Landmark Links December 9th – Eyes on the Prize


Lead Story… As 2016 draws to a close, I think it’s safe to say that we can all expect the drumbeat of California housing crisis articles that have been picking up pace of late will continue well into 2017.  This is not at all a bad thing in and of itself since acceptance is the first step in the road to recovery no less than the Governor of CA and the President of the United States have recognized that California has a NIMBY problem.  We are likely to hear a lot in the coming months about how to go about fixing the issue at hand: not enough housing is getting built in the Golden State to keep up with the tremendous amount of demand coming from those who want to live here – especially in the large, vibrant cities near the coast.

Paavo Monkkonen, an associate professor of urban planning at UCLA wrote an op-ed in the Sacramento Bee last week with some suggestions about how California could ease it’s housing crunch:

First, California’s current Housing Element framework should be strengthened. It gives cities goals for new affordable housing but is now an almost symbolic exercise. Cities that fail to meet their targets should face fines or legal action, while cities that meet or exceed targets should be rewarded through infrastructure funding or other means. In addition, the state should reform the way it determines regional housing needs. The current system relies on population estimates, which underestimate the need in high-cost areas flush with jobs, amenities and public services. Vacancy rates or an affordability index would be more accurate and have a greater impact on affordability.

This seems entirely reasonable to me.  The biggest problem with the Housing Element framework as it currently stands is that it has no real teeth.  I agree with Monkkonen in that it needs to be updated.  This is a small step in the right direction but it’s a good start.

Second, the state must encourage a more diverse group of residents to take part in the planning process. Planners must actively seek meaningful input from families, low-income renters, young people and those unable to attend public meetings. If outreach is too cumbersome, cities should consider cutting off input that unduly benefits small groups. For example, neighborhood councils could be eliminated, as was recently done in Seattle.

Best of luck with that one.  In a ideal scenario, all stakeholders would take part in the planning process.  However, that just isn’t the way that the world works.  Existing home owners are always the most well-represented constituency in local government as they have typically lived in a given city longer than renters – meaning that they have a more emotional connection which leads to more involvement in the process.  They also tend to be more established financially – meaning more time and freedom to go sit though City Council and Planning Commission hearings.  Also, in many cases, renters have been inexplicably duped into taking up the NIMBY cause even though they are the ones that would benefit the most from more housing.  For example, tenant groups played a major role in killing Governor Brown’s sate-wide by-right development proposal earlier this year.

Third, some planning decisions should be moved from the local to metropolitan or state levels since housing and labor markets operate beyond city limits. Where neighborhood opposition is a persistent roadblock, developers could be granted “by right” approval for projects that meet existing rules, exempting them from some reviews and public input. California’s density bonus law – which grants developers additional density in exchange for a share of affordable units – is an important example of this kind of approval. The state might expand the types of projects that are eligible.

Of the three, this one seems the most unlikely.  It’s one thing to propose the state taking over some land use decisions, it’s another thing to actually achieve it.  As previously noted, this has been tried already by Governor Brown and it failed when labor union, environmentalists and tenant groups came out strongly against it.  Even if it had passed, there would have been numerous well-funded legal challenges almost immediately.  The NIMBYs aren’t going to give up their power that easily when they are the dominant force in local politics.

There are other potential solutions as my colleague Larry Roberts pointed out earlier in the week: renters are becoming a larger share of the California population and, while they might not be as active in local politics, they will eventually have the numbers and political clout to take advantage of California’s state-wide proposition system:
Perhaps California’s ballot initiative process could be used to defeat the NIMBYs. Eventually, if we continue to say no to new housing, California will become a renter state, and renters will become a significant voting block. The problem could be solved in one swoop if renters passed an anti-nimby initiative. With no big-money interest on the no, nimbys might find a unified and pissed off renter class imposes an unpopular decision on them.
Before then, the (Fair Housing) act was meant to prevent overt cases of discrimination against minorities–such as hanging signs that exclude certain races or nationalities–which is defined as “disparate treatment.” The Supreme Court ruled in 2015 that the act also outlaws policies that have a negative “disparate impact” on minorities, even if those policies aren’t intentionally discriminatory. As Justice Anthony Kennedy wrote in his majority opinion, “in contrast to a disparate-treatment case, where a ‘plaintiff must establish that the defendant had a discriminatory intent or motive,’ a plaintiff bringing a disparate-impact claim challenges practices that have a ‘disproportionately adverse effect on minorities’ and are otherwise unjustified by a legitimate rationale.”

The decision has since been celebrated by Cato Institute economist Randal O’Toole as a way to abolish certain land-use restrictions. In several speeches, along with a white paper for the Grassroot Institute, O’Toole argues that such laws, while not written with intentional bias (at least not provable bias), nonetheless disproportionately hurt racial minorities. He notes that various regulations, such as zoning, rent control, and urban growth boundaries, have been found demonstrably to increase housing costs. And because certain groups–such as African-Americans–have lower median incomes, these regulations have a “disparate impact” on them, often driving them from select cities.

 What I find compelling about updating the Housing Element, renters growing their political clout at the ballot box and using the Fair Housing Act to scale back the exclusionary zoning that NIMBYs rely on is that they all have fairly well defined paths to implementation – whether they would be successful is another story.  The problem with saying that some planning decisions should become the state’s jurisdiction (assuming that this is even desirable – which I’m not at all certain that it is) is that it’s a bit like me saying that I could travel back in time if I had a time machine.  While technically correct, there is no reasonable path to actually achieving it.


Freak Out: Amazon is opening an innovative grocery store concept with no cashiers or checkout lines leading many to freak out about it leading to less employment.  The irony that this is happening in Seattle, the first major American city to implement a $15/hour minimum wage should not go un-noticed.

Stumped: Contrary to popular belief, the biggest problem with today’s economy may be that gains in science, medicine and technology are slowing at least partially due to risk aversion.  See Also: Silicon Valley is struggling in the world beyond software as real-life constraints like human nature and the laws of physics come into play.

Peaked: The supply of American high school students has stagnated, posing challenges for colleges reliant on increasing their student bodies and tuition to match their ever-growing expenditures.


Bucking the Trend: Malls have suffered in recent years as online shopping has taken off.  However, there has been one segment of the mall market that has actually been booming: the very high end, especially in LA.

Fall From Grace: Earlier this year, REITs were given their own S&P 500 sector.  Around that same time, it was widely publicized that real estate in general and REITS in particular had outperformed stocks for a long period of time.  Chalk it up to bad timing but REITs have been the worst performer in the S&P 500 ever since.


Holiday Spirit: Both FHFA and FHA raised their conforming loan limits for 2017.  While it wasn’t as much as I would have liked for some regions, it could be enough marginally to get some potential first time buyers off of the sideline.

Heartless: NIMBYs showed up en masse at a City Council meeting to oppose a 22-unit affordable housing project for veterans in Poway, CA. The gutless council caved to NIMBY wishes and now the veteran housing won’t get built because NIMBYs basically suck.

New to the Neignborhood: Blackstone has filed for an IPO for Invitation Homes, it’s $10 billion bet on the rental home business.

On the Move: WiFi and laptops are killing the traditional home office by turning the entire home into a workplace.


Book Club: I’ve read pretty much everthing that  Michael Lewis has ever written.  His new book about the two men who pioneered the field of behavorial economics looks great.  See Also: How Daryl Morey  used behavorial economics to revolutionize the art of NBA draft picks (an exerpt from The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis).

Chart of the Day


Exposed Collateral – A sketchy Chinese peer to peer lending site that allowed women to borrow money secured by naked pictures is coming under fire after the site was hacked.

Unusual Lease Clause: A Colorado landlord was recently accused of having sex in his tenant’s bed and then using said tenants’ wife’s wedding dress to clean up the mess.  The tenant found out because he walked in on him in the middle of the act after the landlord had come over unannounced.  I know that the rental market is tight these days, but this is ridiculous.  (h/t David Landes)

Mile High Club: There is now a Tinder for air travel app to help you hook up on planes proving once again that necessity is the mother of  invention.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links December 9th – Eyes on the Prize

Landmark Links December 6th – This is Fine


Lead Story… Since the end of the Great Recession, it’s been well documented that, while borrowing costs dropped dramatically, access to credit for both builders and home owners have become much more stringent.  The end result is that those who can access credit are doing better, actually much better.  While those who can’t are left out in the figurative cold.  This is no way for a market or  economy to work properly but it is how we have been functioning for some time now.  Nick Timiraos of the Wall Street Journal summed it up perfectly this weekend (emphasis mine):

U.S. consumers and businesses have enjoyed ultralow borrowing costs since the financial crisis because the Federal Reserve pinned interest rates near zero. At the same time, regulators and lenders intent on fortifying the financial system have clamped down on risk-taking, making it harder for many borrowers to get loans.

The result is that lending for housing, a pillar of the U.S. economy, has bifurcated. Well-off households and home builders have their choice of loans, while many others without solid credit or stable incomes are locked out.

That dynamic is one reason the U.S. has seen such anemic economic growth despite aggressive efforts to encourage investment. Money has been cheaper and more abundant than ever, but—for some—much harder to get.

Policy makers have focused on “lowering the cost of capital instead of increasing the availability of credit,” says Mr. Dobson, chief executive of Amherst Holdings, an investment firm in Austin, Texas.

What Timiraos outlined above is a classic example of policy picking winners and losers, even if inadvertently.  Ironically, the inverse happened in the early to mid 2000s when credit standards were non existent, forming a bubble.  Now the pendulum has swung too far in the opposite direction.  There has to be a happy medium here but your guess as good as mine when it comes to if or when we will actually find it.  The current state of the credit markets mean less home owners as evidenced by the ever-falling US home ownership rate.  It also means that there is less competition in the home building business since smaller builders are having a very difficult time getting debt financing (in addition to having to cope with extremely expensive equity as I’ve laid out previously).  Small builders are often more nimble, able to specialize more in specific regions or neighborhoods and able to take on smaller infill projects than their larger brethren.  They can also frequently take on levels of risk that the publics simply can’t when it comes to entitling lots.  Less potential buyers and less builder competition is a big reason why single family construction as a percentage of GDP looks like this:



The paradox is that if you don’t need credit, you can probably get a loan.  If  you need credit there is a good change that you can’t.  This isn’t just a home building problem either.  It’s been felt across the economy, but is perhaps most acute in the housing market because: 1) The role that housing played in the downturn led to more regulatory scrutiny than other industries; and 2) It’s high reliance on leverage for both builder and buyer means more exposure to those credit constraints.  Banks have essentially said that life is too short for to deal with the credit challenges of small builders and retrenched to their largest most established clients where they can at least use scale to help offset the regulatory burden.  More from the WSJ (emphasis mine):

Banks would rather extend more credit to large, established firms than make lots of smaller loans to mom-and-pop builders, many of which lost money during the downturn, says Charles Schetter, chief executive of Smith Douglas Homes Inc., a large, privately held builder in Atlanta.

“For the first time, the burden of regulation is setting up a threshold of scale,” says Mr. Schetter, whose company will sell 700 homes this year. He started out in the industry building homes with his father, “when anyone with a hammer, a pickup truck and access to local tradesmen” could start a company, which he says would be difficult today.

Consolidation in the home building and banking industries predated the financial crisis but accelerated during the downturn. Banks with more than $100 billion in assets held around two-thirds of construction loans in 2016, up from less than half during the housing bubble and less than one-third in 2000, according to the Mortgage Bankers Association.

One ironic aspect of this is that the federal government actually tried to loosen up standards a bit several years ago after it was becoming clear that the regulatory regime that had been put into place was suffocating the market.  However, the battle-scarred banks have still been reluctant to meet the somewhat-relaxed government standards.  Again from the WSJ (emphasis mine):

By late 2011, the Obama administration had grown worried about the cumulative effect of the new rules and ultimately prevailed on regulators to back off some of the most stringent proposals.

“There was a lot of concern that steps intended to protect the market would end up locking people out,” says James Parrott, a former White House official involved in those efforts who is now a mortgage-industry consultant.

Lenders have been reluctant to extend credit to the limits of what government programs allow because of concerns over lawsuits if loans ultimately default, and because the costs of managing delinquent mortgages have soared.

“If we had our druthers, we would never service a defaulted mortgage again,” said J.P. Morgan Chase & Co. Chief Executive James Dimon in a shareholder letter earlier this year. “We do not want be in the business of foreclosure because it is exceedingly painful for our customers…and our reputation.”

J.P. Morgan cut its mortgage offerings to 15, from 37, and said it had “dramatically reduced” its participation in low-down-payment lending through the FHA. “It is simply too costly and too risky to originate these kinds of mortgages,” said Mr. Dimon.

It will be very challenging for the home building business to once again become a growth driver in the US economy so long as Jamie Dimon’s sentiment from that last paragraph is a prevalent view in the banking world, which I believe it is.  I am in no way advocating a return to the wild west days of 2004-2006.  However, more relief is needed to limit the cost and regulatory burden to banks who offering mortgages and construction loans or the stagnation and bifurcation laid out above are both here to stay.


Begging Forgiveness: A new GAO report found that the US will forgive at least $108 billion in student debt in the coming years while also blasting the DOE for crappy accounting of the Federal loan portfolio.

Crying Uncle: OPEC finally gave in and agreed to curb oil output, sending oil prices above $50/barrel and giving new life to a US shale drilling industry that was on the ropes.

Big Winner: The populists won at the ballot box in the much-hyped Italian referrendum this past weekend.  Ironically thought, the biggest beneficiarry will likey be US banks.


Proceed with Caution: A combination of increased capital controls and under-performance on high profile New York developments has Chinese developers re-evaluating their appetite for US real estate.

Up in Smoke: Votes to legalize marijuana are already boosting warehouse rents in some regions as expectations of future demand increase, sending property values of once-obsolete properties soaring.


Priced Out: California teachers can’t afford to live in California cities which has led to a worsening teacher shortage.

Rising Like a Phoenix: Once left for dead, Phoenix’s housing market is now projected to be the strongest in the country in 2017.


Out in the Cold: Russia is trying to build it’s own Silicon Valley in the Siberian city of Akademgorodok which is quite literally the middle of nowhere.  I’m guessing that they aren’t doing it for the beautiful year-round climate and burgeoning foodie scene.

Needle in a Haystack: How an original (and frankly terrible) Nintendo game became a highly sought after collectors item that often sells for tens of thousands of dollars.

Chart of the Day

Young college grads love the west coast, the south and the mountains.  The Rust Belt?  Not so much


Tastes Like Chicken: Gourmet rat burgers are actually a thing because, Russia.

Tis the Season: NSFW Elf on the Shelf pictures are the best thing on the internet right now and it’s not even close.

Mug Shot of the Week: An Arkansas man who was found so intoxicated that police were unable to administer a breathalyzer test has one of the best mugshots of all time thanks to someone’s Sharpie artwork.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links December 6th – This is Fine

Landmark Links December 2nd – Moment of Truth


Lead Story… So it finally happened.  Just like a proverbial broken clock, the “interest rates have nowhere to go but up crowd” was finally right, albeit for all of the wrong reasons.  Ironically it wasn’t QE, a soverign debt downgrade, bailouts or the Fed holding short term rates at low levels that ultimately caused rates to soar.  Instead the culprit was an unexpected election result and subsequent expectations of growth-spurring infrastructure investment, tax cuts and financial de-regulation that sent 10-year US Treasury Bond yields on a moonshot from 1.79% at the end of October to 2.44% today – a whopping 36 percent increase (although starting from a very low level).  Mortgage rates have followed suit as one would expect. Whether this move is sustainable or merely a market over reaction to an unexpected outcome won’t be known for a while.    However, the fact that rates responded to uncertainty by going up – rather falling as they have over the past 6 years or so is telling.  At the same time, housing prices are now back above their pre-bust levels, at least in nominal terms.  From Laura Kusisto at the Wall Street Journal (emphasis mine):

U.S. home prices have climbed back above the record reached more than a decade ago, bringing to a close the worst period for the housing market since the Great Depression and stoking optimism for a more sustainable expansion.

The average home price for September was 0.1% above the July 2006 peak, according to the S&P CoreLogic Case-Shiller U.S. National Home Price index released Tuesday. As of the previous month’s reading of the Case-Shiller index, a widely used benchmark for U.S. housing, prices remained 0.1% below the July 2006 record.

Adjusted for inflation, the index still is about 16% below the 2006 high. Home prices jumped 5.5% over the past year.

The record caps a four-year recovery from the trough of 2012, when prices sat 27% below the peak after a crash that caused more than nine million American families to lose their homes.

Admittedly, this recovery has been far from even across the country.  However, the fact that values are back above water is generally good news if you were either able to hang onto your home (assuming that you didn’t buy right at the peak) or were able to purchase a home when prices were at distressed levels.  If you don’t fall into either of those two categories, not so much.  Kusisto goes on to explain why (emphasis mine):

While prices have recovered, the market is flashing caution signs. The country is building far fewer homes than normal, the home ownership rate is near a five-decade low, and mortgages remain difficult to come by, especially for less-affluent buyers. Rising mortgage rates could also begin to pose headwinds to further price growth.

Home-price growth has also outpaced income gains, making it more likely that the current rate of appreciation is unsustainable. Home prices have grown at an inflation-adjusted annual rate of 5.9% since 2012, while incomes have grown by just 1.3%, according to Case-Shiller. By contrast, from 1975 until the present, prices grew at a rate of 1.1% a year, while per-capita incomes grew 1.9%.

When it comes to housing, price has recovered, but in terms of sales volume this has been a meh recovery at best.  Home sale volumes are generally trending up, albeit slowly and the percentage of first time buyers in the market has risen to 33% (it was 31% a year ago and still has a long way to go to get to the historical average of 40%).  Perhaps the most important factor in the still-tepid volume recovery is that wage growth is finally starting to increase solidly after being essentially flat for years.  In addition, the FHFA increased conforming loan limits for the first time since 2006 and the FHA followed suit.  Both of these moves will make mortgages more available and the new administration’s stated desire to lessen banking regulatory burdens will likely do the same.  Demographics are positive as well with an increasingly large percentage of the massive Millennial generation moving into the key household formation years of their mid-to late 30s.

As you can see the conditions are ripe for higher sales volume in the housing market but for one very important question: Can home prices be sustained and sales volumes increased through a period of rising interest rates?  A recent Wall Street Journal article by Steven Russolillo cites a study by John Burns Real Estate Consulting that suggests that they can:

A study by John Burns Real Estate Consulting Inc. examined 10 instances over the past four decades in which mortgage rates rose by at least 1 percentage point. It found prices weren’t especially sensitive to rising rates, particularly in the presence of other positive economic factors, such as strong job growth, rising wages and improving consumer confidence.

I hope this is the case.  However, one of the unique aspects of this cycle has been that low rates have made up for flat to falling incomes for an incredibly long period of time allowing home prices to increase in an era of long term wage stagnation.  As such, today’s housing market conditions are likely considerably tighter and more credit reliant than they were in many of the instances in the Burns Study (I was unable to find the raw data so I can’t say for sure).  If that is indeed the case, wage growth will have to be substantial if rates keep going up, otherwise affordability is going to become a yuge issue.

So, what happens when the positive variables of tight inventory, wage growth, increasing credit availability and strong demographics run into the negative variable of increasing interest rates?  We haven’t had to deal with a scenario like that in a very long time but I suspect that we are about to find out.


Good Investment: It’s been well-chronicled that the US has a ton of infrastructure that needs repairs and upgrades.  The problem is that most of it is simple (think dams, railway bridges/tunnels and freight railway lines) rather than sexy (think high-speed rail) which makes it less likely to get attention and funding.

The Long Game: Incoming Treasury Secretary Steven Mnuchin says that he’ll consider longer treasury maturities as a vehicle to finance the national debt.  With low interest rates, this is a common sense idea and should have been done years ago.  Definitely a step in the right direction.  See Also: Could the US start issuing 100-year debt like European countries?

Too Damn High: A new study by Denise DiPasquale and Michael Murray published in the Journal of Regional Science blames rising rents (and stagnant wage growth) as a substantial contributing factor to America’s recent economic stagnation since renters have less excess capital to consume.


Changes Coming?  There may be some reforms on the way for the Low Income Housing Tax Credit program which has become inefficient and bogged down with inflated labor prices.

TIC Tock: There are few real estate transactions more complex than re-capitalizing a busted Tenants in Common or TIC deal.  My Landmark colleague Ethan Schelin has been killing it in this space lately.  Ethan recently served as an advisor on a $42 million ($32MM in bridge debt and $10 MM in equity) TIC deal for the recapitalization of a large office complex in Connecticut and sat down with Globe Street to discuss the transaction.


Staying Put: American’s are moving far less than they used to, both in percentage and number terms and everything from tight mortgage credit to dual income families to working remotely are partially to blame.  See Also: Buying a house can be a very lucrative investment IF you buy in the right area and stay put for a long time.

Not From The Onion: House flipping startup Opendoor just raised $210MM of venture capital and is now Silicon Valley’s latest $1 billion unicorn.


Unintended Consequences: Fast food workers have been pushing for a $15/hour minimum wage for a while now.  In related news, McDonalds recently announced the nationwide roll-out of touchscreen self service kiosks.  As it turns out, $15/hour doesn’t fit that well for jobs that can easily be replaced by a computer or robot.

Painful: Some big name investors are taking a massive hit from their investment in fraudulent blood testing start-up Theranos.

Horse Already Left the Barn: IMO, one of the more ill-advised things that the incoming presidential administration has floated is the idea of scrapping the Department of Labor’s Fiduciary Standard rule for brokers and financial advisors.  However, according to Josh Brown, the financial industry has already changed so much that the impact will be muted, at least in the long run.

Chart of the Day



Brilliant: A police department in the Canadian town of Kensington has publicly advertised that, in addition to fines, criminal charges and license suspension,  those arrested for drunk driving will have to listen to Nickelback in the police cruiser on the way to jail.  This constitutes cruel and unusual punishment under the Geneva Convention (I Googled that).  It’s also brilliant.

Hero: Meet the Las Vegas man who got frustrated with package theft took matters into his own hands by filling boxes with dog poop and leaving them on his front porch.

Bro…. A South Carolina man sprayed AXE Body Spray into his mouth during a traffic stop in an effort to mask his breath and avoid a drunk driving arrest.  Needless to say it didn’t work and the aftertaste was terrible.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links December 2nd – Moment of Truth

Landmark Links November 29th – Stuck in the Past


Lead Story…  If there’s one thing that the homebuilding and development industry has not often been accused of being, it’s innovative.  For one reason or another, builders are about as far away from the cutting edge innovative leaders of Silicon Valley as one can get while still being a viable industry.  George Casey, CEO of Stockbridge Associates, LLC recently attended several of the top builder conferences and had some pointed remarks for an industry that is still operating as it was approximately 4 decades ago.  The current business model ill-suited to today’s economic realities and ill-equiped to handle the projected wave of demand that’s on it’s way.  Mr. Casey’s entire article is as well-written of a piece as you will find as to what really ails builders (h/t Tom Reimers).  I’ve posted the entire artcile below because there is too much good stuff in here to try and exerpt:

Over the past several weeks, I have had the opportunity to attend a variety of fall industry conferences: the Urban Land Institute (ULI) fall meeting in Dallas, a Vistage Construction Network CEO Roundtable in Boston, and John Burns’ Fall Homebuilding Conference in New York.

The latter was held the day after Election Day about two blocks from the New York Hilton. An interesting time to be in New York, to say the least.

I enjoy the mix of the conferences, because of the variety of viewpoints they provide.

ULI gave the industry view from home builder, master planned community developer, financing and technology perspectives. Big picture and long-view stuff with a national and international perspective. The Vistage Network CEO Roundtable involved construction and construction service CEOs from New England and covered both commercial and residential, but Northeast focused. John Burn’s conference was expansive and deep on home building, residential community development, finance, and demographics on a national basis.

As I processed all of the information, a recurring theme kept coming back, kind of like that “It’s a Small World After All” song from Disney World. Once you get it in your head, it never leaves.

The theme was that many of the major players in the industry are not fully recognizing and attacking one of the core challenges for the industry: the inability to generate enough housing supply to meet the current and even-greater-tomorrow demand that is on the way. The focus of many in the industry is actually on yesterday problems and solutions.

An inability or unwillingness to see the issues that are new and with us today and which lack focus or solution seems to be a blind spot for many leaders.

At ULI, a panel of home builders and community developers on the developer/builder relationship in master planned communities spent the bulk of its effort talking about demographic trends, the need for more product segmentation to drive incremental velocity, and the rapid introduction of ever-more sophisticated technology tools to target buyers, to get to know more about them, to show them Virtual Reality model homes, and, generally, how to drive more sales to accommodate the coming millennial demand that is now, finally, upon us.

Yet, the reality is that in many markets in the country right now, builders cannot keep production up with the current sales level, forget one that is significantly stronger. More sales in this environment equals extended delivery times and eroding profits (just look at the recent batch of public builder operating metrics for case studies) and, most likely, really ticked-off customers.

There simply is not enough skilled labor to build what is being sold in many markets, and the prospect of more labor coming in time to make any kind of short- or medium-term difference is not very bright. Further back in the chain, the existing skilled labor pool for construction is relatively old and retiring out at rates that are becoming concerning.

The historical response to this issue has to bring in immigrant labor (both legal and illegal) to fill this gap. However, in the current political environment, this solution seems taboo.

The reality is that if any of the existing non-working population really wanted a pretty good paying job, the existing demand in construction would have been filled long before now. It seems that the truth is that the hard manual outdoor labor required for site-built construction in the current business model does not fit the fancy or inclination of the remaining unemployed.

The logical conclusion is that we are stuck, most likely, with a continuing and worsening labor shortage in all of construction, whether it is residential, commercial, or the services to the industry.

I asked the panel why they were focusing on the generation of even more demand when it appears that the real problem is how to generate more housing supply in a world where the labor supply to the industry is relatively fixed. Not surprisingly, no one had an answer or had thought much about it (other than to complain).

In fact, it is a relative new and vexing problem.

In the last housing cycle (1991-2008), we filled many construction jobs with baby boomers who didn’t mind working outside and immigrant labor from Central and South America, the former Communist Eastern Europe, and, particularly Mexico. Before that, the non-college-educated blue collar population of the country plus immigrants provided the labor in every cycle before.

The structural immigration changes we have made and the relative demonization of manual labor for millennials has left the cupboard bare.

The bottom line is that some of the smartest people in the industry were back focusing of the intellectually stimulating, tech and demographic fun stuff of marketing, sales, and demand generation, because that was the solution when production constraints were minor in the past.

The fact that the current problem (structural supply constraint instead of demand constraint) is not the past problem, but a new one, had not garnered much intellectual capital for solution.

Meaningful and permanent innovation in production was not on anyone’s radar.

At John Burns’ Homebuilder Conference, that perception was reinforced again through many of the presentations.

Great and thoughtfully analyzed demographic data from John’s team showed a surge of demand coming for both the millennials finally starting households and baby boomers needing retirement housing. A rosy demand picture for the for forseeable future.

A panel of Wall Street analysts and bankers, however, when questioned on why home builder stocks had not appreciated since 2012 in any meaningful way, despite a growth in orders, closings, and revenues, hit on a root problem. They noted that the builders continually overestimated their deliveries, and their margins are continuing to be under pressure and are declining.

These are not good stories to drive stock valuations higher.

In some cases, stock prices are being buoyed by returning capital back to shareholders, rather than re-investing in the business. The stated culprit was that labor was in short supply, which drives up production costs faster than sales pricing and inhibits any reasonable ability to fully dictate deliveries.

Most of the home building participants in the room took this rationale as the non-adjustable norm. Same as it always was; same as it always will be.

When queried about innovation in the industry, new floorplans, the adoption of better CRM software, and better demographic targeting were cited. No one even tried to approach the issue of productivity, nor the possibility that the current business model for builders might be outdated. Not on anyone’s radar.

All I know is if I go into Delta’s faucet plant, Whirlpool’s stove plant, Ford’s F-150 plant, or Boeing’s airplane factory, that factories look significantly different than they did 40 years ago. Robotics, offsite sub-assemblies, lean manufacturing, just-in-time delivery, and other innovations have been brought into those industries in order to become more productive and profitable.

The businesses look much different in so many ways than a generation or two ago.

Yet, when I look at home building, the way the business is run and the way production is done have not changed markedly in that same 40-year period.

The house sales and production processes today are only marginally different than in 1960. Yes, the tools might be better (a pneumatic nail gun vs. the old 16 oz. “Thunderstick” hammer), but fundamental ways the business operates have not changed much.

Almost every builder uses exclusively sub-contract labor to site-build their homes. The training and management of those trades are left to others and most builders have little or no idea who will be showing up each day to advance the production of the homes they (the builder) have sold to a customer. Even worse, most builders do not even know whether the labor will show up.

Therein lies the risk and the opportunity.

If skilled trade labor is no longer as plentiful as it was in the past, yet demand looks like it will be considerably higher than our current and forecast ability to produce well into the future, perhaps someone should recognize the elephant in the room and be looking to fundamentally change the business model of the business.

Rather than buying back stock, shouldn’t the largest home builders reinvest in another way to create homes that involves less labor and more automation, and achieve higher productivity?

It would seem that the very existence of builders depends on how this question is answered and the value of their companies either ride higher or lower based on how they address the issue.

Shouldn’t Boards of Directors of home builders address this existential question before either the activists come in and turn the company upside down or market forces slowly eviscerate the franchise?

I wonder what the reaction in the marketplace would be to a builder CEO who, when asked the question regarding how they were innovating, had a response that sounded something like this:

“We recognize that this industry cannot operate any more like it has historically. The days of abundant and qualified sub-contract labor seem to be coming to an end.

We cannot afford to embrace a business model that thinks it is okay to deliver homes in 6-12 months and where we have little control over who builds our homes each day.

We have looked at other industries and see that, on our current track, we are destined to extinction in the face of a surging demand that our current business model does not permit us to meet at levels of margin and capital return that are acceptable and industry-leading.

We, instead have chosen to take a different path that will involve some short term pain, but will position us as a leader in the new housing economy.

We are going to take a meaningful portion of our cashflow and, rather than reinvest it back in land or stock buy-backs, we will invest in new methods of producing our homes, using a high degree of automation, new materials, and a dedicated workforce consisting of full-time team-members of our company.

We will use the best people and ideas from other manufacturers and home builders from around the world to help drive this innovation. Our belief is that we can deliver homes in under 60 days from the day the customer signs a contract with us, and at net margins and returns on assets of over twice what we achieve currently.

Even more, we are choosing to reorganize our company to continue to invest in the research and development needed to drive the continuous innovation and improvement that we see will be needed to keep us at the top of the competitive heap.

We will be innovative in our use of technology, materials, business systems, and people in this drive.

We know that, if we do not make these fundamental changes, we stand a high risk of extinction, and we will not ignore that fact.”

Wouldn’t that be interesting?

If our current crop of home builders cannot make that speech, my sense is there are others from outside of the industry or outside of the country who see this opportunity and will take it and run with it.

If this elephant of a question is not addressed, the current crop of builders risk a fate similar to those companies in other industries who failed to see the changes that drove new companies like Walmart, Amazon, and Apple to dominate spaces where more established companies had operated. Those companies that did not change with the times and environment ultimately became either extinct or food for the new.

So, if leaders and directors of current home builders continue to work in the old business model and on innovations with a small “i” and a 3-font, rather than innovations with a capital “I” and a 128-font, they will be truly picking up peanuts while the elephants run wild, and, (to mix metaphors) risk becoming the extinct dinosaurs more quickly than they realize.


The Ugly Truth: Technology has done more to kill manufacturing jobs than trade or even excessive regulations.

Change on the Horizon: Banking has been a dull and regulatory-heavy business in the years following the Great Recession but could be on the verge of getting exciting again as regulations look likely to ease following the election.

On the Bright Side: Black Friday has become a spectacle that is both entertaining and horrifying.  Here’s a well-reasoned defense of America’s favorite chaotic shopping day.

Round Trippin’: It’s been a wild year for US Treasury markets and now yields look poised to end the year pretty much exactly where they started.


Party’s Over? The 0ngoing selloff in government bonds could have a substantial impact on commercial real estate valuations which have benefited from ultra-low interest rates.  See Also: Inside Wall Street’s $2.1 Trillion bet that rates will rise.


Suffocating: New research from the Urban Institute found that excessively tight credit led to approximately 1.1 million mortgages not getting funded in 2015 that would have under normal lending conditions.  See Also: Home builders say federal loan limits shut out many buyers.


Innuendo: California is considering a ban on lawyers screwing their clients….in a litteral sense.  Currently the practice is not illegal but is frowned upon.  Rarely in human history has a news item provided such great headline fodder.

Follow Up: If you enjoyed last week’s feature link about Renaissance Technologies and Jim Simons, you’ll love this profile from 16 years ago.

Good Riddance: The NFL is looking at scrapping Thursday Night Football, because Thursday Night Football is completely unwatchable and absolutely sucks.

Up In Smoke: How the incoming administration could be a major roadblock to legalized marijuana if they aggressively enforce existing Federal laws.

Chart of the Day


Sign of the Times: You can now purchase a hipster nativity scene complete with a selfie-taking Joseph and three wise men on Segways bringing gifts in Amazon Prime boxes.

Buy GOLD: Politician who spoke out against squirrels hospitalized after ‘suicide bomber’ rodent causes bike to flip over.

Shots Fired: A Florida woman was arrested on charges of shooting a gun at house guests who refused to leave because, Florida.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links November 29th – Stuck in the Past

Landmark Links November 22nd – GOAT


First off, I’d like to wish each and every one of you a very happy Thanksgiving.  I’ve really enjoyed writing this blog over the past year and a half or so and am very thankful to all of you for visiting it.  This is going to be my only blog post this week as I’m certain that you have better things to do on a long holiday weekend than surf the web as do I.  Enjoy the time with your loved ones and we’ll be back full time next week!

Lead Story… Every once in a while, I come across a profile that is so fascinating that it makes sense to feature it here even if it’s not real estate related.  Today’s lead story feature is a long-form Bloomberg profile of Renaissance Technologies (and the employees-only Medallion Fund  in particular), the world’s most successful and possibly most secretive hedge fund.  I found this particular story so intriguing because it gives the reader a great glimpse of what it takes to be the best in a deeply cutthroat industry and how adaptation is key, even if you are on top.  It’s a fairly long read so it’s perfect for the upcoming long weekend.

Anyone who follows financial media has heard that hedge funds have had a rough go of it lately.  The strategies that they employ are getting crowded with competitors making it hard to find an edge, leading to benchmark under-performance and pressure to cut fees or face redemptions.  However, there is at least one fund, run by a highly secretive team of PHD’s, mathematicians and scientists that hasn’t just beaten the market. It’s torched the market, it’s competitors and pretty much any asset class that you can imagine since the late 1980s…and that’s AFTER you account for it’s astronomical fee structure. That fund is Renaissance Technologies Medallion Fund (whose only investors are Renaissance employees) which was founded by Jim Simmons.  BTW, this is not a Madoffesque scheme just waiting to blow sky high once the market turns.  It’s very real.  From Bloomberg’s Katherine Burton (emphasis mine):

The fabled fund, known for its intense secrecy, has produced about $55 billion in profit over the last 28 years, according to data compiled by Bloomberg, making it about $10 billion more profitable than funds run by billionaires Ray Dalio and George Soros. What’s more, it did so in a shorter time and with fewer assets under management. The fund almost never loses money. Its biggest drawdown in one five-year period was half a percent.

“Renaissance is the commercial version of the Manhattan Project,” says Andrew Lo, a finance professor at MIT’s Sloan School of Management and chairman of AlphaSimplex, a quant research firm. Lo credits Jim Simons, the 78-year-old mathematician who founded Renaissance in 1982, for bringing so many scientists together. “They are the pinnacle of quant investing. No one else is even close.”

Few firms are the subject of so much fascination, rumor, or speculation. Everyone has heard of Renaissance; almost no one knows what goes on inside. (The company also operates three hedge funds, open to outside investors, that together oversee about $26 billion, although their performance is less spectacular than Medallion’s.) Apart from Simons, who retired in 2009 to focus on philanthropic causes, relatively little has been known about this small group of scientists—whose vast wealth is greater than the gross domestic product of many countries and increasingly influences U.S. politics—until now. Renaissance’s owners and executives declined to comment for this story through the company’s spokesman, Jonathan Gasthalter. What follows is the product of extensive research and more than two dozen interviews with people who know them, have worked with them, or have competed against them.

Renaissance is unique, even among hedge funds, for the genius—and eccentricities—of its people. Peter Brown, who co-heads the firm, usually sleeps on a Murphy bed in his office. His counterpart, Robert Mercer, rarely speaks; you’re more likely to catch him whistling Yankee Doodle Dandy in meetings than to hear his voice. Screaming battles seem to help a pair of identical twins, both of them Ph.D. string theorists, produce some of their best work. Employees aren’t above turf wars, either: A power grab may have once lifted a Russian scientist into a larger role within the highly profitable equity business in a new guard vs. old guard struggle.

For outsiders, the mystery of mysteries is how Medallion has managed to pump out annualized returns of almost 80 percent a year, before fees.

Fees, by the way are 5% on the AUM and 44% of the profits.  So, yeah it’s expensive but the after-fee returns are nothing short of spectacular.  By the way, this is an employees only fund so they are investing their own cash.  No outsiders allowed.

There are a couple of points in the article that describe what makes Renaissance different different from most funds.  The first was that they are looking to hire mathematicians, coders and PHD’s, not your typical Wall Street folks:

Encouraged by Medallion’s success, Simons by the mid-’90s was looking for more researchers. A résumé with Wall Street experience or even a finance background was a firm pass. “We hire people who have done good science,” Simons once said. The next surge of talent—much of which remains the core of the company today—came from a team of mathematicians at the IBM Thomas J. Watson Research Center in Yorktown Heights, N.Y., who were wrestling with speech recognition and machine translation.

If you want to outperform, you have to be different from everyone else.  In a highly competitive field, there isn’t much of an edge to be had by doing the same thing as your competitors and trying to be better at the margins.  To truly bring performance to the next level, it’s sometimes imperative to go about doing things in a completely different way.  The second thing that caught my eye was the focus on data.  Not just gathering data but rather compiling it in such a way that it’s usable in testing an investment thesis:

Renaissance also spent heavily collecting, sorting, and cleaning data, as well as making it accessible to its researchers. “If you have an idea, you want to test it quickly. And if you have to get the data in shape, it slows down the process tremendously,” says Patterson.

The business that Renaissance is in is possibly the most data intensive of any field and they have mastered gathering and use of that data in a way that few have.  The third, and perhaps most critical success factor highlighted in the article was the willingness to constantly adapt, despite perpetually outperforming their peers:

In the early days, anomalies were easy to spot and exploit. A Renaissance scientist noted that Standard & Poor’s options and futures closing times were 15 minutes apart, a detail he turned into a profit engine for a time, one former investor says. The system was full of such aberrations, he says, and the scientists researched each of them to death. Adding them all up produced serious money—millions at first, and before long, billions.

But as financial sophistication grew and more quants plied their craft at decoding markets, the inefficiencies began disappearing. When Mercer and Brown joined they were assigned to different research areas, but it soon became apparent they were better together than apart. They fed off each other: Brown was the optimist, and Mercer the skeptic. “Peter is very creative with a lot of ideas, and Bob says, ‘I think we need to think hard about that,’ ” says Patterson. They took charge of the equities group, which people say was losing money. “It took them four years to get the system working,” says Patterson. “Jim was very patient.” The investment paid off. Today the equities group accounts for the majority of Medallion’s profits, primarily using derivatives and leverage of four to five times its capital, according to documents filed with the U.S. Department of Labor.

If you’re on top, it’s fairly easy for stagnation to take hold.  After all, why change things if you’re outperforming all of the time?  The ability and willingness to constantly evolve without allowing performance to slip is easier said than done.  If you have time this weekend, you won’t regret reading the entire piece.


It’s a Long Way Down: A protracted bond bear market is not a sure thing.  That being said, a lot investors searching for yield in long duration instruments are doing the equivalent of picking up nickels in front of an oncoming bulldozer.

Of Broken Clocks: The perennial cycle of “experts” predicting recessions is a complete joke.

The Void: Vocational training was once the norm in high schools.  In the era of hyper-competitive college prep it’s fallen by the wayside.  Here is why we desperately need it to return.


Cookie Cutter: You can thank banks and their insistence on credit retail tenants in order to get project financing for the chain stores that are taking over much of America.


Please Make it Stop: A 157 unit condo project in San Francisco’s Mission District proposed by Lennar got shot down in a massive way last week.  That, in and of itself isn’t news.  What I do find incredible is these two quotes from an excellent synopsis of the NIMBY shit show (it was extreme even by SF’s incredibly low standards) from CurbedSF:

Many of reasons were given, but the one that stands out most is the frequent references to President-elect Donald Trump, who may well have clinched the decision against developer Lennar.

Some called the development racist, and the sitting supervisors racists too. One referred to rich homeowners as an “invasive species.” Another delivered his argument with a Bernie Sanders puppet.

I haven’t a clue how a building could possibly be racist nor what Donald Trump has to do with a proposed development in a city where probably a dozen-or-so people actually voted for him.  Combine that with the absurdity of a sock puppet speaking at a public hearing and that, kids, is why we can’t have nice things at least when it comes to housing in California.

A Step in the Right Direction: Housing starts surged in October but still have a long, long way to go.

Assembly Line: A shortage of construction workers in many US markets has builders turning to a potential solution that they have traditionally derided: prefab production.


Best Shot: Why this is probably our last best chance to fix our infrastructure and refinance America’s debt into longer maturities at low rates.

Just in Time for Black Friday: I have a much better idea for you than standing in line at your local mall or Walmart waiting to do battle with fellow shoppers over a toaster oven.  Instead, check out Honey, the browser add-on that automatically applies coupon codes to your online order and finds the lowest price on Amazon.  Whoever invented this deserves a Nobel Prize if only for doing something to reduce some of the chaos early this Friday morning.  You’re welcome.

Beyond Just Texting: Cars are safer than ever but we just experienced the biggest spike in traffic deaths in 50 years.  The likely reason?  Apps that encourage driver interaction and serve as a distraction to drivers.  See Also: Tech-distracted drivers are turning parking lots deadly.  And: Rain triggers 570% increase in LA freeway crashes because LA drivers suck.

Chart of the Day



Just When You Thought The Election Was Over: A mall Santa Claus in Florida (of course) was recently relieved from his duties for telling kids that Hillary Clinton was on the naughty list.

Extra Sausage:naked man was caught breaking into a pizza parlor in Maryland on a surveillance camera.  He caused several thousand dollars in damage but only got away with some change and is still at large.

Pole Position: Someone apparently thought that it was a good idea to have a pole dancing float in a North Carolina holiday parade.  The entire state of Florida is pissed that they didn’t think of it first.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links November 22nd – GOAT

Landmark Links November 18th – Hiding in Plain Sight


Lead Story….  There are two types of correct forecasts.  The first type is the broken clock forecast.  It consists of someone predicting the same thing over and over again, and being mostly wrong and occasionally correct.  Nobel laureate Paul Samuelson’s “The stock market has forecast nine of the last five recessions” quote comes to mind as do all of the folks that have been telling us that “interest rates have nowhere to go but up” since 2009. Taking advice from anyone who makes these types of predictions is useless at best and possibly detrimental.  The second type of prediction is data based and not subject to the author’s biases.  There are very few people who can pull this sort of clear minded analysis off.  Bill McBride of Calculated Risk comes to mind as does reigning bond king Jeff Gundlach of DoubleLine Capital.  Today I want to focus on Gundlach who has correctly predicted every presidential election result since 1972.  What made this year unique even by Gundlach’s standards is that he predicted that:

  1. Trump would win the election back in January BEFORE the presidential primaries even began.
  2. The 10-Year Treasury would yield over 2% by year end back in January when Treasuries yielded a paltry 1.35%.

Today, I want to focus on Gundlach and why he got both of these forecasts right when so many others were incorrect.  Robert Huebscher of Advisor Perspectives published a post earlier this week called How Gundlach Predicted Trump’s Victory  I’m going to post it in it’s entirety today since it contains a lot of terrific insight on Gundlach’s methodology as well as some valuable commentary about where we are headed next:

How Gundlach Predicted Trump’s Victory

Hillary Clinton was a uniquely bad candidate, he said, because of her failure to beat President Obama in 2008, followed by her problems with the email server and a “basic lack of honesty.”

Why did Trump win? Gundlach said that people felt abandoned by the economy, with the median worker having suffered low or negative wage growth since 1973. This came while the top 5% realized a 51% real increase in their purchasing power. He said that the corresponding increase for the top .01% was so large it would have “blown the scale” of his graph.

“The ownership of wealth has shifted,” Gundlach said. “But those trends are about to reverse.” Gundlach said that wealth inequality will decrease.

A big contributor to Clinton’s defeat was the release of the Obamacare data on November 1, Gundlach said, which showed a “massive” increase in premiums. He said that those responsible for scheduling that release must have expected a great piece of news, not the negative “shock” it actually delivered.

Gundlach commented on what the election result means for the markets and specifically how investors should position their bond portfolios.

The markets are confused

“The markets remain completely confused as to what will be the trend direction from the election,” he said.

As evidence of that confusion, he said he was struck by the many pundits who called for a crash and global depression following Trump’s victory; many of them, Gundlach said, now claim Trump is great for stocks.

Trump does not have a “magic wand” to offer instantaneous improvement for the economy, Gundlach said. Investors should expect a bumpy ride while Trump strives to deliver on his promises, he said.

Gundlach has been warning against a rise in interest rates. He turned negative in July, when the 10-year bond was yielding 1.35%; it is now just over 2%.

An interest rate rise will not be positive for the economy or the housing market, he said. Monthly mortgage payments are already up 15%, he said, and could go up 20-25% relative to their mid-year levels. Median rents have been “skyrocketing” and renters have had a “horrible decade,” Gundlach said; those benefits in the housing market have accrued to homeowners.

“That is not positive for the psyche of the middle class,” he said.

Nor will Trump’s victory be positive for consumer spending in the short term, according to Gundlach. Trump’s supporters are not economically in a position to spend.

Gundlach warned against overanalyzing the effects of Trump’s ascendency. Since 1988, the same institutions have been in place, he said, with politics dominated by the Bushes, Clintons and Obama. “The trends of the past 28 years cannot be relied upon,” he said.

Gundlach was emphatic about one group of stocks. He said to “avoid the FANGs in a big way” – Facebook, Amazon, Netflix and Google. “It is not a good idea to bet on ideas whose trends are correlated to things that won’t continue,” he said, especially since the market had priced a Clinton victory into the prices of those stocks. Instead, he said to overweight financials, materials and industrials “for the quarters to come.”

Silicon Valley put a lot of money behind Clinton, he said. The irony is that Trump would have lost if not for Twitter, according to Gundlach.

“The people who hate Trump the most were responsible for his winning the election,” he said.

The recession and inflation forecast

Gundlach said the probability of a recession has increased based on his indicator, which measures the unemployment rate relative to its historical moving average. But he did not say a recession is imminent.

He was more focused on the prospects for higher inflation.

Inflation measures, including hourly earnings, the core CPI and core PCE, have “bottomed out,” he said. They are all moving higher, as well as the internet-based Pricestats inflation gauge. In July, the market was predicting 1% inflation “forever,” Gundlach said; now it is saying that outcome is impossible, and inflation will likely be above 2.5% by April.

As a result, Gundlach said he has liked TIPS since September. In the Flexible fund, he said every Treasury bond was a nominal bond at mid-year; now 100% of its Treasury holdings are TIPS. Over the same time, he said, the Core fund went from having 0% to 30% of its Treasury holdings in TIPS.

Where rates are heading and will the EU will break up

Gundlach offered a number of forecasts across the asset-class spectrum, as well as a prediction for the future of the European Union.

Crude oil could find its way to $60/barrel, he said, and it will be hard for it to drop below $40. From oil’s low January at $26/barrel, it may have a 100% price increase.

Gundlach is “somewhat neutral” on gold over the short term and not as positive on it as he was at year end. He advocated “paring back” gold holdings.

He said he was positive on the dollar from 2011 until mid-2015. Now he is positive again, and said the dollar will “move to higher levels.” The dollar has been a leading indicator of Treasury rates, according to Gundlach. With the dollar at a high level, he advised against buying bonds until the 10-year Treasury reaches 2.30% or 2.35%.

But he said he has “relaxed” the “negative sentiment” he had on interest rates in July. He said he is less likely to forecast higher rates now, but is not predicting an instantaneous reversal of yields to the downside.

“The 10-year yield is higher than its average the past five years,” he said. “This is not my definition of a bull market.”

Has said that the 10-year yield could be 6% in five years, but this is not necessarily negative for bond funds. It depends, he said, on how those funds are positioned and the path that rates take to get to a higher level. Some funds, he said, will do fine reinvesting their coupons at progressively higher rates.

The cash flows from bonds go up when prices go down, he said, whereas when stocks drop in price it is because of unfavorable earnings or economic news, which can lead to dividend cuts.

“There are a lot of reasons to be less negative on Treasury bonds than we were four months ago,” he said.

Virtually all other sectors of the bond market are “on the rich side,” Gundlach said, including mortgages, CMBS, corporate bonds (including junk bonds), leveraged loans, emerging markets and municipals. He said the worst thing to own are 30-year corporate bonds.

If you want to own fixed income, he said to “play it in Treasury bonds.”

At the end of the question-and-answer period, he was asked whether he expects another Brexit event and whether the Eurozone would collapse.

There will be another exit, he said, but he doesn’t know which country it will be.

“There is never one cockroach,” Gundlach said.

Jeff Gundlach has proven time and again that he is not a broken clock.  Ignore at your own risk.


Overshoot?  Has the post election bond sell off that led to higher interest rates gone too far?

Blinded: Paul Krugman’s election night tweets and blog posts are just the latest example of why political bias & business cycle analysis NEVER  mix.

Welcome to the 21st Century: US Manufacturing is about to get more high tech but still has a ways to go.

Trouble: US consumers are increasingly defaulting on loans made online.  It seems that startups that aimed to revolutionize the banking industry underestimated the risks involved in consumer lending.  Color me shocked.


Evolution: Co-working company WeWork which has soared to a $17 billion valuation by leasing space from landlords and then renting it out at a higher price.  However, newcomers in the space look a lot more like hotel operators where landlords pay co-working operators a fee and keep most of the profits, reducing the operators risk profile.


The Tax Man Cometh: Vancouver, BC seems hellbent on cratering their housing market.  Earlier this year they introduced a 15% surcharge on home purchases by foreign buyers that drove transactions off a cliff.  Apparently, that wasn’t enough because now they are adding a new tax of C$10,000 a year that will be charged to homeowners who let their homes sit vacant.  Those who lie about whether their property is occupied or not will be fined C$10,000 a day, or $7,425, U.S.  In related news, Seattle is looking really, really good to a lot of foreign buyers right about now.   See Also: Why the world’s largest real estate binge is coming to a city near you.  And: As markets waver, the rich are parking money in luxury homes.

Exodus: Data analysis firm CoreLogic found that for every new home buyer coming into California, another three are selling their homes and moving somewhere less expensive as we’ve effectively priced out the middle class through restricting development.

No Privacy: Bathrooms with a view (for both you and potentially your neighbors) are a  hot feature for luxury condo units.


Flying High: Drones are evolving from military to business tools and the potential market could be massive.  FYI, the graphics in the linked report from Goldman Sachs are incredible.

Yuge Infographic of the Day

Millennial Home Buyers


Dirty Money: A Royal Canadian Mint employee (allegedly) smuggled $140k of gold and sumggled it out by shoving it where the sun don’t shine.

Ramen Rampage: An ex con was arrested for domestic battery after striking his live-in boyfriend with a cup of ramen noodles, because Florida.

Mug Shot Competition: Former Oregon football player arrested for theft and a man who was terrifying El Segundo with a turbo charged air horn are locked in a fierce battle for Mugshot of the Week.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links November 18th – Hiding in Plain Sight

Landmark Links November 15th – Restraint


Lead Story… To say that the past few days have been a shit storm in the fixed income market would be an understatement.  As I wrote last week, we’ve spent the past 6 or-so years becoming conditioned to believe that every major financial or geopolitical disruption would result in a flight to quality trade into US Treasuries, lowering borrowing costs for real estate.  Last week’s surprise election result obviously broke that trend and, even the few people out there that got the election result correct mostly got the bond market response incorrect.  As such, are now in a position where things could dramatically change in the lending market which would obviously have profound implications on real estate in general and housing in particular.  Interest rates are already up substantially as talk about potential tax cuts, a mountain of infrastructure spending and de-regulation of mortgage markets abounds.  What seemed to be a grindingly slow and somewhat boring market just a couple of weeks ago is now changing rapidly, leaving some worried and others excited.

But here’s the thing: no one really knows what this new administration is going to look like in terms of economic or housing policy or how it will interact with a congress that, although of the same party was often hostile towards the President-elect during the election.  Political campaigns have become little more than 2 years of mudslinging and bullshit and the one that mercifully just finished was far worse than most.  Markets appear to be jumping to the conclusion that it’s going to be easy for everyone on the right side of the isle to simply come together after all of their inter-squad fighting and slam through broad changes.  This line of thinking largely discounts that there is a very narrow majority in the Senate while disregarding the fact that there are major, major disagreements on key issues between the incoming administration and legislative branch.  Maybe they suddenly come together and do everything that market participants seem to believe they will, leading to higher inflation.  Maybe they don’t.  The fact is that we simply don’t know at this point.

Oaktree’s Howard Marks is one of the most brilliant and successful investors in the world.  His response to the election and policies that may or may not be enacted in the next 4 years is something that everyone should read.  From Financial Review (emphasis mine):

“I am in the ‘I don’t know camp’. We should not rush to conclusions,” the founder of $US100 billion ($131 billion) fund manager Oaktree told the audience at the Sohn Hearts & Minds Investment Leaders conference in Sydney on Friday.

“On paper he should be a pro-business president and objectively speaking he should be more pro-business than Hillary Clinton would have been,” Marks said, but added he will be watching to see which policies Trump will pursue and will be able to pursue and who he appoints.

“He said lots of things people didn’t like but he said some supportive things for the business environment such as cutting taxes. The negative is his view on trade.”

Another positive is Trump’s pledge to invest in America’s infrastructure.

“It will be a nice thing and put people to work but I don’t think it will redirect the trajectory of the economy, but it’s a plus and something people can agree on.”

The rise of populism would become a feature of the US political and economic environment.

“The Trump candidacy didn’t make people angry – it touched on an anger and a division.”

“Globalization and automation has cut into jobs and is going to cut in further.”

He feared that sustained lower growth will be a challenge for the nation.

That’s one of the world’s most successful investors freely admitting that he doesn’t know what’s going to happen with the economy from a policy standpoint.  If only all of the talking heads on the TV and internet could show such restraint….

The crux of the matter is this: infrastructure spending, tax cuts and financial de-regulation are all inflationary.  Protectionist trade policy and tarrifs are deflationary.  At this point, there is no way to tell whether the pro-growth or populist side will win out.  There is a fine balance to be struck here.  During the Bush administration, the regulatory pendulum swung too far towards de-regulation.  The result was banks gone wild and, eventually the Great Recession / housing crash.  Somewhat predictably it swung hard in the other direction during the Obama administration, leading to retulatory stagnation, a lack of bank credit and incredibly low interest rates.  My hope is that the new administration and Congress ease up on regulation enough to get banks lending again but not so much that we go back to the bad old days of 2005 which was basically the lending equivalent of the wild west.  IMO, we need policies that are more pro-growth but not at the expense of stability. To be sure, it’s a difficult tightrope to walk. We don’t know if it will happen or not but I’m remaining open minded until I know more.



Glass Half Full: Higher interest rates mean long term gain at the expense of short term pain.

Positive Trend: The prime working age population (ages 25 – 54) is finally growing again which should help to provide a positive economic tailwind.  See Also: 40-somethings are the prime drivers of US productivity but no one really understands why.

Breaking Away? As you can imagine, a large portion of Silicon Valley was not happy with the results of last week’s election.  Several tech titans got together and are now working on an initiative to put a referendum for California secession on the 2018 ballot.  Here’s why that would be an incredibly dumb idea from an economic standpoint.

A New Direction?  As I previously wrote, last week’s Election results have traders betting on more inflation in the near future.


Giving Away the Farm: Manhattan landlords are offering more concessions than ever due to an oversupply of available apartment units.

Virtual Reality: Some online retailers are turning to physical locations in an effort to connect with consumers better.


Paying Up: A post-election Treasury sell-off that resulted in higher mortgage rates has home affordability in the United States waning.

Bullish: While the nation as a whole may be divided, construction firms are quite bullish on the result of the presidential election.

New Direction?  Silicon Valley is the poster child for the housing affordability crisis in the US.  However, the election of several pro-development candidates in local city council races should be a positive for a region that has become so expensive that it’s not uncommon to see Tesla’s in trailer park driveways.

Chart of the Day

More sensitive than an America college student.

Here’s what happens to values when rates rise 1%


And here’s what happens to values when they fall 1%



Good Boy: A town in Minnesota re-elected a dog as mayor for a third term.  In related news, if anyone asks me what leaders I admire I’m going to direct them to Duke the Great Pyrenees.

Cat Lady: A woman in Texas was arrested last week after police discovered three tigers, a cougar, a skunk and a fox in her house along with her and her 14 year old daughter.

Bottoms Up: A new study found that drinking a beer a day helps prevent stroke and heart disease.  You’re welcome.

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Landmark Links November 15th – Restraint