California Real Estate: Sustainable or Just Another Example of Extraordinary Popular Delusions and the Madness of Crowds?

Silicon Valley is in a real estate frenzy. Frankly, I think the market is slowing down, but that’s just based on my observation, which lasted a whole weekend. That’s not saying prices will come down—just that they may not go up as fast as they have been.

The real estate market out there is and has always been, in my experience, different. The first time I moved there, in 1976, I wanted to offer less than the listing price. The agent was shocked. “Oh, you don’t want to insult the seller,” she said. And this attitude has prevailed (except for the early 1990s when a recession hit the area—I wasn’t there during the last crash, so I don’t know how prices were affected then). As an example of how entitled Silicon Valley sellers are, there was a letter to a real estate columnist in the July 15 San Jose Mercury News complaining that it had taken their agent three weeks to bring them a full-price offer when their neighbors had several offers over asking price in just a few days for an “inferior” house. Imagine! Complaining about a full-price offer. And about those prices.

Strawberry Square, a development of 350 townhouses, is my gauge. I sold my 4 bedroom 2½ bath 1,440 square foot unit there in 1994 for under $200K. A similar unit was for sale during our trip for $1.2 million. It appears to have sold. These units were built in the 1970s and priced around $30,000. They were built on slabs and without air conditioning, and while you can put air conditioning in the units, it has to be routed through the (hot) attic and is an expensive proposition. In spite of the fact that temperatures can get well over 100º, everyone assures buyers, “Oh, you don’t need air conditioning,” which might have seemed reasonable at $30,000, but for $1.2 mil?

          Our host lives in a townhouse she and her late husband bought in the 1980s for $150,000 that could bring well over $1.5 mil today because of its location. She assured us there’s nothing under $1 million in Silicon Valley, and I tend to believe her. Dan and I went to a couple of open houses—one is a 4 bedroom 2 bath house on a busy street priced at $1.7 mil. This house appears to have been redone by a flipper—on the surface it looked great, but it was redone on the cheap; it still has the original 1970s aluminum windows (and no air conditioning). The other open house we went to is a 3 bedroom 2½ bath townhouse priced at $1.398 mil. One reason I think the market is slowing down is this unit was reduced (gasp!!!) from $1.448 mil.

          These houses are in my old neighborhood, west San Jose. Prices are much higher in Sunnyvale, Mountain View, etc.

          High housing prices are not limited to Silicon Valley. We visited a 2 bedroom 1 bath in Pacific Grove, near Monterey, that is priced at $749,500. The house was built in 1909 and has no driveway, garage, or functional parking in front of the house. It also needs a new sewer line. And though there’s no air conditioning, you really don’t need it there.

          We saw high prices all over California, which begs the question—how do people manage to find a place to live there? That’s a tough one. Some people don’t. As we were driving on Santa Monica Boulevard in Los Angeles we saw a large homeless camp under a freeway overpass. Our host in San Jose and I talked to a guard at Airframe Supply while Dan was doing his business there. The guard drives two hours each way to his job and shares an apartment with his father.

          California has two classes of people—those with homes and everyone else, and those with homes don’t seem too interested in those without.

          Housing in California is complicated. Proposition 13 was passed in 1978. It limited property taxes to 1% of the sales price of the home. I believe taxes were allowed to escalate at something like 2% a year, but voters can (and have) approved add-ons (kind of like the streetcar add-ons we will soon have) and “special” taxes can be added as well. Nevertheless, tax rates are much lower for people who bought way back when, and those people are only going to let go of their houses when they die. For people in the market now, even without the add-ons and special taxes, the buyer of a million dollar house will have an annual $10,000 tax bill.

          With interest rates going up and interest and state and local tax deductions being limited, I wonder how sustainable this boom is, but it’s almost always wrong to bet against California real estate.

          Which brings me to the question almost everybody asks: Don’t you wish you’d stayed?

          In a word, no. As I mentioned in my previous post, we stayed with the widow of the man who wound up with my job after I left. I believe the job contributed in a major way to his death. He had diabetes, and as far as I know, Company L did nothing to accommodate his illness. He went on disability a couple of years after I left. I visited him in 2000. He eventually lost both legs. He told me, even in that condition, he was happier than he’d ever been at Company L. That’s how much that job sucked. He died in 2004. If I had stayed, I doubt I would have fared any better.

          My house is definitely not worth a million dollars, but it’s nicer than anything we looked at in California.

And I have a life.  

© 2018 Larry Roth

Legal Pot: California Turns a Liability into an Asset

          Dan and I just returned from our trip to California. I had some frequent flyer miles to use or lose, and Dan had never been south of San Francisco, so I decided to use some miles to revisit some of my old haunts.

          We started in San Jose, where I lived for ten years, and ended in Los Angeles, where I lived for two years.

          The part of our trip that people seem most interested in is our visit to a pot dispensary, so that’s the part of the trip I’ll write about first. I’m going to be honest here and admit I’m no expert on pot. I tried it once in 1976, and I felt… nothing. And yes, I inhaled.

          I knew Dan wanted to visit a dispensary, but I didn’t know it was such a priority. He wound up convincing our host, the widow of the man who wound up with my job after I left it, to take him to a dispensary the first day we were in San Jose. We wound up at Airfield Supply, which is right by the San Jose airport.

          We had to show our ID to get in the store. Once in the store, we had to sign a disclosure form releasing Airfield Supply from liability for anything we might say, do, or stand by as a result of any purchase we might make. Only after that were we allowed into the part of the store with the products.

          I was around in the 1960s, and this store is not what I was expecting, which was a bunch of stoned long-haired hippie types saying “Dude,” “Cool,” etc. The staff could have been mistaken for the younger folks I worked with at Company L (the Los Angeles Times ran an article in its July 15 Business section titled “From Tech to Toke” on how tech workers are migrating to jobs in the “cannabis sector.”) The folks at Airfield Supply were highly professional and seemed to know their stuff, which makes sense. This is, after all, a business, and the goal is to make a profit. Airfield Supply takes credit cards, which surprised me, but, again, their goal is to make a profit, and credit cards make for larger purchases.

          Dan bought oils to vape. One was “Afghan Elite” another was “Gorilla Glue.” His total before tax cost was $100.10. Taxes added $28.49 to the purchase, so various state government agencies collected 28% on Dan’s legal pot purchase.

          He also bought a package of ten small cookies “for me” (I have a well-known weakness for cookies). The cookies, “Big Pete’s Cannabis-Infused Chocolate Chip Mini Cookies,” are professionally packaged and even have a bar code—81156020633—if you saw them on a grocery store shelf, they’d look right at home. These cost $19, and the tax on that purchase, $6.32, was 33%. (Full disclosure, I ate 3½ cookies and not all at once; I think they did relax me, but that could well be psychosomatic.)

          California is making 28% to 33% on all pot purchases.

          If you consider the money California was spending on pot prohibition before pot was legalized, California is making a lot more than 28% to 33% on the deal.

Airfield Supply is just one dispensary. Dispensaries are just about everywhere (although some upscale and upscale wannabe neighborhoods prohibit them), and they advertise not only in the local Pitch-like papers, but also in the Los Angeles Daily News. (Newspapers have to take revenue where they can get it these days--while we were in California, the Daily News announced it would lay off half its staff.) Interestingly, medical marijuana dispensaries are urging their customers not to give up their cards, since a person who has a medical card can buy pot at age 18; recreational stores can only sell to those 21 and older.

          It’s a new world out there, and California has changed that new world from a liability into an asset.

          Perhaps the rest of the country should do the same.

           

© 2018 Larry Roth

Gigged: A Review of the Book by Sarah Kessler

          Sarah Kessler’s Gigged: The End of the Job and the Future of Work is another of those books examining the current jobs situation. Ms. Kessler, a reporter for Quartz, has been observing the “gig economy” since 2011, and her research for this book has included actually taking on gig tasks to see first-hand how the economy works.

          The 250-page book is a fast read. It took me less than a day.

          In the book she interviews several people, including an ethically flexible young man here in Kansas City who worked for and then sued Uber. Uber is one of the few gig jobs that has endured, but Uber keeps changing its terms, which has resulted in drivers’ not being able to make a profit. I’ve talked to a couple of Uber drivers because I couldn’t understand how they could be making any money. One quit after coming to the same conclusion; the other built up a client base and left Uber, taking his clients with him.

          Other examples include a woman who gigged for Mechanical Turk (and wound up with carpal tunnel syndrome and no health insurance), a man who left a high paid but boring job for Gigster, where he did quite well, but in the end, he opted for a job with benefits.

          One of the more interesting stories is about Managed by Q, an office cleaning company. It began as a gig company that contracted with other gig companies to get the cheapest labor available. It turned out Managed by Q got what they paid for and lost clients hand over fist. In the end Managed by Q became a company that hired—gasp!—employees and found that approach, plus treating their employees fairly, worked much better than racing to the bottom of the labor pool.

          While the jury is still out on the gig economy, Ms. Kessler seems to conclude it’s not the answer for people who actually need their gigs to earn them enough to live on, and that the race for the cheapest labor is usually not the best route for gig companies as well.

© 2018 Larry Roth