Author Archives: Eric Fruits

About Eric Fruits

Dr. Eric Fruits is an economics expert, finance expert, and statistics expert. He has produced numerous research studies involving economic analysis, financial modeling, and statistical analysis. As an expert witness, he has provided expert testimony in state court, federal court, and an international court. This blog is an informal look at a wide range of issues in economics, finance, and statistics. Some posts are based on original research, some may be copy-and-pasted from other sources, and others may be some combination of the two. Information, conclusions, and opinions in posts are usually based on casual or informal review of issues and data. Any conclusions or opinions are those of the author’s and do not reflect the views of any individual or organization.

Three opportunities to learn what is happening in the Oregon and US economies

I have been invited to present to three different groups in the next month.  There will be some overlap in the presentations, especially regarding my forecast for the Oregon and US economies over the next year or so.  At the same time, there should be enough of a difference makes all three worthwhile.

Topic: 2013: The Year of the Turbulent Turnaround
Who: Institute of Management Accountants Special CPE Breakfast Event
When: Wednesday, May 8, 2013, 7:30-9:00 am
Where: Crowne Plaza Portland-Lake Oswego, 14811 Kruse Oaks Blvd, Lake Oswego, OR 97035
How to register: Visit the IMA Portland Chapter’s website, and write “Breakfast” in the notes

 

Topic: Real Estate Forecast for the Next Year or So
Who: Association of Government Accountants, Portland Chapter Spring Conference
When: Thursday, May 30, 2013, 8:00 am to 5:00 pm
Where: Lloyd Center Doubletree, Executive Meeting Center, 1000 NE Multnomah, Portland, OR 97232
Note: Other presenters include Gary Blackmer, Director, Secretary of State Audits Division speaking on Oregon’s financial condition; Darrell D. Dorrell, Founding Partner of FinancialForenics on forensic accounting; Nick Beleiciks, State Employment Economist, Oregon Employment Department on Oregon unemployment and the labor market; and Paul Cleary, Executive Director, Oregon Public Employee Retirement System with a PERS Update.
How to register: Visit the AGA Portland Chapter’s website and download the registration form.

 

Topic: Oregon’s Public Employee Retirement System, or Can an 800 Pound Gorilla be Tamed?
Who: Washington County Public Affairs Forum
When: Monday, June 3, doors open at 11:00 am, speakers begin at noon
Where: Tanasbourne Old Spaghetti Factory, 18925 NW Tanasbourne Drive, Hillsboro, OR 97124
Note: The other presenter is Marc Abrams, attorney with the Oregon Department of Justice.All programs are video taped and broadcast over Tualatin Valley Television as well as being streamed from the Forum’s website.
How to register: There is not charge for admission. But, the cost of lunch pays for the room.  Please note, however, that only paid up members of the Washington County Public Affairs Forum are allowed to ask questions of the speakers.

 

 

PSU Center for Real Estate Quarterly Report finds most markets improving

psulogo_horiz_stdThe Winter 2013 issue of the Portland State University Center for Real Estate Quarterly Report has just been published online.

Ron Ross, from Compass Commercial Real Estate Services, provides a review and forecast for Central Oregon’s commercial real estate markets (PDF). He says in 2013, the industrial market should expect to see a drop in industrial vacancy rates and a slight rise in rental rates. He forecasts that retail occupancy will rise and rates will be expected to climb a bit. In the Central Oregon office market, Mr. Ross expects a one to two percent drop in vacancy and for lease rates to remain stable.

In the single family housing report (PDF), RMLS student fellow Evan Abramowitz reports that the market recovery continues, with improving home sales, and increasing upward pressure on prices. In the Portland metropolitan area, the median sales price continues to sputter upward to $315,320 for new homes and $287,000 for existing homes. Central Oregon is seeing signs of improvement, but wild swings in sales and prices from quarter-to-quarter provided little confidence in knowing how strong any recovery will be. The Willamette Valley and I-5 corridor continue to be challenged by stagnant or slightly declining prices.

In the multi-family housing report (PDF), Abramowitz finds a market that “has everything going for it.” He reports that rents have increased in the U.S. by just under four percent. At 2.1 percent, Portland vacancies are among the lowest in the country. The region continues to attract young migrants who seem hesitant to commit to homeownership. He finds that new construction continues to lag behind demand, but several new projects in the pipeline are expected in the next year.

In the office market report (PDF), OAR Student Fellow George McCleary finds a market that has improved modestly in 2012, with general economic conditions continuing a slow upward climb. Fundamentals have improved, and unemployment has dropped almost a full percent, to 7.8 percent. Vacancy is down and 100,000 square feet of space was delivered to the market, although speculative construction is still nearly nonexistent. He concludes that new space is unlikely to be developed before demand increases, forcing lease rates higher.

McCleary’s retail report (PDF) finds overall retail vacancy rate of 5.7 percent, up three tenths of a percentage from the same period last year. Absorption totaled 141,586 square feet for the year, and rents are up by 0.4 percent to $15.83 per square foot. He predicts that measures are expected to improve in 2013. Mixed-use projects drove much of the retail development in 2012, and that most development was build-to-suit or owner-user oriented. Speculative retail construction remains mostly absent, save for smaller infill projects, or ground floors of apartment buildings.

In the industrial report (PDF), McCleary that fourth quarter of 2012 was the tenth straight quarter of positive absorption in the Portland industrial/flex market. It also, however, saw the lowest number of leasing deals since the third quarter of 2003. Although there is a lack of space in certain classes, lease rates are generally still not supportive of speculative construction, as has been in the case for the past four years. Developers have constructed facilities, but nearly all development has been built-to-suit. This is expected to continue in the months to come, with market fundamentals eventually arriving at levels that support speculative development.

More on student debt … A long and lasting burden for some

Yesterday’s post raised the question whether student loans may contribute to income inequality. It generated some buzz in the Twitterverse and caused me to flag some other factoids.

MarketWatch reports that students who go to the most “affordable” four-year public colleges are more likely to drop out and to fall behind on their student-loan payments, according to a “College Scorecard” released by the U.S. Department of Education.

MW-AZ289_gradua_20130214073319_MG

MarketWatch argues that, in general, colleges with lower net costs tend to attract more lower-income students who are also more at risk for leaving school before graduation if their families suffer a financial setback. From there, a domino effect ensues: Dropouts are less likely to have the means to keep up with student loan payments, which in turn leads to a higher default rate for that institution.

Oregon Public Broadcasting’s “Think Out Loud” ran a segment on the long lasting impact of student debt. One of the commenter’s, “Dave in Depoe Bay” highlighted the problems with high student debt:

I have a B.S. in psychology that is currently billed at $200,000. Every year or two they get sold to another collector that then adds more (along with daily interest). Since, I am in default I am considered a criminal without statue of limitations. No chance of bankruptcy, only $800 a month or $85,000 up front.They harass my job, family, and friends without a glimpse of reality. EDUCATION IS THE LARGEST, HAUNTING REGRET OF MY LIFE.

Perhaps before students sign up for ever larger student loans, schools should make them take a short course in the principles of net present value calculations.

Do student loans cause income inequality?

Engineering Professor - complains about the destructive effects of capitalism requiThe distribution—and redistribution of income—is back in the news. The Economist reported on study of the persistence of income distribution from generation to generation, which generated some discussion.

Then, Gary Becker and Richard Posner jumped into the debate with some often overlooked observations.  Judge Posner, however, flag a growing problem that is just getting some attention:

And it must be borne in mind that some programs that purport to reduce inequality, such as the federal student loan program, may well increase it, by imposing debt burdens disproportionate to the value of the education that they finance.

Seems only a few years ago, the discussion of higher education focused only on the benefit side: How much more money will you earn with a BA, MA, or Ph.D.? Now, the discussion starting to turn to the costs: Will the bump in income more than offset the additional cost of debt?

Growing pains in EB-5 program that provides green cards to foreign investors

Visa documentTwo stories have recently surfaced of some growing pains in the government’s EB-5 visa program.

With financing scarce and often difficult to obtain, it’s little wonder that real estate developers across the U.S. are looking for new ways to fund their endeavors. Within the past three years, there has been an increasing amount of interest in the EB-5 Investor Visa Program as a potential source of capital as foreign nationals seek to invest in the U.S. According to a number of recent reports, there is a growing class of foreign millionaires looking to invest in businesses and development projects through the EB-5 program. The Portland State University Center for Real Estate Quarterly Report recently published a primer on the ins-and-outs of the EB-5 program (PDF).

A recent story in the Miami Herald has—perhaps unfairly—characterized the EB-5 program as “selling greencards.” More precisely, the program provides green cards to investors who provide at least $1 million dollars (or, in some cases, $500,000) for projects that add at least 10 jobs to the local economy. The story is a sign that the press is now paying attention to the program.

A more interesting development is the Securities and Exchange Commission’s announcement that it had filed civil charges against—and received an emergency order to freeze assets of—the Intercontinental Regional Center Trust of Chicago. The SEC alleges misrepresentations or omissions in the offering documents and in documents filed with U.S. Citizenship and Immigration Services in connection with the applications for conditional permanent residency, specifically:

  • The offering documents made numerous false claims, including the receipt of all necessary building permits, franchise agreements with several major hotel chains, the availability of a state-sponsored bond facility, the value of the underlying land, the financial potential for the project to provide a return to investors and the refundability of administrative fees if visa approvals were not granted.
  • The sponsors provided falsified documents to USCIS in an attempt to secure conditional visa approvals for investors, which approvals were a precondition to release of each investor’s $500,000 investment to the issuer.
  • More than $2.5 million of $11 million in administrative fees were directed to the principal’s personal bank account in Hong Kong and most of the balance spent rather than available for refund.

As pointed out in a blog post, while there have been allegations of fraud around other regional center projects, this is the first EB-5 enforcement action filed by the SEC. Press reports from September 2012 indicate that an internal memorandum prepared by the USCIS noted that Regional Centers “are not even making good-faith attempts to conform their offering documents to basic securities regulations.” Press reports also indicate that the Department of Homeland Security’s Office of Inspector General has launched an investigation into fraud in the EB-5 program. The SEC notes in its press release for this action there was close coordination with USCIS in bringing the case.

This case confirms that both the SEC and USCIS are paying attention to EB-5 applications’ compliance with securities laws, and USCIS is now monitoring for securities law compliance in its review of visa applications.

“Winter is coming” … and so is an onslaught of urban economics posts

Today is the first day of class for Economics / Real Estate 431, Urban Economics.

That means this blog may have more posts related to the topics we are covering in the course.  It also means that there may be some posts with opinions and conclusions that I do not agree with.  That serves as a handy reminder that just because it’s on this blog, does not mean it’s this blogger’s opinion. If you want to follow along, click on the “Urban economics” category to the left.  This blog is powered by WordPress, which means that you can get an RSS feed of any category.

Economies of scale

Because there the course is cross listed between Economics and the School of Business, the students were assigned to two different classrooms.  One mass email and a sign on the door later, the 30 students who have enrolled for the class will now be sitting in a 235 seat auditorium.

Typically, when students ask if there is room in the class, I answers, “If there are seats, there is room.” I may have to rethink that if another 200 students show up.

The room assignment shuffle is a handy reminder of the economies of scale in education: Teaching 235 students is almost as difficult as teaching 30 students.

Bid rigging and foreclosure auctions: The Sherman Act marches through the Heart of Dixie

From the “What Do You Mean I Can’t Do That? Department” …

Two Alabama real estate investors and their company pleaded guilty this month for their roles in conspiracies to rig bids and commit mail fraud at public real estate foreclosure auctions in southern Alabama, the Department of Justice announced.

Robert M. Brannon; his son, Jason R. Brannon; and their Mobile-based company, J & R Properties LLC, pleaded guilty to an indictment originally returned in an Alabama federal court. The indictment charged each of them with one count of bid rigging and one count of conspiracy to commit mail fraud.

According to court documents, the Brannons and their company conspired with others not to bid against one another at public real estate foreclosure auctions in southern Alabama. After a designated bidder bought a property at a public auction, which typically takes place at the county courthouse, the conspirators would generally hold a secret, second auction, at which each participant would bid the amount above the public auction price he or she was willing to pay. The highest bidder at the secret, second auction won the property. The Brannons and their company were also charged with conspiring to commit mail fraud.

The Brannons and their company are charged with participating in the bid-rigging and mail fraud conspiracies from as early as October 2004 until at least August 2007—that was during the housing boom, not after the bust.

To date, eight individuals and two companies have pleaded guilty in federal court in connection with this particular ongoing investigation.

The comedy of corporate taxes

You may not have ever heard of Bill McDonald, but you have probably heard his jokes. A profile of McDonald explains that, from his Southeast Portland home, McDonald writes jokes for “Tonight Show” host Jay Leno and for about 140 radio stations around the world that feed McDonald’s quips to their on-air staffs—jokes like these from a few years ago:

I’m a little suspicious of these electronic voting machines. They even showed President Bush ahead in Fallujah.

Ricky Williams was asked if he preferred playing on grass or AstroTurf, and he replied, “I don’t know. I never smoked AstroTurf.’”

McDonald also has a keen eye for economic absurdities.  His latest target: “Business” and “employment” taxes. In a recent comment he highlights the Portland region’s peculiar payroll tax used to fund its public transit system, a situation that many taxpayers in many regions face:

Let’s say I wrote jokes that were sent out of state, examined, and then bought outside the state. There is a form called TSE-AP with “Sales Factor Only” on it and “Total within district” where you compute the percentage of sales here versus outside the district.

Stay with me. I assumed that sales within the district would mean….wait for it…the sales within the district. If nobody bought any of my jokes in the state of Oregon and the district was in Oregon that would be zero…..

But what it really means is if you wrote the joke in the district and sold it anywhere in the world, you were to be taxed here so that a train or light rail or bus could be funded, because OF COURSE, I need a bus or train to sit in my basement and write jokes.

Ironically, if I had taken a car out of the district, wrote the joke there, and then sold the jokes to the Mayor of Portland sitting in the heart of the district, that would not be a sale within the district because…oh never mind….

I’ve been around long enough to know why our transit district taxes payrolls the way it does, but McDonald shows that, many times, the difference between what can be taxed and what should be taxed is much like the difference between grass and AstroTurf.

Oregonian op-ed: Lesson from the special session—It’s time Oregon got rid of its corporate income tax

The following commentary was published in the Oregonian. Additional commentary on the special session is available from the Oregonian’s website.

Gov. John Kitzhaber’s call for a rush-rush emergency session of the Legislature has succeeded in getting Oregonians to think again about their tax system. More important, it’s gotten us to think about how we tax our businesses and which ones we tax.

To most people, the purpose of corporate taxes seems obvious: to raise money to fund government. But that role is disappearing. Over time, businesses have become nimble at finding the right place and right time to make money to minimize their tax bills. As a result, states have seen corporate taxes make up a smaller share of their total tax revenues. In 2011, across the U.S. — and Oregon — corporate taxes accounted for less than 6 percent of state total tax revenues.

oregon_corporate_income_taxes_as_share_of_total_state_tax_collections

Today, corporate taxes allow politicians to play a version of Santa Claus. Businesses on the “nice” list get tax breaks paid for by everyone else. It’s not uncommon to see regular mom-and-pop businesses paying their full share of taxes while favored businesses shrink their tax bills through various tax credit schemes.

In 2010, the corporate tax increase known as Measure 67 destroyed a part of Oregon. It destroyed the part in which businesses, their owners and their employees are viewed as members of the community. The campaign cast businesses as “big” or “out of state,” and they don’t pay their “fair share.” The measure sent a loud message to businesses: We only want you for your tax dollars.

The message of Measure 67 hangs over businesses thinking about moving or expanding in Oregon. Every legislative session sends a shiver through boardrooms as business owners worry about what’s next. Some legislators are already drafting a sales tax proposal. A follow-up to Measure 67 cannot be far behind.

It should come as no surprise that Nike — and just about every other business in the state — would want to have some certainty about what its upcoming tax bill will be. At the same time, it is deeply troubling that only the biggest of Oregon’s businesses can get the governor to act.

It’s time Oregon revisit its tax policies and get rid of the state corporate income tax altogether. Even with the Measure 67 increases, corporate taxes continue their long-run decline as a share of total tax collections. The carve-outs and credits for favored businesses corrupt the system and allow politicians to play favorites. With the corporate income tax out of the picture, Oregon can say it’s open for all businesses.

Some thoughts on data visualization and Oregon’s unemployment

Economists often have something interesting to say.  However, they often do a terrible job of making their points in a way that those outside of economics can understand.

For some time, I’ve developed an admiration for the approach preached by Edward Tufte. He is widely considered a pioneer in the field of data visualization—also know as making-tables-and-graphs.

I won’t go into Tufte’s approach here, but I thought I’d show how using his approach can radically improve the presentation of economic data.  In this example, I’m trying to show Oregon’s unemployment record relative to the rest of the U.S.

This first figure, below, shows unemployment for Oregon and the U.S. as a whole.  The chart was made in Excel by highlighting the three relevant columns (month, Oregon unemployment, and U.S. unemployment) and clicking the line chart button.

The result is a standard ugly Excel chart.  Even worse, it does not tell an especially interesting story about Oregon’s unemployment.  Oregon seems to have slightly higher unemployment than the U.S. as whole, but also seems to track U.S. unemployment fairly closely. Big whoop.

The problem with the figure above is that it does not say anything about unemployment in the other states individually.

The next set of figures use a much bigger dataset.  It reflects the unemployment rate for each state in each month from January 1976 through October 2012. That’s more than 22,500 observations.

The figure below is better, but not much better.  Oregon’s unemployment is the heavy black line.  The gray background represents the range between the state with the highest unemployment and the state with the lowest unemployment.

Notice that the graph removes much of what Tufte calls “chart junk”—a frame around the graph, ugly and unnecessary gridlines,  a legend, and the month of “Jan” in the x-axis.

While the graph above is much cleaner and better looking, it is fatally flawed.  With a few exceptions, Oregon looks to be in the middle of the range of unemployment rates across the states.

I know this is not true.

In fact in 213 out of 442 months (48 percent of the time), Oregon has been in the top 10 for high unemployment among the states.  The figure above does not adequately show this fact.

The figure below is a major improvement.  It shows the percent unemployment for each state represented by tiny gray dots, with Oregon represented by the red dots. (I would have preferred a red line for Oregon, but Excel layers dots over lines. Thus a red line would be “under” gray dots and looks amateurish.)

With the figure below, it is easier to see the point that I am trying to make: Oregon’s unemployment tends to be among the worst in the country for many points in time.  This can be seen pretty easily in the years 2001 through 2005.  But the point is not as well made in 1981 and 1981 when Oregon’s unemployment was the fourth or fifth highest in the U.S.

The figure below is another improvement.  The black line is Oregon’s unemployment (the black line is darker than the gray dots, so Excel’s layering problem goes away.)  The red dots represent months in which Oregon’s unemployment is in the top 10.

While the graph is much better and makes the point I was looking to make, something about it bothers me and I feel it is cluttered.

The fact that Excel does some weird thing that makes it look like there are white gridlines really bugs me.

Here we go. One last improvement.

In the figure below, I went back to the gray background representing the range between the state with the highest unemployment and the state with the lowest unemployment. The black line is Oregon’s unemployment and the red dots represent months in which Oregon’s unemployment is in the top 10.

The final figure seems to best make the point I was trying to make.  We see Oregon’s unemployment, we see the range of unemployment among the states, and we see how often (and when) Oregon’s unemployment was among the worst in the U.S.