You may have been reading our reporter Evan Gershkovich's coverage of the war in Ukraine and the situation in Russia over the past year. As you know, Evan was detained by Russia on Wednesday and accused of spying. The Wall Street Journal vehemently denies these accusations. We stand with our colleague and invite you to read this profile of him, which is free to read.

Kathy Hochul is proposing giving the MTA an extra $1.3 billion a year via higher payroll taxes on downstate businesses and revenue from new casinos.

From our reporter Jimmy Vielkind:

>The MTA proposals would generate enough cash to help cover a budget gap caused by a loss in fare revenue from lower ridership since the Covid-19 pandemic began in 2020, officials said. The new funding also would help foot the bill for additional police patrols on the subway system that started in October amid concerns about crime.
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>MTA Chairman and Chief Executive Janno Lieber, who has been lobbying lawmakers for additional funding, said in an interview that the governor’s proposal would allow the authority to avoid service cuts but not a 5.5% fare hike that the MTA assumed in its 2023 budget.
...Under Ms. Hochul’s proposal, that tax would increase to 0.5%, generating around $800 million a year in additional revenue. For example, an employer would pay an additional $160 a year for each employee with a $100,000 annual salary.

-mc

Right now, AI is largely augmenting the workflow by making decisions while workers carry them out. But the tech is getting more advanced. More from the story:

>Charlie started out with simple tasks such as greeting callers, saying, “Hi, I’m Charlie, your digital assistant,” and asking basic questions, such as, “Please tell me why you are calling today.” After learning to route callers to the proper department, she was able to reduce average call-handle times by 36 seconds, or more than 10%, Ms. Cloud said.
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>Charlie is a quick study. By late fall, she was trained to handle a water-leak claim (“Is this a major leak?”), while using empathy (“I’m sorry to hear about your leak”) and determine the urgency of the issue (“Are you able to shut off the water yourself?”) She then booked a contractor to come out for the repair. From start to finish, Charlie’s processing time took less than two minutes compared with a human, who averages eight. She now handles 15% of claims volume and is expected to handle 20% by next year. Chief Transformation Officer Kim Ratcliffe said she hopes Charlie can take over 40% of calls eventually.

-mc

Call centers are the testing grounds for a future workplace where AI plays more and more of a role — whether human employees like it or not.

From Lisa Bannon:

>A new generation of artificial intelligence is rolling out across American workplaces and it is prompting a power struggle between humans and machines.
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>Recent advances in technologies such as ChatGPT, natural-language processing and biometrics, along with the availability of huge amounts of data to train algorithms, has accelerated efforts to automate some jobs entirely, from pilots and welders to cashiers and food servers. McKinsey & Co. estimates that 25% of work activities in the U.S. across all occupations could be automated by 2030.
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>Today, however, AI’s biggest impact comes from changing the jobs rather than replacing them. “I don’t see a job apocalypse being imminent. I do see a massive restructuring and reorganization—and job quality is an issue,” said Erik Brynjolfsson, director of the Stanford Digital Economy Lab. McKinsey estimates 60% of the 800 occupations listed by the Bureau of Labor Statistics could see a third of their activities automated over the coming decades.
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>For workers, the technology promises to eliminate the drudgery of dull, repetitive tasks such as data processing and password resets, while synthesizing huge amounts of information that can be accessed instantly.
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>But when AI handles the simple stuff, say labor experts, academics and workers, humans are often left with more complex, intense workloads. When algorithms assume more human decision-making, workers with advanced skills and years of experience can find their roles diminished. And when AI is used to score human behaviors and emotions, employees say the technology isn’t reliable and is vulnerable to bias.

Read more, free with email registration: https://www.wsj.com/articles/ai-chatgpt-chatbot-workplace-call-centers-5cd2142a?mod=wsjreddit

-mc

Research has shown that wealth, including housing wealth, has an impact on labor force participation decisions. In this recent data review from the Fed, they update previous research which suggested that 15% to 20% of the decline in labor force participation could have been caused by rising asset values (including for housing & financial assets). The latest data adjusts for falling real asset growth and finds that somewhere between 16% and 36% of the recent increase in labor force participation could be explained by these trends. So wealth has an impact, but it's not the only impact.

The Fed is focused on its dual mandate: price stability and full employment. And with the unemployment rate still near long-term lows and inflation well above target, price stability is the half of the mandate that has commanded more of the Fed's attention.
While wealth effects are important, it's also important to remember that if one spends housing wealth by using a mortgage to tap into equity, it has to be repaid.

-Danielle

Rent control as a topic has a good bit of research literature focused on it. Based on real-life cases, restricting the amount of rent a landlord may collect tends to dis-incentivize capital improvements to a property, or even new construction, because the costs tend to increase with inflation, many times at a faster pace than rent growth. While rent control measures can stem the rapid rise in rents over a short time period (and thus offer relief to burdened tenants), over a longer time horizon, they tend to discourage development and lead to diminished supply in the market, which in turn, keeps market-rate rents going up. A more sustainable solution for affordable housing, especially given population growth, is new construction. - George

The iBuying model is predicated on the assumption that a firm or a group of investors can find value in a given market, and through marginal investment (fixing what's broken or outdated) can extract that value by selling for a higher price. In that process, investors can and have leveraged cash as a negotiation tactic, offering less than comparable properties in exchange for speed and ease to buyers who either had a lot of equity and/or were in a hurry.
These assumptions work very well in an up-market, where the rising tide lifts all boats (houses). The real test for iBuyers is a market downturn, when properties which were acquired at a high price no longer command those lofty prices, and when operating costs (taxes, utilities, etc) start to pile up. As we've seen this past year in the case of several well-known companies that existed the iBuying model, a market downturn can wreak havoc on the best-designed models.
In answer to your question, yes, iBuying can impact a local market, especially if investors buy a large share of homes in a given geography. The activity can drive prices higher and make it challenging for individuals or families to get a foot in the door at a more affordable price.
I see equity investor participation (large funds with available cash) in housing to continue in the future, as long as return remain attractive. At the same time, I see a smaller number of strict iBuying transactions taking place. - George

I talked to a lot of economists last year about the 2023 market, and everyone agreed that the range of forecasts was unusually wide. One thing everyone agreed on is that there’s going to be significant regional variation. Unlike in 2021 and 2022, where basically every market in the U.S. showed strong price growth, economists expected some markets to slow far more than others this year. For the most part, the markets where prices rose the most during the recent boom are also expected to post the steepest price declines.

And remember, the housing market is in a much stronger position today than during the housing boom and bust of the early 2000s. In many markets, even a 20% home-price drop would not bring prices back to pre-pandemic levels, so many homeowners would still have equity.

-Nicole

edit: added gift links

The concern about housing being in a bubble has dominated a lot of conversations over the past couple of years, especially as people referenced the 2005-07 period as a baseline. While the two periods are not alike (2005-07 saw significant oversupply, no-doc no-income loans, subprime/Alt-A loans and loose underwriting), we did see a similar run-up in prices. With the government response to the pandemic adding a massive dose of fiscal stimulus, in addition to the monetary response from the Fed, liquidity in the housing market became generous and we saw historically-low mortgage rates. Naturally, with “cheap money” it was easy to bid up prices on a limited number of homes for sale.

And as mortgage rates doubled this past year, we’ve also seen the correction in prices. As of January 2023, we’ve seen median list prices decline 11% across the country. That being said, current economic and market fundamentals do not point to a burst/crash. Employment remains solid, with most people who have a job seeing wage gains. We have 11 million open jobs and half as many unemployed people looking to fill them. Mortgage rates have been sliding from the 7%+ in October/November. In addition, there are still markets in the US where demand for housing remains robust.

Importantly, we still have a housing market which is undersupplied. By Realtor.com’s calculation [https://www.realtor.com/research/us-housing-supply-gap-nov-2022/], the gap between the number of new households which were formed in the last 10 years (population growth) and new homes constructed is above 5 million. With that shortage, as long as the economy remains resilient, given the number of millennials, and now also Gen Z in the 26-35 age group, I expect demand for housing to remain solid.

Yes, the record-low rates which fueled overheated prices are behind us, and we’re seeing that correction take place. At the same time, it would take a combination of deep recession with massive job losses plus major new construction inflows to inflict a steeper correction on home prices. Bottom line, I expect to see more divergence in pricing and market dynamics based on geography and location, meaning, some markets will see prices decline while others may still see growth this year. - George

You're right about the variety of predictions. Ours are on the stronger end for 2023. The full 2023 housing forecast and economic forecast are linked, but I'll summarize some key takeaways.

1. We expect inflation to slow, but not return to its target which means that the Fed keeps rates higher for most of the year.

2. This keeps upward pressure on mortgage rates (though admittedly, we've seen more weakness in rates for 2023 than we initially expected).

3. Because mortgage rates and home prices remain relatively high, sales decline. Our expectation is that sales for 2023 will be down 14%, which would actually put them slightly above the pace we've seen in recent months.

4. Slowing home sales will help curtail price growth, but we expect to see home sellers pull back from the market in 2023, which will keep home prices from adjusting quickly, and we expect them to grow in 2023.

The 2023 housing market is not going to be as strong as we've seen over the past few years from either a sales or price growth perspective, but I do think it will surprise those expecting a crash.

-Danielle

Federal Reserve Chair Jerome Powell did call the recent housing market boom a bubble last year.

“You had housing prices going up at very unsustainable levels and overheating,” he said at a Nov. 30 event. “Now the housing market’s going to go through the other side of that and hopefully come out in a better place.”

-Nicole

edit: added gift links

Trying to pinpoint when a bubble is happening in real time is notoriously difficult. It's usually only obvious in hindsight. That doesn't stop investment firms or researchers from trying. The Dallas Fed, for example, has a metric tracking exuberance in the housing market based on price-to-rent, price-to-income, and real house prices which has signaled exuberance in the housing market since 2020. But this metric identifies when buyers and sellers are exuberant and not necessarily when and by how much prices will come down when the exuberance is over.

The best indication of the trend for home prices going forward are fundamentals that drive supply and demand and an indicator of how in- or out-of-balance the current housing market is. Several indicators tell us that the 2022 housing market started off with a record imbalance of demand far-outstripping supply. As mortgage rates rose, we saw market-balance shift away from sellers and suppliers, toward buyers, but still, even as we start 2023 and the number of homes for sale is up more than 65% compared to a year ago, there are more than 40% fewer homes than was common at this time of year in the 2017-2019 pre-pandemic housing market.

Home buyers have more negotiating power and leeway than they've had over the past few years, but compared to most prior periods, the housing market still remains relatively under-supplied.

-Danielle

I hear several topics wrapped in the question, TXKAP... :) On a less bleak note, demographics play an important role in housing, but not the only dominant role. Cost of construction (materials, labor, fees, etc.), financing (interest rates), labor markets (wages and incomes) and importantly, land zoning, also play major roles in the availability of affordable homes. After all, when boomers came of age, the construction industry offered a NEW home for every budget, from low-cost Sears homes, which were boxed and trucked to the build site, to a large volume of master-planned suburban communities, and all the way to high-end custom homes. And those were in addition to the existing home supply.

However, in most municipalities, zoning regulations were redesigned in the 1970-1990s, which created artificial barriers and elevated the costs of development. Many of those zoning regulations remain on the books today, even though the US population has grown significantly since then.

On top of this, we overlay the impact of the 2008-09 housing bust, when a large number of local and regional construction firms left the industry. The net effect has been a significant underbuilding over the past decade and a half, just as the millennial generation came of home-buying age. With less supply and a lot more demand, not surprisingly, we ended up with much higher prices.

In brief, we could have more affordable housing today if we made a more concerted effort, at the local level, to adjust zoning and work with developers and construction companies to meet the level of population growth we’ve experienced. We are seeing movement in that direction, along with some technological innovation (e.g. 3D-printed homes). In fact, just the past week, a company managed to push concrete-printing to a second-story for a home in Houston.
Moreover, modular housing technology has also come a long way with some great products. But financing for modular/prefab homes remains stuck in past decades. We can do better on that end, as well.
I believe that we can still enjoy our boomer parents and grandparents AND build more affordable housing. - George

Household formation is an important long-term indicator of housing demand for both rental and for-sale housing. But household formation is also affected by affordability, because people make different choices based on what they can afford. There was strong demand for all types of housing in late 2020 and 2021. Many millennials were entering their prime first-time home-buying years, and a strong job market and remote work enabled people to seek more space. But in 2022, rising mortgage-interest rates and high rents have weighed on demand. More people are doubling up with roommates, and home prices and rents are now falling in some markets.

-Nicole

edit: added gift links

Intelligent_Bat7377 - Tampa has seen a noticeable influx of new residents over the last few years, which has pushed demand for housing higher, along with prices. This trend only accelerated in the pandemic period. In the fourth quarter of 2022, over 45% of home shoppers looking to buy in the Tampa metro were from out-of-state.

In tandem with the surge in demand, construction has focused mostly in the higher price tiers, with a lot of new properties being priced above the median. This has also come against a backdrop of undersupply from the past decade. The net effect has been that prices and rents have increased. Median list prices in Tampa rose by double-digits from April 2021 until October 2022. Even last month, list prices were still 7% higher than last year.

While new construction is beneficial for the supply pipeline, and should help tame the pace of rent growth, the fact that most new homes carry higher prices will keep pressure on rents in the short term. - George

Here's what our reporter had to say:

>they will contribute to the state fisc, but the exact tax rates are parts of their bids. So TBD!
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>But my guess is it won’t have enough of a fiscal impact to be used to lower income taxes.

That's a great question — I'll reach out to the reporters and see what they think.

Caesars wants to do Times Square:

>Caesars Entertainment Inc. and office landlord SL Green Realty Corp. have proposed converting a Times Square office tower into a hotel and casino. It would cater to Midtown office workers and tourists who already come to the area, said Brett Herschenfeld, an SL Green executive vice president.

That may be the move:

>State gambling regulators are conducting a competitive bid process for three downstate licenses. Industry players expect two will go to video-slot parlors that already operate in Yonkers and another near John F. Kennedy International Airport in Queens—essentially leaving only one up for grabs.

Hey everyone, Maddie here from the WSJ. We have a story out today on the future of gambling in the city and I thought you might find it interesting:

Gambling companies are competing to build a casino in Manhattan, but local officials could force projects to move outside the heart of the city.

From Jimmy Vielkind and Katherine Sayre:

>Real-estate and casino developers are pitching several sites in midtown Manhattan, including on the top floors of the Saks Fifth Avenue across from Rockefeller Center and in the very heart of Times Square. It’s vital to be near the city center to draw the right mix of tourists and wealthy clients, they said.
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>For years, New Yorkers have had to leave the city limits to gamble at full-fledged casinos in Atlantic City or rural Connecticut. Four casinos in upstate New York have opened since 2014. Now, state gambling regulators are conducting a competitive bid process for three downstate licenses. Industry players expect two will go to video-slot parlors that already operate in Yonkers and another near John F. Kennedy International Airport in Queens—essentially leaving only one up for grabs.
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>…State and local officials who represent midtown Manhattan have been openly skeptical about casinos, though they haven’t shut the door entirely. Construction of housing is a more pressing concern in a part of the city where the median monthly rent now exceeds $4,000.
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>“There’s going to be an uphill road for any site in Manhattan,” said Manhattan Borough President Mark Levine, a Democrat.

Read more, free with email registration: https://www.wsj.com/articles/a-casino-at-saks-times-square-or-the-u-n-companies-pitch-nyc-officials-11674654233?mod=wsjreddit

Hi everyone, Maddie here from the WSJ. We have a story out this week about the Philly Goat Project and I thought you all would enjoy it!

January is the GOAT for goats in Philly, who get an all-you-can-eat buffet of old Christmas trees.

From Joel Millman in Philadelphia:

>Teddy is on a diet, but for two Saturdays this month he’s delighted to eat his fill.
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>The 200-pound Nubian breed goat needs to be at 180, his handlers say, to prevent arthritis pain in his knees. Yet, he recently munched contentedly on a buffet of pine needles and twigs at what has become an annual postholiday event here—the recycling of hundreds of discarded Yuletide trees into goat feed and, later, mulch.
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>“Balsam fir is his favorite. It’s like the Godiva chocolate of pine trees,” says Karen Krivit, 59, the social worker-turned-animal activist who oversees the Philly Goat Project from a farm in Philadelphia’s Germantown section.
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>…A parade of sedans, SUVs and the occasional pickup truck winds through Germantown’s Awbury Arboretum, each stopping just long enough to remove discarded firs from rooftops, back seats and trunks. Siblings Barb Newbold and Paul Soltis dropped off two trees, paying $20 apiece to the Philly Goat Project to help cover the cost of sorting, stacking and de-tinseling trees.
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>Near a fire pit where visitors melt marshmallows and chocolate into s’mores, 12-year-old-middle schooler Remy Teel is tending to Oonagh, a Nigerian/Oberhasli mix. She began volunteering when she was eight. She has experienced the pull, quite literally, of goat celebrity at four Philly Goat Project calendar shoots, as goats who may weigh twice as much as she does lunge from their leashes to sample ornamental plants, marketplace produce, or any edibles left unattended.
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>“They get restless sometimes,” says Remy, whose parents also volunteer on tree donation Saturdays.
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>Oonagh is one of the few Philly goats not named for a prominent Philadelphian.
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>Teddy, now five, was an actual kid when he arrived with the other goats to join the project in 2018. His name honors the late vocalist Teddy Pendergrass, an icon of soul music’s Philadelphia Sound. “Holiday” is for jazz singer Billie Holiday, while Anthony honors abolitionist Anthony Benezet. “Theo” is for Theophilus Van Kannel, the 19th-century Philadelphian credited with inventing the revolving door.
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>…The Philly Goat Project’s next donation day is this Saturday, Jan. 21.

Read more, free with email registration: https://www.wsj.com/articles/discard-christmas-trees-recycling-goats-eat-11673968934?mod=wsjreddit