1. Please list and discuss the roles played by the concept of new technology as it relates to the decision to build factory #5: Even if sales volume is flat, profits are low, and interest rates are high, why would a firm desire to build factory #5, at least in theory?

2. What is residential construction and sales volume, exactly? How many housing units are built, and sold, in this country in a typical year (before March, 2020)?

3. What are six of the occupations that are involved in this sector of the economy? That is, when there is a 20% drop in this activity, residential construction and sales volume, which workers lose their jobs? Why?

4. What could our government do to help cause a rise in residential construction and sales volume in our economy? Please list and discuss three actions that our government could take, at least in theory. What are the forces that may cause a rise or a drop in this area of the economy in the next 12 to 24 months?

***those are the lecture you can follow:

+ New Plant and Equipment Construction, Residential Construction and Sales Volume: One of the greatest factors influencing the volume of factory (new plant and equipment) construction is the R&D (research and development) of new technology. Of course, WE HAVE TO BUILD THE NEW FACTORY! In our factory #5 example, the R&D AND CONSTRUCTION of Factory #5 may result in a. a dramatic drop in the cost per unit (the cost per pair of shoes, in our hypothetical) and/or b. The introduction of a product that is….. NEW! And IMPROVED!, thus causing a rise in Demand, where, if it captures the imagination of the consumer, we may RAISE THE PRICE and increase profits by a great amount. Let’s say that our price per pair currently is $30 per pair, and our cost per pair currently is $27, for a profit of $3 per pair. If a new method of mass producing shoes that saves on labor costs is “invented”, for lack of a better word, we will want and need to build this new factory. Let’s say that Factory #5 lowers the cost per pair to $21 by using less than half of the workers used by Factory #4. We will build this new factory! $30 per pair minus $21 per pair yields a profit of $9 per pair!!!! BUT WE MUST SELL THOSE NEW SHOES!!! If our rivals are building this factory, and we do not…. We will die. (We have rivals) - VERY few firms are true monopolies. Factory #5 may mass produce TWO million pairs of shoes compared to #4 with one million pairs in yearly output. We may build factory #5, then shut down factory #1… thus resulting in FEWER WORKERS ON OUR PAYROLL… SAD BUT TRUE…..Our sales could be dropping along with our profits. Interest rates may rise. We will still need to build that factory. Especially if the product mass produced by this new factory causes a rise in Demand. YET THERE IS A FINITE SUPPLY OF LOANABLE FUNDS AND EQUITY FINANCING available, thus, we have a tragedy: some firms are doing so well that they wish to expand---but are denied financing. What is the proper role of the government? The Obama Admin. lent money directly to Tesla in order for them to expand in Fremont. This may be called ‘industrial policy’. It worked out well. If not, Obama may have been a one term President, even though he was an excellent leader by any metric. Yet the government could be criticized for ‘playing favorites’ since THERE IS A FINITE SUPPLY OF FUNDING that the government may access. If the ‘new’ Mercedes Benz assembly plant built in Alabama (yes, this is on U.S. soil) represented a new and improved SUV, then why did this German firm build the plant here? On U.S. soil? Cheaper labor (the U.S. workers make less and have fewer benefits than their German counterparts),---incredible, but true…the firm will enjoy lower distribution costs (all those rich people on the east coast of the U.S. will buy our cars), and it is easier to ship them from Alabama than from Germany, while avoiding any possible hikes in tariffs the Trump Admin may levy NOW OR LATER---- do you trust Trump? Are you feeling lucky today? How about the next 20 years? I mean, your buyers are here on the East Coast, and Alabama offered HUGE tax incentives to Daimler (Mercedes Benz) to build the plant in Alabama instead of South Carolina, home to a BMW plant. Alabama had to ‘outbid’ South Carolina for the new factory. Also, the German firm avoids any and all possible labor disruptions by dockworkers in the U.S.---now, and for the next 20 years. We do not care if the firm’s headquarters are in Germany. If they build the factory on U.S. soil, then the expenditure is part of the Total Spending on U.S. goods and services = C+ I+ G+(X-M) equation. More on this later! “Residential Construction volume and Residential Sales volume” is not just some area of the economy---the Total Spending equation—that we have to study. It is WHERE WE LIVE. It is at the CENTER of OUR NUMBER ONE PROBLEM AS A SOCIETY: LACK OF ‘AFFORDABLE’ HOUSING UNITS. As you may know, government regulations play a huge role is this area of Total Spending. We start with the basic facts: There is a certain volume of new housing units built, about 1.1 million units per year in America (historical average), and total housing units SOLD each year (about 5 million units sold per year, historical average). Fine. Dry. What is the human element? WHO ARE THE SEVEN MILLION PEOPLE (more or less, in a normal year) who have jobs related to the building and the selling of residential units? On the building side, we have home building companies, who buy land, hire workers to assemble parts: lumber, tiles, windows, window coverings, dry wall, plumbing, electrical supplies, cement, dozens of other materials. These parts are made by workers---very labor intensive in many cases. On the ‘selling’ side, we have realtors who represent the buyers, realtors who rep the sellers (often a 100% commission job), title company workers, loan officers at a bank who may be paid a wage plus a bonus IF….IF and when a deal goes through, termite inspectors, building inspectors, and many many others. THIS IS AN INCREDIBLY LABOR INTENSIVE INDUSTRY---and almost no other industry is more dependent upon the supply of loanable funds. (Capital markets) What forces are at work that may cause a 20% rise, or (possibly) a 50% fall in the volume of residential construction and residential sales activity? STAY TUNED!

+ Residential Construction Volume and Sales Volume: Forces that may cause a rise or fall: Okay! So we have established that roughly 1.1 million housing units are built per year in a normal year (historical average), from mansions to ‘ADUs’—(granny flats, in-law apts., many other names)—ADUs are often built ….. ‘extralegally’ --- I love that phrase! ---without the proper permits…. And roughly 5 million housing units will be SOLD in a normal year----NOT THIS YEAR---more on that later----. WHAT ARE THE FORCES THAT MAY CAUSE OR INFLUENCE A RISE OR A FALL IN THESE BUSINESS SPENDING CATEGORIES? Okay: home building companies will buy land, employ labor, but LOTS of raw materials (plumbing, electrical, windows, window coverings, drywall, nails, dozens of other items) and use plant and equipment to BUILD HOMES AND SELL THEM FOR A PROFIT. The average house in the U.S. sold for about $350,000 last month. (before the pandemic hit the U.S. on a scale that will change spending patterns)…. Now, some homes in the South and the Midwest may sell for about $250,000---Grand Rapids, Michigan comes to mind------A small townhome in the Canoas Garden area of San Jose may sell for $700,000 (my realtor friend next door just listed one---he’ll get 2.5% of the sale as a commission---or—he’ll get-----nothing (if it does not sell)---he lives on 100% commission. I couldn’t do it. So let’s say a home building company in the central valley will build a home for $400,000 and sell it for $440,000—this is just an example. The company building the homes cannot simply build 8 homes, then 8 more, then 8 more….. without selling some. With a time lag that may be variable, RESIDENTIAL CONSTRUCTION VOLUME IS TIED TO RESIDENTAIL SALES VOLUME! If home sales volume drops in March, macroeconomic theory, and common sense, will lead one to conclude that residential construction volume will drop 3 months or six months later. Thus, the forces that cause a rise or fall in SALES volume will also be the forces that cause a rise or fall in construction volume—with, in theory, a time lag. Also, in order to build a home, a home builder must apply for building permits. Let’s say that all of a sudden the volume of PERMIT APPLICATIONS tanks---drops in half…. New building volume will definitely drop----with a time lag. This volume is sometimes called a ‘leading economic indicator’. Okay: what causes a rise or fall in home buying (and selling ) volume? 1. ‘THE GENERAL STATE OF THE ECONOMY’. Let’s say that 5 million families—couples, single people, families---let’s say they are couples---are THINKING about buying a condo, (they may or may not)….which means MOVING out of the situation they live in now….. (stressful……many couples do fine together---until they buy a condo together……)---perhaps they are living in an apartment and paying $2800 a month in rent---the mortgage on the new home or condo will be a higher amount under our model. WHAT WILL MAKE THEM GIVE THEMSELVES THE ‘GREEN LIGHT’?? In theory, their income must be HIGH…. And RISING…. And EXPECTED TO RISE FURTHER IN THE FUTURE. Let’s say that a certain percentage of these couples, wherever they live in the U.S., will be BARELY ABLE to make the monthly payments---the mortgage---on the home loan. IN THEORY, they must have GREAT EXPECTATIONS regarding their future income. If they---either one of them, loses their job…. Or believe they MAY lose their job…. Or suffers a drop in hours at work… or BELIEVE that they may soon see a drop in hours at work…. Then they WILL NOT WANT TO TRY TO BUY A HOUSE. Imagine how many people out there were considering buying a house or condo just a month ago… and now… no way…… Okay: IF the couple gives themselves the green light (one party is going to be more excited about the plan than the other party, most likely)………………….. then……………………… they must get FINANCING! Let’s do a Midwest example then multiply by 3x for a townhome in San Jose: Let’s say a house costs $250K ($250,000) in Grand Rapids, Michigan. The couple has $50,000 to put down, which is a 20% down payment, which is considered the ‘historic average’ required down payment (a family can buy a house with less money down in some cases---also, each deal is different---also, the government is very much involved in this process, especially for military veterans). A $250,000 house with $50,000 down means this couple must borrow $200,000 from the financial and capital markets—the yearly loan pool. With a historic average 5% interest rate on the loan, including points and fees, this couple will have monthly mortgage payments of about $1200 a month (historic average for this house)…(3x all these numbers for that condo in San Jose). Let’s say that the lending institution---it can be a bank or some other financial entity--- requires that this couple DEMONSTRATE a gross income level of AT LEAST ---AT LEAST---THREE TIMES the monthly mortgage payment---remember, there are other costs associated with living in that house: insurance, property tax and maintenance/repair costs---the roof and the sewer line are the BIG ones. If this couple earns their income by dealing pot on the black market, they may not get loan approval from the bank---which I find interesting----the bank does the ULTIMATE ‘credit check’ on this couple. New mortgage firms make it seem easy and ‘fun’ to apply for a home loan. It is not. This couple, under this model (x3 for San Jose) must earn AT LEAST 3x $1200 a month or at least $3600 a month or about $43,000 a year, (sounds low, I know, I know,,,) to qualify for the loan. THIS IS JUST A MODEL…..Let’s say that all of a sudden interest rates (r) rise from 5% to 7 ½ % ----owing to the Fed pursuing ‘contractionary monetary policy” -----(they are doing the OPPOSITE right now, more on this later). The couple, in theory now have monthly payments of about $1800 a month, forcing them to show to a lender gross income of 3x 1800= $5400 a month, or about $63,000 a year, higher than the national median level of income. MANY MANY FAMILIES IN THE U.S. earn over $43,000 a year but under $65,000 a year. A HUGE PERCENTAGE OF BUYERS----OR POTENTIAL BUYERS ---- WHO WOULD HAVE QUALIFIED AT 5% interest now CANNOT QUALIFY at 7 1/2 %. This is an inexact science, but there is NO DOUBT that there would be a huge drop in residential sales volume, immediately, and with a time lag of 3 to 6 to 9 to 12 months, a huge drop in home BUILDING volume as well. So we would see a huge wave of layoffs in ONE sector, followed by a huge wave of layoffs in ANOTHER sector. SO MANY roofers lost their jobs in the 2008 to 2009 recession….that the industry really never fully recovered, according to some studies. These two industries are VERY dependent on the supply of loanable funds, and interest rates. OTHER FACTORS: TAX POLICY: this couple MAY now ‘deduct’ their monthly mortgage payments and property taxes from their declared income for FIT and SIT purposes—at least in theory. Okay… it is complicated… they have to make just the ‘right’ amount of money for it to work, but at least some couples in some parts of the U.S. can subtract the mortgage and the property tax from their declared income for FIT and SIT purposes.. Consult you tax professional! Here is the model: A couple in San Jose making, say, $160,000 MAY be able to deduct some or most of their mortgage payments and their property tax payments from their income------if they are in the 22% FIT bracket and the 9.3 or 10.23% SIT bracket, then “the government will be paying part of their mortgage for them”---in theory. It is complicated. There may be a ‘tax incentive’ for this couple to BUY a condo in san jose instead of renting that same condo in San jose. Why would this couple want to buy a condo in the first place? Why not keep renting? Obviously, if you rent, your landlord can evict you at any time (in theory) and a landlord can in theory conduct a yearly inspection of the property. My friend would call me every year to help him move all of his pot plants because the landlord was coming by. True story. Every year, there were more pot plants. Two of the dumbest things I have ever done: buying a truck… and telling my friends that I had a truck….ANOTHER FACTOR: LOCAL GOVERNMENT REGULATIONS! (G REGS) Wow, has this issue been in the news lately! If you want to build a housing unit on YOUR OWN land, you need a PERMIT from the government—possibly several governmental entities in fact…. A homeowner needs a permit to convert her garage into an ‘accessory dwelling unit’---- AND MANY GOVERNMENT ENTITES ARE SAYING NO! Many local governments are very anti growth: Cupertino, Palo Alto, Santa Cruz--- there is a huge battle: our governor states that we need 3.5 million new housing units in our state…. But local authorities are blocking any huge wave of new construction. In order to comply with GOVERNMENT REGULATIONS, a home builder must spend TIME and MONEY---let’s say that 30 years ago it would cost $10,000 and six months to apply for and get approval to build—no lumber, no nails, just approval. Let’s say that now it can cost two years and WELL OVER $100,000. PER UNIT, in some cities….Over a 30 year time span, in theory, We will see a drop in the volume of residential construction. Another factor: The DEBT and THE DEFICIT: EVEN BEFORE THE PANDEMIC our government on the federal level was borrowing about $1,000 Billion a year form the yearly loan pool, with estimates of it rising to about $1300 Billion a year after this year---now it will be MUCH HIGHER THAN THAT----BUT FOR THE RIGHT REASONS----OUR GOVERNMENT MUST HELP ALL THE PEOPLE WHO HAVE LOST THEIR JOBS. NOW. RIGHT NOW. The DEFICIT--- THE AMOUNT OF MONEY OUR GOVERNMENT BORROWS FROM THE LOAN POOL--- is high, and rising. ‘Crowding Out” is the concept that SOME of that loan money that our G is borrowing would have gone to fund residential construction. In other words, FEWER HOUSING UNITS ARE BUILT EACH YEAR EVERY YEAR since about 1983 owing to the fact that our government has been borrowing ‘too much money’ from the loan pool. It will be getting worse from now on---the government will be borrowing even more each year, and the debt will rise at a faster pace---MUCH MUCH MORE ON THIS LATER. Finally, there are “CHANGES IN OUR CULTURE”: a person, 26 or 27 or 28 years old, might be ‘in the market’ to buy a condo a generation ago. Now, she might have much better ways to spend her money. People in that age group are delaying marriage, delaying family formation, and often delaying buying a condo EVEN THOUGH THEY HAVE THE MONEY. This is their right, of course. But it can help explain, in theory, very slowly, a long term drop in volume in housing starts and housing sales. Buying a house at age 30 and making that last mortgage payment at age 60—or earlier----used to be called ‘The American Dream’. Now, for many Americans, the dream is out of reach.