% over a period of 6-12 months, not 2-3 years.

But a lot has changed over the past couple months to make me reevaluate my stance. First, it’s important to note that the Fed’s forecast for policy has become more hawkish over the past 6 months. Every “dot plot” we’ve gotten this year has indicated that interest rates are projected to be higher in 2015 and 2016 than they were projected to be in the prior meeting.

And look what that’s done to markets. Long-term interest rates have fallen all year:

5-year breakeven inflation rates have fallen by roughly 0.45% over the past 3 months:

And we’ve seen a rise in real interest rates:

All of which has put significant upward pressure on the dollar:

We’ve now gotten that move in the unemployment rate below the psychologically significant 6% level:

And we’ve seen loan growth come back, which is something I’d been anticipating:

And yet we haven’t seen wage growth accelerate like I was looking/hoping for this spring:

Nor have we seen an acceleration in the single-family housing construction market:

Or in core PCE:

So, thinking about the balance of risks in monetary policy, what are the risks in tightening too fast/too soon vs waiting longer?

As I see it, if we go too fast too soon we run the risk of a dollar/emerging market shock and/or “liftoff” taking even longer than expected. We can see right now that the currency/rates markets aren’t buying the economic acceleration story, and it’s hard to see how hawkish actions would change that.

On the other hand, what if we wait an extra 3-6 months? It’d be desirable to see loan/wage/housing start growth accelerate along with the unemployment rate continuing to fall. And it’s hard to believe that anyone can say with certainty if any level of the unemployment rate represents a magic threshold at which inflation becomes a real concern. I’m encouraged by wage trends for construction workers, and think/hope it’s a leading indicator for the job market as a whole:

I’d feel better about tightening if we saw the dollar stabilize, breakevens rise back towards 2%, and more evidence that wage growth was trending towards 3% or higher. Until that happens, I’d like the Fed to stay on hold.

21st Century City Success: Access and Authenticity over Megacities

This post is a bit loosey goosey, so take it for what it’s worth (as a reader, free/nothing to you!):

After checking out the Las Vegas Downtown Project in person earlier this year I’m not surprised to learn that it’s struggling. What makes Las Vegas special, what it does that nobody else in the world can do, is provide a world class entertainment experience to people from all over the world. It’s too big of a golden goose to mess with, and provides too much influence, both economic and political, to Las Vegas. Additionally, Las Vegas isn’t a powerhouse of higher education, with UNLV being the only noteworthy institution in the region. It’s not reasonable to expect it to become a startup hub. Las Vegas surely has room for improvement, but Las Vegas should stay being Las Vegas. That’s what it does well, that’s its brand, and that’s what attracts visitors to it, which powers its economy.

Mostly unrelated, an idea I’ve been mulling over lately in part due to conversations with Adam Carstens is the thought of decoupling information jobs from physical locations. This won’t be the case for all jobs, but if you’re a journalist or a financier or consultant or engineer there’s no real reason why in the 21st century you have to be tied to DC, New York, or San Francisco. What if an increasing number of workers have the option to work from home or work from anywhere, perhaps with occasional needs to check in to a main office or client location?

Now let me throw one more somewhat unrelated idea into the mix. General Electric’s corporate structure. One of the strengths of General Electric’s business model in the 1990’s was its diversified line of businesses. Before the ubiquity of ETF’s this also provided investors with portfolio diversification benefits not available in most stocks. The steady cash flow of the industrials business gave GE a lower cost of capital, which gave them a competitive advantage in the financials business. And having a strong financials presence allowed GE to engage into other industries it otherwise would have no reason to be in. Flash forward 10-15 years and ETF’s give investors cheap and easy portfolio diversification, so there’s no real reason to own a diversified company like GE anymore. Focused, transparent verticals are seen as more valuable.

Okay, so what does this have to do with cities in the 21st century? Let me try to tie it together:

Access matters more than place: If I don’t have to be tied to my job geographically anymore, it opens up all kinds of places to live that I ordinarily wouldn’t be able to live in. Instead of paying $3,000/month for rent in Manhattan I can pay $1,500/month for a mortgage in Asheville. That being said, there’s still value in being able to get places (via plane, train, or automobile). A clunky analogy might be thinking about going from buying software to subscribing to a SaaS model. Mega airports become the new megacities. The new “infrastructure” that cities build will be catered towards telecommuters or those with “consulting schedules” rather than daily commuters. Institutionalizing co-working spaces/districts, gigabit internet, intercity rail hubs, and things of this nature.

A city’s “brand” or “authenticity” becomes more valuable than being a megacity-like conglomerate of everything: Portland. Asheville. Boulder. Austin. Louisville. Savannah. Santa Fe. People will want to live in places that encapsulate the values and image of themselves they want to see. Maybe that means beach. Maybe mountains. Maybe retirees. Maybe walkable urban living. Maybe country music. Maybe bourbon and horses. Maybe a great place for families. Maybe a great place for young singles. Cities specializing in a type of lifestyle will make urban planning more harmonious. It’s the next level of Big Sort. Huge megacities like New York will be seen as undesirable because there will be too many different classes of constituents to appease and too much of a footprint, too much complexity, to do anything well. New York will be seen as the 2006 General Electric or Citigroup of cities.

Authenticity, #TQE, and Why We Care

There’s been a running gag/joke/theme on Twitter that Guillermo started a few months ago about what has been dubbed “the quaint economy,” which, it being 2014 and all, has been re-branded/hashtagged as #TQE. What is #TQE? It’s our desire to drink cocktails out of mason jars rather than mass-produced glasses from Ikea, at a bar covered in reclaimed wood from a barn in Kentucky rather than something you’d find in the interior of a DMV. Anything that invokes the word “authenticity.”

Where has this come from? Why has this become so bougie chic? This article on Madewell’s history addresses it better than I’ve seen anywhere else.

It gets to our complicated relationship with capitalism in this era of “late capitalism,” where we’re getting close to being able to mass produce/mass consume anything we want at the flick of a switch on a 3D printer.

Part of it, and this is what the tech utopians/dystopians miss, is the ugly side of American status-seeking and our belief that “anything anyone can have isn’t worth having,” which is why we’ll continue to buy 2 carat diamonds when far-cheaper cubic zirconia alternatives may have similar curb appeal. If technology and capitalism can give us any artifact we want, then we’ll crave artifacts technology and capitalism struggle to provide (old barn wood, which is scarce).

But the other part taps into our collective distrust of capitalism in recent years. Capitalism, we believe, led to the finance industry swindling us by giving some people mortgages they couldn’t afford, and selling those mortgage securities to pension funds that are supposed to provide for us in retirement. Capitalism lets soda and fast food companies market products to our kids that make them sick and increases the costs on the healthcare system. It lets retailers buy lead-based toys from China, and grocers buy monoculture and corn-based frankenfoods from big agriculture. It lets healthcare companies deny coverage to people with pre-existing conditions.

Consumers have stopped trusting capitalism devoid of values and morality. Which is where the desire for authenticity-based consumption comes in.

Companies that have existed for generations seem more robust. If you’ve been around since 1837 you’ve survived wars and depressions and fads and new technology. You haven’t been disrupted. There’s something trustworthy in that.

If you’re local then you’re prioritizing geography over scale and economics, showing that your home means something to you. Which makes it mean something to us too.

If you have a unique foundational story about your product or company — you got fired from your corporate job, hiked the Appalachian Trail, and met the love of your life at a maple syrup farm in Vermont, leading you to get into the syrup business — then your passion for your work is seen as more important to you than the commerce side of the work. We trust producers that put their values, work, and customers before profits.

If transparency is interwoven into your business you seem like you have nothing to hide, and we like that.

If you don’t market your product, or don’t market it in traditional ways (print/radio/TV), then again, it seems like you’re just about your work, your product, and your customers.

"Authenticity" is all about placing barriers on growth, which is interesting now that corporations and firms are trying to scale the authenticity economy.

What happens when these values and this trend migrates from niche consumption of food/beverage products, apparel, and home goods into sectors more traditionally based on nothing more than scale, distribution, money, and power — finance and politics, for instance? We shall see.

Thoughts at the End of My Europe Trip

I’ve been to Europe 4 times in the past 5 years — Ireland in 2009, Italy/Prague in 2010, Berlin/Paris in 2012, and now Amsterdam/Barcelona in 2014. By no means am I an expert on Europe or European travel. If anything, my experiences are probably fairly typical for an American coming over here every so often, only that I’m thinking Conor things while I’m here.

  • The quality of life in the US is racing ahead of Europe. This isn’t a statement on the differences between the US and European economies, but the day-to-day things. Beds are uncomfortable, air conditioning is lacking where it’d be desired, pharmacies remain small corner stores, and the downside of cute, old buildings is that they’re, well, old. Barcelona, on my international data plan anyway, doesn’t have LTE service, and it drains my battery about twice as fast as it drains in the US. The quality of food and drink has improved so much in the US over the past 10-15 years, but especially the past 5, that food here feels increasingly pedestrian in terms of its lack of variety. Yes, the tapas are amazing, but you can’t find a good salad anywhere, you can’t find eggs or avocados in most places, and I guess brunch isn’t a thing here. What Europe does well it probably does better than what the US does well, but I honestly won’t miss the dining scene.
  • Ignorant American comment — Barcelona people don’t consider themselves a part of Spain. Legally Barcelona is a part of Spain, which is a part of the EU. But their hearts aren’t in it. The only Spanish flags you see here are on the government buildings where they’re required. The signs are in Catalan, and that’s what everyone speaks. Living in the states where we’re constantly thinking about global markets for technology and finance, it strikes me as quaint and petty. Catalonia is a region of 7-8 million people. There will never be a Facebook or a Twitter founded in Catalonia — the native-speaking market isn’t big enough. There are perhaps 3 global languages in the 21st century — English, Spanish, and Madarin — and many parts of Europe, by holding onto their national historical languages, have chosen to isolate themselves.
  • Asian tourism is growing. In our various tourist groups — a bike tour, a tapas tour, a paella cooking class tour, and tours at La Sagrada Familia, all in English, Asians and/or Asian Americans probably represented 20-25% of the attendees. If tourism is a competition for resources, which is why Millennials go to Prague and Croatia when their parents went to France and Italy, then our kids will be fighting with Asians for tourism resources in 2035.
  • Tourism hot spots are increasingly becoming artificial Disneyland-like theme parks with old buildings and churches as props. This Bloomberg article on Berlin talks about it somewhat. Europe is hurting, its depression perhaps worse than the 1930’s, yet you’d never know it as a tourist. Almost by definition, anything popular you do based on a TripAdvisor review is thriving. The breadth and depth of tourist activities geared towards foreigners has grown over the years. As a result, it’s quite easy to spend days here doing typical tourist sightseeing, a Fat Tire bike tour, a cooking/food tour in your native language, gorge on gelato/coffee/croissants for awhile, eat at a few restaurants with high Yelp scores, and then head out of town. It’s not an American experience, but it’s debatable whether it’s really a European experience. With two big markets for global tourism — Asians and empty nester Baby Boomers — growing, and Europe’s struggle seemingly never-ending, look for tourism to increasingly crowd out the local economies in places like Berlin, Amsterdam, Barcelona, Italy, and Prague.
  • I miss Atlanta. Europe feels to me like a place that respects its past and lives for the present because it’s unable to envision any sort of future. It’s perhaps a great environment as a tourist — “look at how their priorities are balanced!” — but depressing to a future-oriented person like myself. In Atlanta the debate is more about what our future should look like — transportation options, the Beltline, school reform, and housing — but basically all the city thinks about is its future. I’ll miss the non-car transportation options here but I think another generation of Europeans may need to pass on before this continent figures out what it wants to be in the 21st century.
The Causality is Backwards — It’s Housing That’s Holding Back Employment

Here’s what we know:

1) Over the past 6 years, we’ve built far fewer single family houses than we have since at least the 1940’s. We’re undersupplied.

2) The Millennial Generation is slightly bigger than the Baby Boomer generation, and the peak population cohorts of the Millennials are currently in their early 20s. The closer this cohort gets to its early 30s the more single family housing they’ll demand. The demographic demand story for housing over the next decade is the strongest it’s been in 20+ years.

3) The housing stock we have is old. The decade that produced the largest number of homes still standing is the 1970’s. In addition to adding new supply we’ll have to tear down and replace old supply (chart below h/t George Pearkes).

When you combine the undersupply from the past decade, the coming demand from the next decade, and the age/condition of the existing stock, it should be a no-brainer to expect housing construction activity to be picking up significantly right now, and it’s not. So what’s going on?

The problem, as Evan Soltas pointed out so clearly yesterday, is that housing is the weakest link in the economy right now, not employment. Households will only move out of their apartments and parents’ houses into homes of their own if they have [good] jobs. Builders will only build (and hire construction workers to build) when there are buyers with jobs looking to buy. But what do you do when the missing jobs are in the housing sector? It becomes a chicken and egg problem.

To get an idea of what I’m talking about, here’s a look at residential fixed investment as a % of GDP compared to the unemployment rate for when residential fixed investment as a % of GDP is less than 4%. You can see that 4% is historically very low:

As you’d expect, there’s generally a strong relationship between the unemployment rate and the employment-sensitive housing sector. I shaded past cycles different colors to highlight contrasts, and only included the past 6 quarters for this cycle.

I bolded 2 quarters in 1982 because those are the only two quarters prior to this cycle where RFI/GDP was as low as it is now. In those 2 quarters the unemployment rate was 9.6% and 10.1%. In the first half of 2014, with similar levels of residential fixed investment activity, the unemployment rate was 6.7% and 6.1%. Similar level of housing activity, much lower unemployment today.

A look at the 1974-95, 1981-83, and 1991-92 periods show housing activity levels higher than we’re seeing today, but also higher unemployment rates. Ex-housing, employment really is quite robust in 2014.

What about those first periods from 1966-1970? They, I believe, hold the key to our future. In 1966-67 the unemployment rate was very low, sub-4%, while housing activity was also low. That was also the period when the older Baby Boomers were in their early 20s. Demographers could’ve told you that we’d need to build a lot of houses in the 1970’s (and as mentioned above, they did). But where were they going to find the workers to do so when the unemployment rate was sub-4%?

All of a sudden the inflation in the 1970’s makes more sense — employers were in a vicious competition for workers to do all the work needed that decade.

At the moment, the job market isn’t strong enough to get builders off the sidelines and building. The rental market is tight, as is the homebuying market, especially at the low end. By the time the job market and wage growth are strong enough to induce builders to get back to mid-cycle levels of production — forget make-up production or an overshoot — it’ll be clear just how inadequate the labor supply is to meet this demand, and we’ll get wage growth that we haven’t seen in 20+ years.

How Hard Times and Tight Budgets Led to “Rich Only” Urban Planning

I’ll start with Atlanta because so much of what I think about starts with Atlanta.

Atlanta, like many cities, was hard hit by the financial crisis. Its economy historically has been more real estate-dependent than average, and additionally the shock to unemployment rates and credit access for blacks in particular had a devastating impact on a city that’s over half black.

The past 5+ years has been spent digging the city out of its financial hole, and with rainy day funds built up and property valuations and tax revenues recovering, Atlanta’s looking to plan for the future and address its infrastructure deficiencies.

Any vision for the future has to start with the constraints of the present. And cities know that when it comes to the federal government, “the cavalry is not coming.” While cities have an easier time raising taxes than states or the federal government, the middle class is still struggling and can’t afford the tax hikes, and governments at all level are reluctant to raise taxes for fear that it’ll hold back economic and job growth.

So if you’re a city looking to invest in infrastructure and can’t get money from the federal government or your own tax increases, the only answer is to do things to raise your tax base via gentrification and/or density. Imagine that mayors are like CEO’s and are looking to pad the bottom line without having the ability to increase prices for existing product lines.

From the point of view of a city’s financials, not all residents are created equal. The rich are more profitable than the poor. Employed adults are more profitable than “cost center” children. When you start thinking this way, current development trends make more sense.

Building a high end apartment complex with studio and 1-bedroom apartments is a lot more profitable than building housing for low income families. Land is scarce, especially in desirable and gentrifying parts of town, and when you’re scraping for every tax dollar you can get having an underutilized part of town can cost your city real money. And every tax dollar missed out on means fewer sidewalk improvements, fewer road repairs, fewer beautification projects.

The fact that good neighborhoods close to job centers and transportation infrastructure are so scarce, with two decades of Millennial demand on the horizon, means that for desirable cities and communities it’s a sellers’ market.

Struggling communities, like East Point here, don’t have that luxury. Desirable residents and businesses aren’t looking to move there, and the tax base hasn’t recovered in the wake of the financial crisis. They’re forced to greenlight any proposed development they can, and are making hard choices about what public services to cut. Meanwhile, the community’s infrastructure decays.

This all serves to reinforce trends that are increasing inequality at the local level, and until the federal government gets back in the game or the economy recovers it’s hard to see these trends reversing.