Landmark Links October 17th – “It’s Another Day In Which To Excel”

I’ve been spending a lot of time with my family over the past few weeks and that has left me basically no time to blog.  For those of you who don’t know, my father in law passed away on October 1st unexpectedly and I have been busy both grieving and helping out with the estate issues that accompany such a tragic event.  Today’s blog post is a bit different from the normal Landmark Links fare – no funny pictures or goofy WTF headlines about the latest Florida crime wave – just a tribute to a member of my family and also a good friend.

There is an old saying in the commercial real estate industry that old brokers never retire.  Sadly, I’ve become all too aware of this over the past few of weeks.  Just a few short months ago, I was honored to attend a 40th work anniversary at CB Richard Ellis for my father in law, Ted Snell.  A lot of old friends from his time in the industry showed up to share old war stories and honor a man who had been a fixture at CBRE going on 4 decades.  Ted and his wife Nancy moved out to Newport Beach back in the late 70s when Orange County was in the beginning of an epic growth spurt.  As the story goes, Ted showed up in the lobby of the CBRE (then called Coldwell Banker Commercial) office in Newport Beach and basically refused to leave until they gave him an interview.  His persistence paid off when they offered him a job (if memory serves me correctly he was the first broker hire who wasn’t a USC or UCLA grad).  Mrs. Links and I brought our two young daughters to share in the moment of what their “Papa” had accomplished in his storied career. 

On October 1st, Ted passed away surrounded by his family in the hospital after suffering a massive heart attack a few days earlier.  For anyone who has never lost someone they love unexpectedly, the days after are both grief-stricken and chaotic.  Funeral and memorial arrangements need to be made, estate and financial matters need to get dealt with and most importantly of all, you need to be there to comfort your family.  To be honest, the last three weeks are already a bit hazy in my memory and could have just as easily happened a year ago (I’ve read that this is a fairly common human response to traumatic events).  The traditional way of honoring someone in writing is an obituary and Mrs Links wrote an excellent one that detailed Ted’s life as a family man, successful commercial real estate broker and prolific youth sports coach in our local paper.  Today, I want to take a bit different approach.  While time on earth is limited for each of us, the lessons and wisdom that we impart to others during that time potentially lasts much, much longer.  Today I want to share a simple but critical lesson that I learned from Ted in the time that I spent with him:

Trust Your Gut – Ted’s work persona could best be described as an old school broker’s old school broker.  He was a big, physically imposing presence with an even bigger personality.  Ted was far from computer literate, relied on business cards or memory rather than Outlook or his cell phone for contact information, and understood how the internet worked roughly as well as I understand nuclear physics.  However, he made up for this the way that the best old school brokers do: by forming deep relationships with clients from the top to the bottom of an organization and relying on good old fashioned gut instinct.

Ted was somewhat infamous among his family and co-workers for making snap judgments about people and he often drove his kids nuts by drawing quick conclusions about their friends or potential significant others.  But here’s the thing that they would reluctantly admit – he was almost always proven correct.  Ted was as good at making quick character and personality judgments as anyone who I have ever been around and it served him well in his career since it allowed him to quickly assess who he wanted to pursue business relationships with.  He was an absolute master at reading the subtle cues that people give which mostly go un-noticed.  It also made good business sense. Some of Ted’s best clients were relationships that went back decades and those relationships often started with his ability to read a prospective client. These were the type of relationships that were there in good times and bad. As anyone who works in an industry with unpredictible cash flow like commercial real estate brokerage knows, there’s a lot to be said for that and it often starts with ones ability to assess character. 

I recall that Mrs. Links made me a bit nervous about this talent before I first met Ted several years ago.  It was a very short first meeting since we were running an errand at the time and I remember asking her how I did a few days later.  His verdict?  Something along the lines of “that guy is driven” – in other words, I passed.  I’ve been called that before but wondered how he was able to make such a judgement in a few short minutes.   Did this habit make him come across as the world’s friendliest person initially? Was he best buds with everyone or did everyone liked him instantly?  Of course not, but that didn’t seem to bother him at all which was part of his charm.  Some of my favorite stories at his memorial were about the dichotomy between his often gruff persona and the fact that he was basically a big teddy bear once you got to know him.

The lesson here is simple in theory but complicated in practice: it’s a basic social convention to give people the benefit of the doubt when you first meet them.  However, that shouldn’t mean that you ignore often-subtle cues that can provide an insight as to someone’s personality and or character in a relatively short period of time.  On a personal note, I worked on a couple of projects recently where my partners and I suspected that something might be amiss but continued to push forward anyway – both ultimately went nowhere.  In both cases, we would have wasted less time if we had trusted our gut instinct initially rather than telling ourselves that everything would work out.  Ted was the master at this and it’s a skill that I find myself wanting to improve upon.  

The quote that I used as the title to this post was a mantra that Ted repeated to his kids constantly when they were growing up.  It’s a perfect catch praise for someone who had the guts to drive across the country to a place where he knew no one, show up unannounced at one of the world’s top commercial real estate brokerages demanding an interview and then go on to a storied 40 year career.  He was one of a kind and will be dearly missed.  Rest In Peace. 

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

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Landmark Links October 17th – “It’s Another Day In Which To Excel”

Landmark Links September 29th – Mark Up


Lead Story… Short on time this week so I didn’t have a chance to write a lead story.  However, I want to share the housing chart series from the Daily Shot which was fascinating this week and tells the story of aging housing stock and high prices beginning to have a detrimental impact on sales:

1. Let’s begin with the housing market. New home sales were weaker than expected in August, hitting the lowest level of the year. A portion of the decline was due to Hurricane Harvey, which flooded the Houston metropolitan area in the final days of the month.

The pricier homes saw the greatest slowdown.

The supply of unsold homes (measured in terms of months needed to clear the inventory) jumped to the highest level since 2014.

2. A slower rate of household formation this year has been a headwind for home sales.

Source: Piper Jaffray & Co.

Will household formation improve as young adults move out of their parents’ homes?

Source: Goldman Sachs, @joshdigga

3. New residential construction remains tepid. As a result, American homes are aging quickly, boosting the home renovation industry.

Source: Goldman Sachs, @joshdigga

By the way, the above trend, combined with all the hurricane damage, has pushed Home Depot shares higher.

4. Home prices are still climbing by almost 6% per year. Here is the national Case Shiller index showing housing inflation gradually rising.

Housing markets in some metropolitan areas have overheated. For example, below is Seattle’s real estate index rising at 13.4% per year. Of course, folks from Vancouver probably think that Seattle homes are still cheap.

5. Household mortgage leverage (the ratio of mortgage debt to disposable income) is drifting lower. Note that this chart does not include consumer debt such as student loans and credit cards.


Pinch Point: The Trump Administration’s proposals on tax reform are unlikely to happen.  Why? Because 52 Republican Members of the House who represent districts in blue states are unlikely to accept elimination of the ability to deduct state income tax payments.

Squeeze: Citigroup thinks that we are more likely to see an oil supply squeeze in the coming months than a flood of additional supply from OPEC.

Supply, Not Demand: A new paper finds that the declining male workforce participation rate is due to an increasing number of men getting disability benefits, not a weak labor market.


Ghost Town: Elmira, NY could be ground zero of the brick and mortar retail apocalypse.  Here’s why.


Money for Nothing? Lennar is trying to entice Millennial buyers by offering to make a payment to a buyer’s student loans of as much as 3% of the home purchase price, up to $13,000.

Out of Balance: The US housing market is unhealthy and increasingly mismatched with today’s buyers with little entry level product and inventory at mid-1990s levels despite population growth of more than 60 million since then.  See Also: Home prices pick up despite fewer sales.

Invasion: Flippers are swarming Houston looking to buy flooded homes on the cheap and renovate them for a profit.


When History Repeats: How the history of Sears – which started out as a mail order business and grew into brick and mortar retail – predicts nearly everything that Amazon is doing today.

Say What? Crypto fund king Mike Novogratz is starting at $500MM hedge fund to invest in cryptocurrencies yet claims that Bitcoin will be the biggest bubble ever.

You Don’t Say…: Early data indicates that cannabis legalization could be a boom for McDonalds and Taco Bell.


We’re Going to Need a Bigger Toilet: An Alberta town’s waterways are being invaded by giant mutant goldfish that reproduced and grew after people flushed some of the unwanted pets down their toilets.

Working Out Different Muscles: A recent UK study found that Britons spend twice as much time on the toilet as they do working out.  (h/t Steve Sims)

Video of the Week:  Watch a gopher mascot absolutely truck a child in a halftime football game and then put on a somewhat horrifying end zone celebration.  Also, it gave me an excuse to post this video of mascots destroying kids which I consider one of the 10 best Youtube clips of all time.

Gotta Hear Both Sides: A swinger’s party in Michigan ended when a jealous wife who attended the party with her husband attacked him with a mini-van.  Perhaps it’s just me but I never envisioned people going to swinger parties in minivans.  To each their own, I guess.

Measured Response: A woman had an affair with her daughters husband, then tried to run him over with her car after he came clean about the cheating because, Florida.

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

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Landmark Links September 29th – Mark Up

Landmark Links September 26th – Living on the Edge

Ice fishing

Lead Story…. 2017 has been a truly dreadful year for natural disasters in the United States (and Mexico for that matter), and we still have a few months left to go.  After several quiet hurricane seasons, the southeastern US and gulf coast have been hit with major storms and flooding which have caused loss of life and billions of dollars of property damage.  The impact on the US economy will be substantial.  Patrick Clark of Bloomberg took a bit of a different look at this ongoing issue last week in an article entitled Home Prices Soar in Disaster-Prone Areas (emphasis mine):

Amid the terrifying recent events is a worrisome finding from a new report: The parts of the U.S. most at risk of natural disasters are also the places where property values are highest and increasing most quickly.

The chart comes from Attom Data Solutions’ natural hazard index, which matches geographic areas to government data on risk of flood, earthquake, tornado, wildfire, hurricane, and hail.

The riskiest 20 percent of U.S. counties have the most homes, the highest average home values, and the greatest price appreciation in recent years. Why? Buyers who pay premiums for ocean views and mountain lookouts may be getting some additional disaster risk as part of the bargain, said Daren Blomquist, senior vice president at Attom. Those kinds of geographical attributes are likely secondary factors in driving price appreciation, though. More importantly, Attom’s list of disaster-prone areas overlaps with engines of economic activity.

I had never really thought about our economy this way before but, as the statistics bear out, it really is the case that economies tend to be stronger in disaster prone areas. The big question is why is this the case.  I have a few thoughts:

  1. The Weather is Better – It’s been fairly well documented that population and economic growth tends to be greatest in so-called smile states that make up the sunbelt.  People may be drawn by warm climates initially but economic growth also tends to beget more economic growth and these trends have been in place for quite a while.  It’s an unfortunate reality that warmer places tend to be more prone to tropical storms and hurricanes meaning that the very thing that drew people in the first place is also the cause of risk.  I was reminded of this in Michael Grunwald’s excellent essay in Politico a few weeks ago entitled A Requiem for Florida, the Paradise that Never Should Have Been.  In that piece, Grunwald details the history of the Sunshine State and how it was considered uninhabitable swampland until developers figured out how to drain it, making population growth possible.  However, in doing so, it made large portions of the state extremely unacceptable to storms since the former swamps were low lying and in the path of hurricanes and tropical storms.
  2. The Geography is Better – People generally like to live near the coasts.  The weather is more temperate and natural ports historically allowed for more commerce meaning that this is where large, vibrant cities tended to pop up and grow  A city near the water is more susceptible to flooding and storms than a city located inland.  As above, the very feature that  draws people to live or build there is what makes a region more prone to natural hazards.
  3. The California Effect – I would be remiss if I did not bring up my adopted state here.  California has the best weather and some of the most dynamic cities in the US.  However, almost the entire state is fraught with earthquake risk, not to mention fires during the dry season and hillside slides during the rainy season.  It’s also the largest state in the US by population and has a toxic marriage of some of the most restrictive housing policies and some of the best job growth which has led to a major affordability crisis with home prices around 2.5x the national average.  The Golden State absolutely plays an out-sized role in driving up average housing prices higher in high risk zones.

I tend to suspect that people will be more cautious about topography in Houston and Florida going forward.  In fact, we are already seeing this behavior in Houston as homes that didn’t flood are now selling for a premium.  California, on the other hand hasn’t had a major earthquake in quite a while and I suspect that we are becoming too complacent.

In conclusion, I wouldn’t expect much of anything to change when it comes to home prices in regions with high natural disaster risk.  It all comes down to trade-offs.  After all, would you rather live near a coast in a dynamic city with good job prospects and face the risk of an occasional natural disaster or would you rather live in Cleveland?  I know what my answer is. (Side note: I considered writing an apology for that last part – especially to my handful of friends who grew up in Cleveland.  Then I remembered that they understand this better than I do).


Get Real: Real wage growth has been strong of late because inflation has been low. However, firmer inflation caused real wages to dip in August and they could fall further if that trend continues.

A Tale of Two Cities: Economic prosperity is concentrated in America’s elite zip codes, but economic stability outside of those communities is rapidly deteriorating.

Toxic Mix: Believe it or not, bubbles aren’t necessarily bad things…..unless debt is involved.


Still Going Strong: The predicted CMBS slowdown hasn’t occurred yet.  In fact, there has been a flurry of activity according to CoStar.

Under Pressure: Mall REITs are tanking again as debt continues to haunt ailing retailers in the wake of the Toys R Us bankruptcy.


What’s Next: The Fed is about to embark on a quantitative easing unwind which will likely result in higher mortgage interest rates.

Low Hanging Fruit: The mortgage market is ripe for disruption despite fintech startup missteps.  Can incumbent lenders get innovation before the startups get market share?


More than Just Grades: Being a member of a fraternity in college lowers a student GPA by approximately 0.25 points on the traditional four-point scale, but raises future income by around 36%, according to a paper, “Social Animal House: The Economic and Academic Consequences of Fraternity Membership,” published by two economists from Union College in Schenectady, New York.  See Also: The friends that you make in the first year of college can impact how well you do.

Contingency Plan: Amazon is a lifeline for some retail workers but only if they happen to live in the right city.

Someone is Going to Jail: There was some highly suspicious bearish trading in Equifax options right before the largest data breach in history was announced.  However, whether it’s criminal or not all comes down to who initiated the trade order.

Chart of the Day

US housing prices continue to diverge from wages. Here is the updated comparison since the early 1990s. Is this trend sustainable? Some housing analysts say that it is as long as inventories remain low.

Source: The Daily Shot

Shooting self in foot:

The US protectionist move against Canada’s lumber hasn’t worked out as intended. Lumber prices soared as Canadian firms pass the tariffs (and higher margins) to the buyers. New US homes will become more expensive.



Employees Must Wash Hands: Someone (allegedly) put semen in soap dispensers at Detroit’s airport. It’s a good thing the perp wasn’t caught or he would have missed his flight home to Florida.

Today in Brilliant Marketing: Charmin has offered free toilet paper to the Colorado Springs ‘mad pooper’ if she turns herself in.

Truth in Advertising: A coffee called ‘death wish’ has been recalled because it actually might kill you as a result of contamination from botulism.

You Don’t Say: An NYC restaurant that served raw cookie dough in bowls (mainly to hipsters) has been hit with a class action lawsuit for making people sick.  Apparently it’s not a great idea to consume a lot of raw eggs.

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

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Landmark Links September 26th – Living on the Edge

Landmark Links September 22nd – Myth Busters


Lead Story…. There are few forces on earth more powerful than that of mean reversion. I’ve written about common media narratives regarding Millennial preferences quite a bit since I started this blog.  Since the beginning of this cycle, the US media has latched on to a juicy narrative that was too good go pass up – that Millennials were unlike any other prior American generation and would forego things like home ownership and car ownership “forever” in favor of renting, mass transit and ride sharing.  I’m really not sure where this view originated.  Chances are that it was someone or a group of people with an ax to grind against suburban sprawl who saw that Millennials were increasingly foregoing home and car ownership.  Rather than investigating the underlying causes, they simply attributed these life decisions to reasons that fit their pre-existing biases.  Media outlets took the bait and the Millennial-as-perpetual-urban-renter theme became accepted as fact.  For several years, John Burns Real Estate Consulting (and others) have pointed out the fallacy of this thinking – there is a critical difference between what someone would like to do and what they are actually doing.

In the years following the Great Recession, Millennials did indeed rent in the city and forego purchasing cars in droves.  However, as this generation has aged, it’s behavior is reverting to the mean just as it did with previous generations.  Two stories came out this week that helped clarify the difference between what young people are doing with regards to home ownership and what they would like to be doing.  The first was from Daniel Taub at Bloomberg who referenced a joint study by the National Association of Realtors and non-profit American Student Assistance that found that heavy student debt loads delay home purchases by 7 years on average (emphasis mine):

The typical student debt load for millennials in the U.S. is $41,200, surpassing their median annual income of $38,800. One impact of that burden: first-time home purchases are being delayed by seven years.

That’s according to survey results released Monday by the National Association of Realtors and the nonprofit group American Student Assistance. Only a fifth of millennial respondents own a home, with 83 percent of non-owners citing student debt as the reason they aren’t buying. Among those who do own, 28 percent said they’d sell their current home and purchase a better one, if not for student loans.

It’s difficult to buy a home when debt service on student loans eats up so much of your income and potential down payment savings.  This is a problem that previous generations didn’t have to deal with at nearly the same scale.  However, young people are still buying homes (and SUV’s for that matter) once they form families and start having kids.  They are just going through these rights of passage later than previous generations did.  Another story from NPR’s Emily Sullivan and Sonari Glinton pointed out that older Millennials are buying suburban homes and SUVs, just as previous generations did and completely counter to the Millennial-as-perpetual-renter narrative (emphasis mine):

But now, as millennials get older — and richer — more of them are buying SUVs to drive to their suburban homes.

The National Association of Realtors’ 2017 Home Buyer and Seller Generational Trends study found that millennials were the largest group of homebuyers for the fourth consecutive year.

Zillow’s chief economist, Svenja Gudell, says that for millennials, growing older is beginning to mean buying a house in the suburbs.

The Great Recession acted as a pause button for many choices that Gudell says millennials were already going to be slow to make.

“We’re seeing that the age at which women have kids has also gone up. And so instead of having children in their late 20s, you might start having kids when you’re in your early 30s at this point,” she says.

Generationally speaking, the stereotype of millennials as urbanites falls flat when it comes to home ownership. The Zillow 2016 Consumer Housing Trends Report found that 47 percent of millennial homeowners live in the suburbs, with 33 percent settling in an urban setting and 20 percent opting for a rural area.


Michelle Krebs, an executive analyst at Autotrader, says college debt kept millennials out of the car market, but now that’s changing.

In 2011, millennials were just 20 percent of the market. They’re about 30 percent now, and Krebs says that they’ll be 40 percent of the market before the next decade if current trends continue.

Erich Merkle, an economist with Ford, says that as millennials cross the threshold into family life, they’re buying large SUVs.

“We expect them to carry on as they age with three-row SUVs and likely go larger simply because they need the space to accommodate children that are now teenagers or preteenagers,” he said.

Ford expects all SUV sales to grow from 40 percent to more than 45 percent of the total U.S. new vehicle market within the next five to seven years.

Millennials just might be mainstream after all.

Young people increasingly moving to the suburbs and purchasing SUVs both fit nicely with the demographic trend that my favorite chart from Calculated Risk illustrates:


As Millenials age, they are acting exactly as previous generations acted – just a few years behind due to student debt and the unfortunate reality of coming of age during the Great Recession.  Look for this mean reversion to continue as the 30-39 year old age group grows dramatically over the next decade or so.  Deferring home and car purchases due to personal financial limitations may not be as sexy to write about as a sea change in attitudes amongst an entire generation towards two bedrocks of American society. However, it is a far simpler explanation and, per the actual data, also has the advantage of being the correct one.


Tale of Two Demographics: New data shows that retirees are on the move but young people are increasingly staying put.

Warning Signs: The next financial crisis is far more likely to be brought on by untested and largely unregulated Silicon Valley fintech startups than by Wall Street.

It’s Been a While: The incremental bump in US incomes that we have been experiencing of late does not erase the 50 years of stagnating wage pain that preceded it.


Leveraging Up: Interest from bond investors is prompting publicly listed mall owners to issue debt at record levels this year even as equity investors rush for the exits.

Winter Wonderland: Landlords are tying to turn under performing open-air shopping centers into winter hangouts complete with skating rinks, fire pits and programmed entertainment in an effort to drive foot traffic in colder months.

Short Commute: Not driving to work is the new high end job perk and the more that you make, the less likely you are to take public transport.


Whatever It Takes: A new startup called Loftium will give you up to $50,000 to put a down payment on a house but only if you agree to continuously list an extra bedroom on Airbnb for 1-3 years and share income with them during that time.

Tightening: Bank financing for residential acquisition, development, and construction suggests that banks are getting more selective.


Virtual Roller Coaster: Bitcoin’s wild ride shows the truth – it’s value depends on it becoming digital gold or being used by criminals – and that value is most likely zero. See Also: Bitcoin has become all about the payday, not its potential.  But See: What Jamie Dimon gets wrong about Bitcoin and Tulips.

Disappearing Act: The fascinating post-baseball story of former Giants super star pitcher Tim Lincecum, as reclusive an athlete as you will ever find

Chart of the Day

Some housing stats from The Daily Shot

Existing home sales dipped again, missing economists’ forecasts. Affordability is becoming more of an issue.

Source: Piper Jaffray

Most housing analysts blame these slowing sales on shrinking inventories. Home listings are seasonal, and for this time of the year, the availability of houses for sale is the lowest since the 90s.

Source: The Daily Shot


Truth Serum: A new survey of British plant eaters has found that one in three vegetarians eat meat every time they’re drunk on a night out because not eating meat sucks.

Over Confident: A shaman was killed while swimming in a crocodile invested lake in Indonesia.  He jumped in there in an effort to prove his  supernatural control over crocodiles after a villager had been killed the previous day.  The whole ordeal was caught on video.  It’s easy to say in retrospect but this was probably a bad idea.

Good Samaritans and Better Headlines: Topless car wash raises cash for deputies wounded in gun battle at Rastafarian pot farm

Gotta Hear Both Sides: A Colorado Springs woman is wanted for questioning by local police after having been spotted pooping on a family’s lawn multiple times.  The manager from the local Chipotle was unavailable for comment.  (h/t Dave Landes)

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

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Landmark Links September 22nd – Myth Busters

Landmark Links September 15th – Toxic Brew

Meals on Wheels

Lead Story…. One universal truth about the financial industry is that it inhabits an ever-changing spectrum of fear and greed.  Real estate finance is certainly no different.  When greed is rampant, lenders bend over backwards to get money out the door so long as a perspective borrower can fog a mirror.  When fear rules the day, the process of obtaining financing is more akin to a full proctology exam.  People generally like to think that we learn from past mistakes.  However, when it comes to finance, memories are short and lessons generally only stick for a short period of time.  After that, they become lost in the dustbin of history or rationalized away by some variation of the ever-popular “it’s different this time” meme.  So, imagine my lack of surprise when reading a story this week about an Australian real estate financing scheme virtually certain to end in tears for all involved.  From Frank Chung at (emphasis mine):

THE Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

To clarify what is happening here: if an investor in Australia owns a rental property and wants to buy another, lenders are letting him or her cross collateralize the original property and use the equity from that initial property as a virtual down payment, negating the need for the investor to actually invest any additional cash.  When done in scale, this introduces a massive amount of risk into the system since it drives leverage ratios through the roof.

The first thing that you are probably thinking is how the hell is this going on when the housing bubble happened so recently?  Well, here’s a bit of perspective: that was the case in the US but not in Australia.  A fairly recent crisis is far less of an impediment to bad behavior when it happens in a different country thousands of miles away.  As the chart below shows, Australia had a brief market correction around 2008 but it’s housing market has been headed to the moon ever since, largely buoyed by massive inflows of capital from international buyers:

Image result for australia versus us housing

When I initially read the article quoted above, my first thought was whether or not rents are high enough there to cover expenses when properties are essentially 100% financed.  Short answer: they are not.  More from Frank Chung (emphasis mine):

The report describes the system as a “classic mortgage Ponzi finance model”, with newly purchased properties often generating net rental income losses, adversely impacting upon cash flows.

Profitability is therefore predicated upon ever-rising housing prices,” the report says. “When house prices have fallen in a local market, many borrowers were unable to service the principal on their mortgages when the interest only period expires or are unable to roll over the interest-only period.”

LF Economics argues that while international money markets have until now provided “remarkably affordable funding” enabling Australian banks to issue “large and risky loans”, there is a growing risk the wholesale lending community will walk away from the Australian banking system.

“[Many] international wholesale lenders … may find out the hard way that they have invested into nothing more than a $1.7 trillion ‘piss in a fancy bottle scam’,” the report says.

The report largely sheets the blame home to Australia’s financial regulators, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission. “ASIC and APRA have failed to protect borrowers from predatory and illegal lending practices,” it says.

This is a “business plan” that is 100% reliant on substantial appreciation to be successful.  From the article, it appears as if many of these loans have a built in interest only period and aren’t even covering debt service during this I/O period.  Once the loan adjusts and begins to amortize, the borrower needs to refinance or sell.  Otherwise he or she will have to continue to feed the project (or have the loan negatively amortize) every month in order to cover the loss.  Such a business plan is successful if and only if the property appreciation is greater than the amount of cash or negative amortization needed to cover the negative cash flow.  Perhaps the worst part is that the market doesn’t even need to fall in order for a borrower to get wiped out (remember all of the properties are cross collateralized under this scheme).  Instead, the market simply needs to move sideways and, due to the negative cash flow and borrower’s inability to refinance in a flat market, the borrower will eventually default.

Notice that the regulators are already being blamed for not reigning in the banks and allowing predatory lenders to prey on borrowers.  Let’s be honest: these borrowers know exactly what they are doing.  They are trying to amass a portfolio of investment properties with minimal investment and as much debt as possible with a complicit lender taking on equity risk in order to get more dollars out the proverbial door.  This isn’t some middle class worker who was sold on the dream of home  ownership by a smooth-talking mortgage banker and got in over his head.  The lenders here are being blinded by greed and the borrowers are as well.  Both are 100% culpable for the mess that they are going to cause. I feel a bit like I’ve gone back in a time machine writing this post since it reminds me so much of the shenanigans in the US mortgage market back in 2005 and 2006 when negative amortization pick-a-payment loans were all the rage.  Our current system in the US is far from perfect and is still too restrictive thanks to the ongoing housing bubble hangover but thank God that US mortgage lenders aren’t doing what Australian lenders are.


Strategy Shift: In a tight labor market, companies are looking to set up in cities with large numbers of underemployed people who would leap at a new opportunity.

Contrarian: An unconventional Bank of International Settlements paper makes the argument that global demographics- which have played a role in driving global deflation – will change course and cause inflation to increase in the coming years.

Grinding Higher: US Median income has now hit a new high. but still isn’t much greater in real terms than it was in 1999.


Assessing the Damage: In the wake of hurricane Irma 25% of homes in the Florida Keys were destroyed and thousands more were damaged.  Meanwhile, millions of people in the Southwest were still without power as of early this week.

Can’t Stop. Won’t Stop: Houston’s housing market seems undaunted by Harvey as buyers and builders are keeping deals on track.


Trail of Disruption: Since being released 10 years ago, here are all of the things that the iPhone has helped to destroy.

Tightening the Noose: China is planning to ban the trading of bitcoins and other cryptocurrencies traded on exchanges after banning ICOs last week.  The country accounts for nearly a quarter of bitcoin trades and cryptocurrency was largely seen as a means to move cash offshore in light of capital controls from Beijing.

Subtle: When asked about Bitcoin at a recent conference, JP Morgan Chase CEO Jaime Dimon was quoted as saying “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.”  Sometimes I wish that these corporate types would stop with the overly PC answers and let us know what they really think.  Contra: Dimon has trashed Bitcoin in the past and it’s nearly always been a buying opportunity.

Chart of the Day

Important Difference: Global income inequality hasn’t grown since the financial crisis

However, wealth inequality has.

Source: The Daily Shot


Strange Visual: Denny’s announced a new mascot this week that looks like a turd with eyes.  Actually, it look exactly like Mr. Hankey from South Park.

Keeper: A runaway bride in Great Britain was arrested after skipping town with 13,000 pounds of her fiance’s bachelor party fund.

Exposed: A married couple was busted for public indecency when they posted videos of themselves getting busy in public places online.  See Also: Nude model jailed for topless Egyptian temple shoot vows to keep stripping at holy sites.

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

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Landmark Links September 15th – Toxic Brew

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Lead Story….  Basic economics and simple logic both dictate that if you want to make something more affordable, you do so by lowering it’s cost.  Then again, as anyone who has lived in California knows, the powers that be in this state have almost no aptitude when it comes to either simple logic or basic economics.  Consider the issue of affordable housing:  the fundamental problem is that we have a growing population and don’t build nearly enough units to keep housing costs in check.  However, rather than addressing the problem head on, lawmakers continue to push schemes to subsidize the construction of an extremely limited number of affordable units that are funded by imposing taxes and/or fees on pretty much everything else.  Take the City of Los Angeles and it’s proposed linkage fee on new construction that is nearing approval and would drive up already high construction costs substantially.  Land Use Attorney Andrew Starrels of Holland & Knight LLP did an interview with Globe Street (h/t Steve Sims) last week to explain how this latest scheme would work (emphasis mine):

The City of Los Angeles is considering imposing a significant new fee on most construction projects. These are called “linkage fees” because they attempt to connect new development to the severe need for affordable housing in the city by providing a sustainable funding source. The fees apply to virtually all new commercial and residential construction, and will be collected when a building permit is issued and deposited into the City’s Affordable Housing Trust Fund. As originally proposed, the fees would amount to $12 per square foot of new residential construction and $5 per square foot of commercial development. This will represent a significant assessment on nearly all forms of development in the hopes of creating more housing affordability. The measure is sponsored by affordable housing advocates and political leaders, including the Los Angeles Housing and Community Investment Department and nonprofit and for-profit developers of affordable housing. Los Angeles has one of the most dire shortages of affordable housing in the U.S., as very limited supply and rising land costs have combined to create a doubly burdensome situation for poor and working class families. Wage growth and the cost of living have simply not kept pace with the rising cost of real estate, especially in high-value coastal areas, even as the economy recovers.

First off take note of who is pushing this: “for-profit and non-profit developers of affordable housing” along with the usual advocate and bureaucratic folks.  At it’s core, these developers are trying to get others to fund their projects.  It’s good business for them at the expense of anyone who wants to build market-rate residential or commercial in Los Angeles.  Second, and increase of $5/sf for commercial development and $12/sf for residential development is insane given already-skyrocketing construction costs.  The sad part is that the revenue from the proposed linkage fee will likely provide little more than a drop in the bucket towards the amount of affordable housing actually needed.

Let’s face the facts: It’s really expensive to build affordable housing in California.  But don’t just take my word for it: A 2016 legislative analyst’s report estimated that building enough affordable homes for the roughly 1.7 million low-income household in CA that currently spend half or more of their salaries on housing would cost as much to finance each year as the state’s spending on Medi-Cal.  This is not a problem that is going to be solved via piecemeal subsidies.  Period.  Should this pass, it will result in a relatively small number of low income units built at best.

To understand the scale of the problem, the waiting list for Section 8 vouchers in LA is 40,000 people long – that’s an 11 year waiting list.  In an example of how slowly affordable housing units actually get built, just 329 income-restricted units were built between 2008 and 2014 as part of LA’s density bonus program that rewarded developers with additional units for making a portion of a project affordable – barely even beginning to scratch the surface of what is needed. The way that California’s cities deal with housing is roughly akin to a drunkard who has a cocktail in the morning to help ease his hangover.  Sure, he may feel better for a short while but it will ultimately make the problem worse. All the while, what he really needs is to face the problem head on and get sober – which is a lot harder to do but a far better outcome in the long run.

So, what will happen if the linkage fee passes?  A small number of affordable units will get built and will provide shelter for a number of people in need.  That’s good.  However, in doing so, construction costs will go up substantially, discouraging much-needed construction needed to keep costs under control for the middle class.  California’s housing paradigm will remain unchanged: a very limited number of lucky low income people will get subsidized housing, the middle class will continue to get priced out and only the rich will be able to afford well-located housing.  Sad.


Keeping Options Open: More Americans are delaying marriage past their 20s than ever before.

Bye Felicia: Vikram Pandit, former CEO of Citigroup thinks that 30% of bank jobs could be lost to technology in the next 5 years.

Out In Front: San Francisco edged out Washington DC to become the nations highest income large metro area. Median household income in the San Francisco metro area in 2016 was $96,667, versus $95,843 in the Washington region. However, per Zillow the median home value in San Francisco is $1.23mm versus just $547k in DC. Hmmmmm. I wonder why.


Kingmaker: Why Amazon’s 2nd headquarters doesn’t necessarily need to be in a large city and how it could create the next Austin.

Production Line: NY and California continue to dominate when it comes to new office deliveries.

This is a Bad Idea: Two ex Google employees want to eliminate neighborhood mom and pop bodegas by putting smart phone operated boxes with non-perishable items in buildings. The idea was received poorly to say the least.


Cramped: Seattle is building a whole lot of 1 bedroom apartments and not much of anything else.

E for Effort: California lawmakers passed several bills in an attempt to deal with the housing affordability crisis. Some are a step in the right direction but come with strings attached like prevailing wage provisions so I don’t expect much of an impact. Hope I’m wrong….


Blood in the Water: Silicon Valley has largely flown under the radar of Federal Government regulators while oil companies and Wall Street banks have not.  That is changing quickly as big tech firms find themselves more in the cross hairs of Washington than ever before.

Predictable: Bitcoin took a dive after China banned exchanges.

Building Out: This interactive map of planned development of the LA subway and light rail system between now and the 2028 Olympic Games is fascinating.

Chart of the Day

Popular delusion

Investors still think that the current private equity multiples will get them their usual returns (such as what they got with the 2010-12 vintages). Amazing.

Source: The Lead Left via The Daily Shot


Hear No Evil: A sign language interpreter used gibberish and warned of bears, monsters and pizza during Hurricane Irma because, Florida.

Your Tax Dollars at Work: A former county administrative assistant from Arkansas admitted to fraudulent use of a credit card to make $200k in purchases including a tuxedo for her pug.

VICTORY: A Berlin court upheld a man’s right to fart in public this week.  Fortunately the judge was not long winded in his decision.

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Lead Story…. The United States construction industry has been coping with a massive labor shortage pretty much since the economy emerged from the depths of the Great Recession.  Job openings and steadily increasing compensation have not been enough to tempt young workers to enter an industry that generally pays relatively well (especially for those without a college education) but also involves manual labor.  Housing starts have increased some this year (although they are still low by historical standards), leaving the industry in an tight situation by the end of the summer.  Then, over the past couple of weeks, Hurricane Harvey devastated Houston and Hurricane Irma flattened part of Florida both of which which will exacerbate the problem substantially.  The level of sheer devastation from these storms if unfathomable.  Tens of thousands (possibly more by the time you read this) will have damaged or lost homes or worse.  I tend to joke about Florida a lot in the WTF section of this blog but I am truly keeping my favorite crazy state in my thoughts and prayers as they (and the greater Houston area) go through this.

Now the cleanup begins and the consequences of having to rebuild one of America’s largest cites and a portion of one of it’s largest and most populous states are going to be profound.  This would be a monumental effort even in a “normal” construction labor market since a massive amount of workers and resources need to be re-directed from the normal  construction economy.  Laura Kusisto and Doublas Belkin of the Wall Street Journal pointed out just how tight the market for construction labor currently is (emphasis mine):

Before Harvey, construction workers across the U.S. were already in tight supply and material costs were rising. Houston is likely to face such a severe crunch that it could affect the national economy by pushing up material costs and driving down the U.S. unemployment rate for construction workers further, according to Robert Dietz, chief economist at the National Association of Home Builders. There were 225,000 unfilled construction jobs in June, near the recent high of 238,000 recorded in July 2016, according to a National Association of Home Builders analysis of Labor Department data. In all, 10,000 to 20,000 workers could be needed to rebuild the homes damaged by Harvey alone, or 10% to 20% of the total number of residential construction workers in the Houston metropolitan area, according to the National Association of Home Builders.

Let’s dig into those numbers a bit further.  The team at John Burns Real Estate Consulting took a look back at rebuilding after hurricane Katrina hit New Orleans in order to get an idea of what to expect after Harvey (this was written before Irma made landfall in Florida, so in all likelihood, it only gets worse).  Here were their major takeaways (emphasis mine):

  1. Repair and remodeling spending will surge 9% nationally, taking labor and material resources away from new home construction. Our VP Todd Tomalak expects total 2017 disaster repair spending to reach $23 billion, which is more than double that of 2016. Those without flood insurance will tend to DIY.

  2. New home construction costs will rise for several years.

    • Government regulation and oversight will likely increase, making home construction more expensive. After three major floods in less than three years, most Houstonians no longer believe flooding is a once-in-a-lifetime event.
    • Labor costs will rise. 8 of the 14 builders we spoke with last week expect new home permits to decline for the balance of the year, primarily due to short supply of labor. All builders expected labor prices to continue increasing. Construction worker compensation rose 14% in Mississippi after Hurricane Katrina. Our clients in Dallas expect to lose workers to Houston as well.
    • Land prices likely to remain stable. The shortage of land in good locations will likely continue to keep land prices high.
  3. Real estate discounts will disappear. Prior to the hurricane, many new home sellers and apartment landlords were offering incentives to buyers and renters due to a slowly growing economy and an overbuilding of expensive apartments. Apartment Data Services, the Texas leader in apartment statistics and research, estimates approximately 10% of Houston-area apartments flooded from Hurricane Harvey, and believe most of the 70,000 vacant units will become occupied quickly. With housing vacancy certain to decline, we expect the incentives to disappear..

  4. Construction volumes will be higher than forecasted in 2018 and later. It took about five years after Hurricane Katrina to rebuild the housing stock in Harrison and Hancock counties.

The logical conclusion is that it’s likely about to become more expensive to build or remodel a home as the labor market continues to tighten up in the coming months.  I have two main takeaways from this:

  1. How mobile is the construction labor pool in 2017?  In other words, will workers in California, Colorado, Arizona, Virginia, etc be inclined to go to Houston or south Florida for a few months of work in order to make higher wages that become available when a crisis hits?  The Wall Street Journal had some anecdotal evidence that they will.  If the answer is yes, this will have a ripple effect on pricing on a much more nationwide basis.  If it is no, then the impact will be an acute cost increase in the regions surrounding Houston and South Florida but relatively minimal impact elsewhere.  I’m still not 100% sure on this but am leaning towards the idea that the construction labor pool is currently more mobile than commonly thought – especially when that mobility entails leaving a high cost of living region like coastal California when better wages become available in a lower cost of living region like Houston or South Florida.  Only time will tell.
  2. In the past, a construction labor shortage would have been at least somewhat offset by immigrant labor (legal and otherwise) as jobs open up and wages rise.  That is highly unlikely to happen this time around given today’s political climate and the result will be higher housing costs.  I’m not writing this to make a political argument but merely to point out a fact: less potential workers lead to shortages and a higher cost of living when demand increases.  IMO, this is something that is not acknowledged frequently enough by either side of the immigration debate.

We have been fortunate in recent years that the Atlantic hurricane season has been relatively tame.  Not so in 2017 and it’s still relatively early.  Keep all of those impacted by these brutal storms in your thoughts and prayers.  Houston and south Florida will rebuild but the resulting higher construction costs will likely be felt long after the sky has cleared.


False Premise? Why the notion that higher interest rates were “normal” while current ones are “unnaturally” low is false.

The Big Shift: Economic productivity is finally rising as companies begin to hire more workers in the goods producing and professional & businesses sector and less in lower productivity sectors like retail, leisure and hospitality.

Unreliable: If central banks can’t explain why inflation is so low, then why is there any faith in their forecasts?


Pick Me, Pick Me! Cities across the US are falling over themselves to be the site of Amazon’s second corporate headquarters.

Disruption: The reason that WeWork is valued so highly is that they have the potential to change the way that office buildings operate by utilizing better data.

Soaked: There is nearly $30 billion in CMBS exposure in areas affected by Hurricane Harvey.


Standout: Home ownership is hovering near a 50 year low but increasing Hispanic home ownership since the depths of the housing crisis is one of the few bright spots.

Reminder: Lower than anticipated GDP is very much a residential investment problem and is helping to keep interest rates low.

The Forbidden City: Many of Los Angeles’s most popular and iconic buildings would not be allowed to be built today.


Schadenfreude: The Juicero failed at least in part because it’s founder and CEO is a bat shit crazy, self righteous vegan (h/t Steve Sims):

Some employees say Evans’s passion for wellness was overwhelming. The founder mostly ate raw and vegan foods, and would sometimes scold non-vegan employees who ate yogurt or drank milk at team meetings, according to three former employees. He occasionally referred to dairy products as “cow pus,” they say. For a time, he also refused to allow employees to expense work meals at non-vegan restaurants, the ex-employees say.

Too Easy: Online hookup apps have taken a bite out of the bottom lines of brothels in Australia.

Hmmmmm: Three Equifax managers sold a substantial amount of stock in the company right before last week’s cyber attack which compromised the data of 143 million people was revealed.

Chart of the Day

Hello, Industrial Revolution

World GDP per capita over time

Source: Visual Capitalist 


Buy GOLD: A cybersecurity scientist has issued a bizarre warning that sex robots could one day rise up and kill their owners if hackers can get inside their heads.

Panties in a Bunch: Hurricane Irma wreaked destruction across the Caribbean and some models are sending their thoughts and prayers via racy bikini pics on Instagram, leading to claims of tone-deafness.  Let me go on the record to say that I am not offended by this.

Clowning Around: Clowns are gearing up to protest Stephen King’s movie ‘It’ over something that they call negative clown stereotypes.  Just my opinion but clowns are terrifying and deserve to be stereotyped.

FAIL: A French soccer team misspelled their own name on all of their player jerseys for the 2017-2018 season.  Spellcheck FAIL.

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