Oregonia

Smashing Pumpkins in 2018 and 1991

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The Smashing Pumpkins came to Portland on Saturday, August 25th at the Moda Center (the arena where the Portland Trail Blazers play). It was a good show and the sound was excellent (we recently saw a show at the Veterans Arena adjacent to the Moda Center and the sound was so terrible we walked out half-way through the show).

They played the hits – most of the show was based on their first few albums – Gish, Siamese Dream, and Mellon Collie and the Infinite Sadness, and a bit of their next two.  There wasn’t a lot of their most recent work – the local paper described the show as “Give the Gen X’ers What They Want”.

The whole band was there except for original bassist D’Arcy.  Like (nearly) everyone else, I had my story of when I ran into the Smashing Pumpkins back in Chicago – James Iha and D’Arcy were behind me in line at Best Buy purchasing CD’s a long time ago.

While I love the Smashing Pumpkins unconditionally, I can see how Billy Corgan’s “woe is me” routine would be grating.  He had a bad childhood and it was highlighted from the very first song “Disarm” where he had pictures of himself as a child with annotations and they weren’t happy, for sure.

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West Coast Real Estate Starts to Turn

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When I moved to the West coast I noted that prices were generally high relative to incomes.  It is well documented elsewhere that San Francisco area housing prices are very high and Seattle has been skyrocketing as well.  In Portland, housing isn’t as costly as Seattle or San Francisco but is very high relative to the local job market, particularly within the city limits and in the nicer areas.  A condo in “the Pearl” in Portland (a local high rise market) is 2-3 times what I’d pay for a comparable unit in my former River North area in Chicago.

From an economic perspective, the income tax changes passed in late 2017, particularly the virtual elimination of the State and Local Tax deduction (SALT) for high earner households, along with continuing reductions in the mortgage interest deduction, should have had an immediate, negative impact on house prices in high tax states such as Oregon and California.  I didn’t see these effects, but changes in the housing market take a long time to appear, because many transactions are already under way and sellers will hang on in the market rather than taking a perceived “hit” to the value that they expect to receive.

It looks like the market, in Portland at least, has crested and is (likely) to proceed in a downward direction.  From an article in Bloomberg titled “The US Housing Market Looks Headed for Its Worst Slowdown in Years“

Dustin Miller, an agent with Windermere Realty Trust in Portland, said he’s trying to manage sellers’ expectations, something he hasn’t had to do since the end of the last housing boom. One customer, a baby boomer moving to a new home across the state, expected to have buyers fighting over her house. She got one bid, below her asking price.  “Buyers want to shop and take some time, as opposed to having to rush and throw offers in,” Miller said. “It’s the market correcting itself. At some point, you hit a peak of momentum, and then things level off.”

The real estate agent refers to this as moving from a ‘peak’ to ‘leveling off’ and we will see if this moves to a prolonged rout, like we had back in 2008-9.  It will also be interesting to see if real estate in high tax states doesn’t bounce back as fast as real estate in states with lower tax rates, but we won’t be able to see the net effect of this for many years (and it is but one variable among a sea of variables).

I have a semi-sad theory about this – I don’t think folks understand the impact of the changes in tax laws until they file their taxes.  Whether due to complexity (it is hard to model just a couple of variables in a tax program unless you know what you are doing) or a lack of financial acumen, I believe that after 2018 taxes are filed in the middle of 2019 you will start to see more of a “wealth effect” as home owners start to realize the potentially large impact of the changes to the SALT deduction.

As I look out my window in Portland I hope that they complete the high rise buildings that they are working on, and don’t break ground on new ones.  We used to look at partially completed buildings for many years in Chicago after the 2008-9 crisis, until they finally completed them up to 5 years later.

Cross posted at LITGM

Seismic Upgrade, Moral Hazard and Gentrification

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While there has not been a recent major earthquake in the Pacific Northwest, research has proven that the area is seismically active. Building codes were established to withstand earthquake damage and new buildings have been held to this higher standard. However, there is a substantial portion of the commercial and residential buildings which have not been retrofitted to date. This cool interactive map shows earthquake risk in Portland based on the age of construction… and the pervasive color “red” is bad.

While wood frame houses may fare reasonably well in an earthquake, the highest risk buildings are large structures made of brick. The term for these sorts of buildings in Portland is “unreinforced masonry” or URM for short. They are the buildings that give Portland all of its “character” like classic old apartment buildings and multi-use commercial and residential structures. Many schools, churches and community centers also fit in this classification. This article estimates that it would cost $4.6B to retrofit the remaining URM buildings in Portland. They also note that at the current rate of upgrades, it would take 100 years to complete the effort.

I read a different local article and an engineer put it most pithily

The value of an URM building is zero

I do see some building owners “biting the bullet” and doing a seismic upgrade. When I look out the window of my building I can see many of the older buildings that gabapentinoral have been upgraded in this manner, and many that have not. Here is a construction notification for a nearby 5 story masonry building that is being retrofitted.

There are two threads here that are most interesting to me:

1. How do owners of apartment buildings, where residents will most certainly be at higher risk of death during an earthquake, sleep at night? They talk about the costs of retrofitting as if it is an abstract event; but not doing so creates an economic externality of human misery that apparently they value very little if at all

2. Any mandate the city or region employs on URM will almost certainly drive gentrification because owners will have to invest in higher cost apartments and in turn raise rents; ironically, the city’s mandates on re-use and burden of oversight rules will make the future rent increases even more burdensome

The likeliest solution is some sort of “muddling along” in the near term. For valuable commercial and high rise residential locations, the inevitable commercial upgrades will drive the URM upgrades. For apartment buildings, the future is much dimmer, because if you are a landlord owning an URM building, you can’t raise and invest the money if your local competitors are just going to “accept” the URM risk (on behalf of their residents, ironically). In fact, it makes no sense at all to invest anything more than the cosmetic minimum in these URM buildings, which will move them down the road of being slums at some point in the future.

Cross posted at LITGM

Disruption – The Weed Market in Oregon

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Oregon allows recreational marijuana. Originally, there were laws limiting growers to local Oregon companies (when it was a medical marijuana industry) which were effectively eliminated when the transition was made to recreational usage (allowing out of state funding). There was also a relatively small local market for growing cannabis.

Dispensaries cropped up everywhere, even in seemingly small, out of the way tourist towns with only a few hundred souls. It seems that you can’t go far without seeing the “green cross” that symbolizes a marijuana dispensary. Unlike other states, Oregon apparently allowed anyone who met basic criteria to open a “weed store”.

While it surprised many of the locals who curated their wares and made custom strains of local cannabis, the free market reared its head and drove down prices on effectively undifferentiated product and storefronts. From the local WWeek newspaper:

A gram of weed was selling for less than the price of a glass of wine… we have standard grams on the shelf at $4… before we didn’t see a gram below $8… Wholesale sun-grown weed fell from $1500 a pound last summer to as low as $700 by mid-October.

As a result of this, there is significant consolidation in the market as smaller growers either bow out or are bought up and dispensaries are being purchased by large groups (often vertically integrated with growers) at fire-sale prices.

(the) Oregon cannabis industry is a bleak scene: small businesses laying off employees and shrinking operations. Farms shuttering.

One farm profiled in the article went into growing weed with the expectation of selling at $1500 a pound; when they finally had to liquidate most of their crop at a weed auction, they only received $100 a pound.

The entire Oregon recreational cannabis industry has played out exactly as you would expect in a market with few barriers to entry and a relatively undifferentiated commodity:

1. Suppliers rush in to take advantage of high prices for crops, turning what was originally a weed shortage (and resulting scarce supply) into a huge spike in supply which in turn drove down wholesale prices to almost nothing on the margin

2. Retailers who have little or no differentiation are being driven out of business by low profits or being forced to run at a loss

For me the interesting part of this is not the plain execution of basic market economics (in an industry with low barriers to entry, prices will drive down to near marginal cost of the most efficient operator), but in what that means to “adjacent” industries. For example, if a gram of (high quality) weed is the price of a single glass of wine (actually a lot less at $4… that is probably 1/3 of the price of a glass of decent wine at a standard restaurant), will customers switch from beer or wine to cannabis? From an economic perspective (cost / buzz) this would be a relatively clear-cut choice. Over time economists should chart the impact of low cannabis prices on both prices and consumption in adjacent alcohol industries.

Cross posted at LITGM

Apple Pay for Better Security

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Over the last year I’ve had several opportunities to drive to remote parts of Oregon. Often we stop by a local grocery / convenience store to pick up groceries or a snack. These stores are small and often with a single check out lane and a very quaint atmosphere of old-time store goods.

A bit of fun for me is to walk up to the credit card reader which usually has the icon for near field connectivity (NFC) and I surreptitiously use my Apple Watch with Apple Pay enabled to quickly pay for groceries without taking out my credit card. The cashier gets flummoxed and wonders what happened, and I show them my Apple Watch with my card image and they laugh.

What is sad is that Apple Pay works “out of the box” at most of these remote grocery stores but it doesn’t work at many of the large retailers in the city. Instead of encouraging Apple Pay or similar google technologies, the retailers want to control the experience and the data and so they turn off this feature. You have the unfortunate alternative of putting your credit card in the chip reader and waiting for 5-10 seconds which slows the line for the whole process. Worse than the inconvenience is the fact that Apple Pay is much more secure than any card reader – Apple Pay doesn’t provide your “real” credit card to the store, instead it uses a “token” for the transaction.

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