Landmark Links September 23rd – What’s the Point?

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Lead Story… Former Federal Reserve Chairman Paul Volker once said that the only useful modern financial innovation was the ATM.  While that’s a rather harsh assessment, there is a bit of truth to it.  Too often, financial products ranging from subprime loans, to derivatives to leveraged ETFs are created more as profit and marketing opportunities for those selling them than they are to fill an actual need of the people that they are being sold to.  That being said, I’m still somewhat fascinated by the FinTech industry because there are segments of the market that are not covered by traditional sources where FinTech companies can provide real value to consumers.  There have been several such products from online mortgage lenders to crowd funding platforms for real estate deals that fill a need.  I’m especially interested when a FinTech startup is aimed at our beleaguered national housing market.  Last week, top tier Venture Capital investor Andreessen Horowitz announced a new venture called Point which was created to invest in a portion of the equity in a home in exchange for a portion of the return when you sell or refinance.  Point lowers a homeowner’s monthly payment because you don’t pay current on Point’s equity investment and that all of their profit is realized upon sale or refinance of the home. Although this reduces a homeowner’s current pay, it could cost a lot more in the long term depending on whether your house appreciates and by how much.  When Point was announced via press release, the financial blogosphere when into a bit of a tizzy which was somewhat predictable given that: 1) The concept of offloading equity in a home, typically a family’s largest asset, has been around for some time but this seems to be the first time someone has attempted to do it in scale; and 2) Andreessen Horowitz is known for making smart investments – so people naturally assume that their involvement validates Point’s business plan.  I wanted to hold off on offering my opinion until I had time to do a bit of reading and research on the product.  There is still  a lot of information that hasn’t been released on how the product works but I’ve been able to piece together enough to get a decent ideal.

First off, let’s explain how the product works.  The best way to do that is probably the example from their own website:

 

Check if you qualify

Enter your address and answer a few questions. The process is free and takes less than 5 minutes.

5 minutes

  • You provide us with basic information about your home and your household finances.
  • To be eligible for Point, you’ll need to retain at least 20% of the equity in your home after Point’s investment.
  • We can instantly give you pre-approval or denial based on the information you provide.

Point Makes you an offer

Point makes a provisional offer to purchase a fraction of your home. We will provide you with an offer based on the value of your home today.

1-3 days

  • If pre-approved, we provide a provisional offer based on the data you provide.
  • The offer is typically for between 5% and 10% of your home’s current value.
  • We’ll ask you to complete a full application and provide documentation for our underwriting team.
  • If possible, we will improve on our pre-approval offer.

Schedule an in-person home visit

Pick a time for a licensed appraiser to visit you. We want to ensure the price is correct by checking the place out — no cleaning necessary🙂

5-8 days

  • We will schedule time for a home valuation visit.
  • You will be charged for the cost of the appraisal, which is typically between $500 – $700.
  • The appraiser will visit and inspect your home.
  • We will share the appraiser’s report with you once it’s complete. The appraiser’s value is an important component of the final offer.

Point pays you

We usually send the money within 4 business days of closing.

3-5 days

  • We finalize the offer following the appraisal and receipt of all supporting application documents.
  • You will meet with a notary to sign the Point Homeowner Agreement.
  • Point files a Deed of Trust and Memorandum of Option on your property in your county recorder’s office.
  • Once the filings have been confirmed, we transfer the offer funds (less Point’s processing fee of 3% and the escrow fee) electronically to your bank account.

Sell the home or buy back from Point when the time is right for you

Point is paid when you i) sell your home, or ii) at the end of the term, or iii) during the term, when you choose to buy back. Regardless of the timing, there’s no early buyback penalty.

1 to 10 years

  • If you sell your home within the term then Point is automatically paid from escrow.
  • If you don’t sell, you can buy back Point’s stake at any time during the term at the then current appraised property value.
  • Point is paid a fraction of the home’s value. If the home has declined significantly in value, Point may be due less than its original investment.
 Sounds simple enough but as usual, the devil is in the details.  A few caveats:
  1. Point collects a processing fee of 3% upfront in addition to appraisal and escrow fees
  2. You need at least 20% equity in your home to qualify
  3. You are guaranteeing repayment in 10 years
  4. Point is in a preferred position, meaning that they get paid first in the event that your home loses value
  5. When Point first went live last week, they gave an example of their pricing on their website (they have since taken it down for some reason).  In this example, Point put up 10% of the value of the home and received 20% of the appreciation (net of any improvements done by the home buyer in return.
One of the primary issue holding back the market is a lack of capacity for down payments by first time home buyers.  Low interest rates may be great for monthly payment affordability but they do nothing when it comes to a buyer’s ability to save a 20% down payment for a conforming loan.  There is a real need for investors in this space and some platforms have tried to tackle it.  For example, FirstRex which was profiled by Bloomberg back in 2013 will put down up to 50% of a homebuyer’s downpayment in exchange for a portion of the profit.  However, I am not aware of there being a substantial need for people who already have a large amount of equity in their homes to be able to extract that equity, especially when cheap HELOCs or reverse mortgages ( for seniors) are readily available.  Both HELOCs and reverse mortgages allow an owner to extract their equity WITHOUT giving up 20% of the upside in their home.  In order to illustrate this I ran a scenario outlined in Point’s press release.  For the sake of simplicity, I didn’t include property taxes, insurance or maintenance as these would be the same with or without Point.  I also didn’t include any loan fees in an effort to keep things simple.  This analysis has 2 scenarios:
Scenario 1: Borrower buys a home for $500k.  Borrower takes out a $400k with a down payment of $100k.  The mortgage has a 4% coupon.
Scenario 2: Borrower sells $50k in equity (10% of the total value of the home to Point, reducing the loan size to $350k, again with a 4% coupon.  Under this scenario, Point gets 20% of the home price appreciation.
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As you can see, it’s substantially less expensive to use a traditional mortgage if you experience any home price inflation – and Point’s website and press release both imply that it will be targeting higher priced markets that will likely experience more inflation.  If a borrower lives in a market that experiences home price inflation of less than 2%, Point makes some sense.  Above that, it doesn’t appear to.
So what’s the Point (Pun fully intended)?  IMO, this would be a great investment program if it were structured as some form of down payment assistance (like the FirstRex example above) – I’m even willing to bet that they could get more aggressive splits if it were designed to fill that substantial need in the market.  However, as currently offered, it’s an expensive preferred position that sits in front of a substantial amount of equity (again, assuming that there is any home price inflation).  I’m just not sure that there is much of a need for a product that allows people with a lot of equity to extract it from their homes when HELOCs are available, cheap and flexible and reverse mortgages are an option for seniors.  Borrowers that need something like this (and would be willing to pay for it) to defray their down payment can’t qualify and those who would qualify have better options if they want to extract equity from their homes or finance a purchase.  As such, I just can’t see how this is something that will be very scalable in it’s current form.

Economy

Surprise, Surprise: The Fed chose not to raise rates at their meeting this week but signaled that 2016 rate increases are still likely.  For those keeping track at home, they did exactly the same thing that they’ve done at pretty much ever meeting this year.

You Want Cream or Sugar with That? Yes, there is a Millennial underemployment crisis but it only extends to those with liberal arts degrees.

Commercial

Bottom of the Barrel: The ongoing dumpster fire that is K-Mart announced that it’s closing 64 stores and laying off thousands of employees.  I honestly had no idea that there were 64 K-Marts still open to begin with.

Going Long: Blackstone jumped back into the logistics business after selling IndCor Properties in 2015 by purchasing a $1.5 billion mostly-west-coast portfolio from Irvine-based LBA.  See Also: How Amazon is eating the department store, one department at a time.

Residential

Flipper’s Back: Home flipping continues to make a comeback and is now at it’s highest level since 2010.  A lot of the activity has been taking place in secondary markets like Fresno which could be a good sign that things are getting better.

Soaring: According to the Federal Reserve Bank of St. Louis, urban rents in US cities are rising quicker than they have in any time in recorded history.

Kicked to the Curb: Cities are starting to follow New York’s example by allowing developers to eliminate or reduce parking requirements for condos and apartments in order to provide more density and cheaper prices.  However, there is a lot of concern over the impact of this move with regards to on-street parking in cities where mass transit infrastructure hasn’t kept up.

Profiles

Talking Your Book: One of Lyft’s co-founders believes that private car ownership will go the way of Johnny Manziel’s NFL career by 2025.

Grudge Match: Tesla’s battle with car dealers has the potential to reshape the way that cars are sold in the US.

The Paradox of Leisure: The rich were meant to have the most leisure time. The working poor were meant to have the least. The opposite is happening.  Here’s why.

Chart of the Day

Rise of the regional banks

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WTF

Terrifying: A crazy woman from New Zealand made a handbag out of a dead cat and is trying to sell it for $1,400.

Broken Clocks: Brangelina broke up this week, meaning that those tabloid headlines that you’ve seen every time that you go to the grocery store for the last 10 years were finally correct.  If you believe Us Weekly, they broke up at least 31 times in the last decade.

Hero: Meet the 110 year old British woman who attributes her longevity to drinking whiskey on a daily basis.  See Also: New study suggests that people who don’t drink alcohol are more likely to die young.

Hell NO: South Carolina residents warned about clown trying to lure children into woods.

Video of the Day: Watch a diver catch video of great white shark attack on his GoPro off the coast of Santa Barbara (don’t worry, no blood).

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 23rd – What’s the Point?

Landmark Links September 20th – Young Man’s Best Friend

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Lead Story… If you follow the news even casually, you probably know that Millennials are less likely to own cars and homes or be parents than prior generations.  However, there is one area where Millennials are out ahead: Pets.  The Washington Post published the results of a study of pet ownership among young people and the results were somewhat stunning (emphasis mine):

Three-fourths of Americans in their 30s have dogs, while 51 percent have cats, according to a survey released by research firm Mintel. That compares to 50 percent of the overall population with dogs, and 35 percent with cats.

The findings come at a time when millennials, roughly defined as the generation born between 1980 and 2000, are half as likely to be married or living with a partner than they were 50 years ago. They are also delaying parenthood and demanding flexible work arrangements — all of which, researchers say, has translated to higher rates of pet ownership.

“Pets are becoming a replacement for children,” said Jean Twenge, a psychology professor at San Diego State University and author of “Generation Me.” “They’re less expensive. You can get one even if you’re not ready to live with someone or get married, and they can still provide companionship.”

You read that correctly, 75% of American’s in their 30s have dogs!  That is a yuge percentage and makes this self-proclaimed crazy dog person quite happy.  As with most publications though, WAPO seems to be implying that Millennials’ penchant for animal companionship makes them somehow different from the rest of “us.”  Indeed, if Millennials were going to forego family life permanently in favor of living with only dogs or cats it would have dire demographic implications.  Instead, I would suggest the pet ownership trend fits nicely with my theory about Millennials: they aren’t any different from prior generations, they are just taking longer to hit certain milestones than previous generations did.  Human beings need companionship and pets fill that gap before young people are ready to start families.  The increase in pet ownership is a good thing.  There are a ton of healthy benefits to having a pet as a family member, not the least of which is reducing stress.

Why am I so certain that dramatically increasing pet ownership among young people isn’t a harbinger of demographic doom? Well, for one, I’ve lived it.  I was born in 1979 so I’m not technically a Millennial but I didn’t get married until later in life.  I rescued a Black Labrador named Shadow when I was 24 who was my best friend for 10 years.  Despite my attachment to my dog, I ended up getting married in my mid-30s and had kids soon after. Shadow passed away several years ago and Pepper, a 2 year old Golden Retriever is now an important member of our family.  Also, I can’t imagine a scenario under-which we wouldn’t have a dog.

All that being said, there was one segment of the article that really frightened me (emphasis mine):

Millenials were also twice as likely than Baby Boomers to buy clothing for their pets, a phenomenon Richter chalks up to the prevalence of social media.

“The clothing is, for them, an opportunity for performance — they put it on their dog or cat, take them for a walk, post a picture on Facebook,” Richter said. “It’s increasingly about getting a digital stamp of approval.”

On second thought, I take back everything that I just wrote.  Maybe Millennials are the hipster weirdos that the press makes them out to be after all.

Economy

Nada: The reason why the stimulus from low oil prices never boosted the economy – it was 100% offset by the reduction in energy investment.  Mea Culpa on this one.  I was dead wrong.

Crossroads: The Fed is basically in the dark when it comes to the relationship between “full employment” and inflation in today’s economy.  As we approach what was traditionally considered “full employment,” they have a decision to make.

Commercial

Out of the Shadows: Shadow lenders are stepping up to fund development deals as regulators force banks to pull back on commercial real estate exposure.

See Ya: Mall owners are totally over department stores and not sad to see them go as retail tenant mix remains in flux.  But See: Nervous bond investors are hedging their exposure to malls with mortgage derivatives.

Residential

Building Up or Building Out: Awesome time-lapse graphics from the Washington Post this past weekend on density in major urban areas over time and the conundrum that cities face when it comes to keeping housing affordable: do you build up or do you build out?  See Also: Some suburbs are trying to add urban-style development projects to attract young workers and the employers who covet them.

Profiles

Always Be Closing: How Wells Fargo’s high pressure sales culture spiraled out of control and led to a massive checking account scandal.

Fleeced: Back in 1999 former recalled CA governor Gray Davis gave away the farm to public employee unions that had supported his election bid in the form of increased pension benefits based on the bullshit assumption that  CalPERS’ annual returns would average 8.5% forever. Davis sold benefits increase to taxpayers by claiming it would cost them nothing since all of the increase would be borne by CalPERS’ return on investment.  Needless to say, things didn’t go as planned.  Today the unfunded liabilities total $241 billion.

Battle of the Buzz: How the alcohol and pharmaceutical industries are bankrolling the fight against marijuana legalization.  See Also: There is a land rush going on in some of California’s worst real estate markets and commercial pot is the reason.

Chart of the Day

Europeans are not as happy with big-city living as commonly believed.

WTF

Florida Grudge Match: Nothing says Florida quite like an octogenarian brawl on the shuffleboard courts. (h/t Steve Sims)

Buy Gold: A notorious runaway Russian robot that has escaped it’s lab twice has been was arrested by police at a political rally.  And so it begins…

Somebody Walks in LA: Meet LA’s first “People Walker,” a bearded hipster and wannabe actor who will go on a walk with you for $7/mile. (h/t Ingrid Vallon)

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 20th – Young Man’s Best Friend

Landmark Links September 16th – The Carrot and The Stick

Lead Story… Investopedia defines Behavioral Economics as the study of psychology as it relates to the economic decision making processes of individuals and institutions.  IMO, one of the more fascinating applications of behavioral economics deals with the largest investment that most people make in their lifetimes: buying a home.  It’s all a matter of motivation.  What motivates a person to buy a home versus renting?  Much of the preference is based on mobility (renting) vs stability (buying) depending on where a potential buyer or renter sees their life going in the foreseeable future.  However, there is also a very substantial financial motivation that manifests itself in the form of one of the two primary economic forces: fear and greed.

During the housing bubble of the mid aughts, greed was a primary motivating factor in converting renters to owners.  There was a (foolishly) widely adopted mantra back then that housing never fell in value and that acquiring property was a road to riches even if it meant leveraging up to your teeth.  People were buying homes up and calling them “investments” when they were really just speculating on potential future appreciation.  This type of behavior is also driven by a variation of fear: Fear of Missing Out or FOMO for short which was the chosen mantra of the “buy now or be priced out forever” crowd.  Greed in expectation of asset appreciation and FOMO are classic bubble fuel because they tend to make the current price of an asset irrelevant to a prospective buyer.  Once these forces take over the mind of a buyer, the only thing that matters to is the future projected value appreciation.  In the end, trees don’t grow to the sky and we all know how that turned out.

Today, prices are rising again but buyer motivation is quite different than it was a decade ago.  Online real estate website Redfin recently posted the results of a survey of 1,800 home buyers  taken in August that contained this fascinating statistic:

High Rent Driving Tenants to Become Owners

Nearly half of all first-time homebuyers, 45.4 percent, said they were most influenced to get into the housing market because of high rent. In comparison, a year ago 24.7 percent of first-time buyers said they were house hunting because of high rent.

Most-influenced

Among all buyers surveyed, 22 percent said the cost of rent motivated them to get into the market, up substantially from last year’s 12.8 percent but down from 24.4 percent in May.

Overall, 26.3 percent of all buyers said they were most influenced to purchase because of a recent life event, like the birth of a child or a marriage, an identical number to last August.

A whopping 45.4% of first time home buyers said that they decided to purchase a home because rent was too high.  What’s particularly notable is that number is up over 20 percentage points from a year ago.  The second most common answer was a life event.  These are hardly indicative of a bubble or market peak.  Note that those two factors add up to 48.3% for all buyers and 68.8% for first time buyers.  Unfortunately they didn’t publish the whole data set so we can’t see where “Expected Appreciation” or “Investment Return” was on the list.  However it couldn’t have been more than 31.2% for first time buyers based on the numbers provided.  This is a substantial behavioral shift from the bubble era.  I’ve never bought into the “a house is always a great investment” narrative but I don’t buy the “a house is a terrible investment” one either.  The real “investment” value of a house is the hedge that it provides against the rising cost of shelter, primarily rents.  If a buyer purchases a home in a market where future rents are expected to rise substantially (like coastal California) then he or she would typically be willing to pay more because the ownership hedge is more valuable in a market where rents are largely stable because supply can be easily added as needed (Houston, TX for example).  The Redfin findings are encouraging because they indicate that buyers are behaving rationally.  Despite rising prices, buyers today aren’t primarily motivated by FOMO or projected appreciation but rather by an analysis of whether they will be better off financially renting or owning.

Economy

A House Divided: A lack of consensus on inflation at the Federal Reserve means that the central bank is more likely to stand pat than do anything with rates.

All About the Benjamins: A new study confirms that money can’t buy happiness….but confirms that cash often does.

Finally on the Rise: After years of stagnation, median incomes are improving again, and the biggest gains are coming where they are needed most: among the poorest deciles.

Residential

On Point?  Leading VC fund Andreesen Horowitz announced this week that it’s getting into the housing business. To be more precise, the tech investor is backing a new venture called Point which is set up to purchase portion of a homeowner’s equity in a preferred position and participate in the upside at sale.  I want to take some time to digest this one a bit deeper before writing more but I can see several potential fatal issues at first read.

Great Migration: Seattle’s already-hot housing market could see a large influx of Chinese capital now that Vancouver, Canada has told foreign buyers to get lost by imposing a 15% foreign transaction tax, sending sales tumbling.

That Sinking Feeling: San Francisco’s city Building Department is getting hauled in front of the Board of Supervisors to explain how/why they approved Millennium Tower, SF’s incredible sinking luxury condo building.

Profiles

Tough Grader: Want your product to be labeled “Bear Proof”?  It’s going to have to withstand 60 minutes in an enclosure with some of the most difficult reviewers in the world: grizzly bears.

There’s No Place Like Home: The story of how Amazon out-executed both Apple and Google and positioned itself to dominate the technological infrastructure of your home.

Surf’s Up: Surf parks, or giant pools nowhere near the ocean with perfectly formed man-made waves are about to go mainstream.

Chart of the Day

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WTF

Where’s the Beef?  A restaurant patron in Florida was arrested for trashing a Wendy’s after being dissatisfied with her food.  If she expected decent quality food, I don’t know why she was in a Wendy’s in the first place.  In More Fast Food News: Burger King is about to start offering something called Cheetos Chicken Fries.  The race to the bottom for fast food continues unabated.

Apocalypse Now: What happens when millions of people in a city with poor infrastructure ceremonially sacrifice animals before a torrential monsoon downpour?  You get rivers of blood running through the city, which is exactly what is currently happening in Bangladesh.

Frivolous: An Austrian teen is suing her parents over their posting embarrassing childhood photos of her on Facebook, including potty training pictures.  If I couldn’t post embarrassing pictures of my family on social media, I’d quickly lose my will to live.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 16th – The Carrot and The Stick

Landmark Links September 13th – Falling Behind

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Lead Story…. It’s incredible how quickly things change.  Just a few short years ago, conventional wisdom was that it would take an eternity to work through all of the excess inventory created by the housing bust and foreclosure crisis.  However, in reality banks were incredibly adept at managing their REO inventory, effectively preventing the massive  glut that so many expected.  In the meantime, very little in the way of new housing was built as financing dried up and builders pulled back in fear of competing with the looming bank REO inventory liquidation that never really materialized.  Fast forward to 2016 and the stark reality of a new sort of housing crisis: there simply aren’t enough residential units being built to satisfy household creation.  The pivot has been as pronounced as it has been swift and it doesn’t look like things are about to change anytime soon.  The Federal Government’s bi-annual report on housing inventory provides a rather bleak outlook, especially for entry level buyers and renters.  From ULI (emphasis mine):

Newly released data and analysis from several sources illustrate a major obstacle to a fully healthy housing market in the United States: the nation is not building nearly enough new residential units. The serious shortage of new supply is bottling up housing demand and pushing home prices and apartment rents well beyond what a growing number of households can afford.

A biennial report from the federal government titled The Components of Inventory Change found that the nation’s housing stock increased by a net 270,000 units between 2011 and 2013—the slowest growth measured by the survey over the past decade, which included the worst years of the Great Recession. The report concluded: “Despite the gradually improving economy, there were large declines in both new construction and net additions to the housing stock during the 2011–2013 period compared to the 2007–2009 period.”

A recent Freddie Mac market commentary noted that the total number of housing starts (single family plus multifamily) in 2015 was 30 percent below the historical average between 1970 and 2007. The National Association of Realtors estimates that the country’s supply of for-sale and rental units combined is 3 million units short of current demand.

The most substantial issue here isn’t even the massive shortfall in raw numbers, it’s the distribution of where what limited construction that we do have is occurring: at the high end.  Not only are we not producing enough units across the board but nearly nothing is being produced at the entry level in either for-sale or for-rent properties where units are most in need.  Again, from ULI (emphasis mine):

Not surprisingly, millions of Americans cannot find an affordable home to buy or an apartment to rent. A survey conducted by the National Association of Home Builders (NAHB) found that 59 percent of respondents said they could and would spend no more than $249,000 on a new home, but only 35 percent of new homes started in 2015 were at or below that limit. The online real estate service Trulia recently reported that the number of starter and trade-up homes available in the 100 largest U.S. metropolitan areas has plunged by more than 40 percent since 2012.

Yes, apartment development has experienced a historic boom: multifamily construction volume nearly doubled in 2012 compared with that seen in 2010, and increased another one-third from 2012 to 2014, according to a new study by the Research Institute for Housing America. New multifamily completions topped 310,000 units last year, the most in at least 25 years, according to the National Multifamily Housing Council. And 1 million more apartments could come on line in the United States in the next three years, according to projections by the market research firm Axiometrics.

But most new apartments and single-family homes are aimed at the top of the market. The median asking rent for a new apartment today exceeds $1,300, which is unaffordable for roughly half the renter households in the United States (based on a rent standard of affordability of 30 percent of income). The average price of new homes for sale in 2015 was $351,000—a 40 percent increase from 2009.

What is driving the trend towards builders constructing a smaller number of higher priced units versus a larger number of lower priced ones?  A few factors to consider:

  1. Post financial crisis, there wasn’t much of any mortgage financing available at the lower end of the market.  It doesn’t make sense to build homes for people who can’t obtain financing so builders focused on more expensive price points where buyers were willing and able to obtain financing or buy with cash.  Combine this with the higher margins often achieved on luxury units and you have a recipe for builders gravitating towards more expensive units.  Availability of financing is improving but it has left certain markets 100% beholden to FHA limits.
  2. Regulatory burden is soaring.  A study that the NAHB released earlier this year found that regulatory fees for new construction jumped nearly 30% (80k per home) over the past 5 years.  It’s incredibly difficult to make any profit on lower priced product in that type of environment meaning that builders need more expensive product to absorb the regulatory burden.
  3. People are staying put longer in their entry level homes since less move up houses are being constructed.  The result is less infill inventory which drives up prices.  Yesterday’s entry level home becomes too expensive to be classified as entry level if supply does not materialize to meet demand.
  4. While the development financing market has shown some marginal signs of improvement, it still pretty much sucks for all but the most credit worthy of developers in the best locations.
  5. Land owners aren’t selling, at least not when it comes to their best lots.  One would think that rising home prices would make this a great time to be a land seller.  However, that isn’t currently the case as Bloomberg detailed last week.  When asked for investment advice, Mark Twain once said: “Buy land, they’re not making it anymore.”  Right now, owners of well-located property are taking a similar stance in expectation (or, in some cases hope) of higher prices: don’t sell your well located land because you can’t sell it a second time and it’s likely to be more valuable in the near future.  In other words, there is substantial gap between what builders are willing to pay and what landowners are willing to sell for, particularly in the best markets.  Landowners will sell today but only if builders are willing to pay them for possible future inflation that may or may not happen.  To complicate matters further, a lot of landowners bought during a brief run-up in 2013 thinking that the market was about to take off.  It didn’t and now they are holding out in hope of larger profits down the road.

At some point, the laws of economics pretty much dictate that this has to change.  We aren’t going to stop creating households and people can’t continue to pay an ever-larger percentage of their incomes towards housing costs without the result being major adverse economic consequences.  In reality, demographics are actually improving for household creation through at least 2024, meaning that the housing shortage will get worse as the deficit continues to widen unless we ramp up production in short order.  Unfortunately, as you can see it’s not a problem that’s easily solved.

Economy

Christmas is Cancelled: The bankruptcy of South Korea’s largest shipper has a lot of cargo stranded at sea just as retailers are stocking up for the holidays. See Also: The shipping industry has a major problem – there are simply far too many ships for current demand.

Tougher Road Ahead: Economists are predicting a tougher road ahead for the labor market. But See: Short term optimism as wages expected to rise amidst the scramble for seasonal holiday workers.

Commercial

Yogi Bear, Architect: Brokers are having a difficult time selling a seven story office building in Columbus, Ohio designed to exactly resemble a picnic basket. 

Back Up the Truck: investors are bidding up REIT shares prior to real estate getting its own sector in the S&P500.

Residential

Good Riddance: Gaudy Mediterranean style McMansions that were all the rage in the 1990s have fallen out of favor and are not rising as quickly in value as other types of houses.

Sound Familiar? Norway’s economy is historically based on oil, which has had a rough go of it lately.  Norwegian interest rates have plunged along with the price of oil, leading to soaring housing prices and housing sector investment.  This sounds eerily similar to the post-tech bust era in the US to me.

Don’t Call it a Comeback: Cities in California’s Central Valley that were largely left for dead in the wake of the housing crash are making a comeback.

Profiles

Those Who Fail to Learn From the 90’s Are Doomed to Repeat Them: People are buying minivans again and trying desperately to convince themselves that the soccer mom mobiles are somehow “cool.” Newsflash: minivans will NEVER be cool

Viva Socialism: Venezuelians are turning to black magic and animal sacrifices to heal their sick due to a lack of basic medical services.

You Should Already Know This: Cheese triggers the same parts of the brain as hard drugs.

Chart of the Day

Super Size Me, urban home edition.

Us home sizes_map_final

WTF

FAIL: There are still 4 months left in 2016.  However, I think that we can safely call this year’s Darwin Award for a Florida man (of course) who found an old bulletproof vest in his garage.  He wanted to know if it still worked so he put the vest on and had his cousin shoot him.  It didn’t work and now he’s dead and the cousin is in jail.

Cultural Literacy 101: Apple’s iPhone 7 launch slogan: “This is Seven” translates to something sort of vulgar in Cantonese.

When You Gotta Go: How NFL players hide it when they have to pee during a game. Spoiler: there’s often more going on in the huddle than you think.

Sort of Impressive: A man was arrested for stealing $3,000….. in pennies.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 13th – Falling Behind

Landmark Links September 9th – Misunderstood

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Lead Story… I doubt that any generation has ever been hyper-analyzed the way that Millennials have.  You can’t turn on the TV, read a news website site or open a newspaper (yes, some people still read them) without coming across an opinion piece purporting to know everything about Millennials: how to make them happy at work, where they want to live, how they want to shop, etc.  Much of it reads as if the people born between 1980 and 2000 are some type of exotic beings that are to be observed in their natural setting to understand how their species live.  Spare me.  I’ve long suspected that most of this is BS and that Millennials aren’t really that different from previous generations.  Most of the actual survey data that I’ve seen confirms this to a large extent.  This past weekend a collegue sent me the link to a study done by CBRE appropriately titled: Millennial Myth Buster: Young Americans Do Like the Suburbs (h/t Tom Reimers)  In this report, CBRE’s research group dug into actual migration and census data to show where Millennials are actually moving as opposed to where conventional wisdom says that they are moving (emphasis mine):

The most recent available annual data (2014) show that 2.8 million people moved from the suburbs to cities that year; however, 4.6 million did the opposite.1 Since this runs contrary to the prevailing narrative about urbanization, it’s worth digging into the data to see what’s behind these numbers.

There are many ways to look at domestic migration——age, education and profession are all useful in breaking it down. In recent years, media stories have frequently focused on the role of millennials——those born between 1980 and 1995, roughly——in driving the resurgence of downtown areas. The focus on this generation was not unwarranted; millennials are now the largest age group in the country and make up the largest segment of the U.S. workforce. It is fair to say, however, that census data disagree with the media on where millennials actually live and where they have been moving to.

Approximately 30% of millennials live within urban areas. The other 70% do not appear to be rushing to move downtown: In 2014, 529,000 people between the ages of 25 and 29 moved from cities to the suburbs, while only 426,000 moved in the opposite direction. For younger millennials aged between 20 and 24, the flow’s direction was even more pronounced, with 721,000 moving out of cities for the suburbs and 554,000 leaving the suburbs to pursue life in the city. It’s true that some of those moving to the suburbs were returning to childhood rooms or basements in their parents’ homes, but the migration trend still holds: not every millennial can or wants to live downtown.

Ok, so that’s just one year but the data has actually been remarkably consistent over time. This is one case where the facts are 180 degrees away from the narrative.  The US is getting more suburban, not more urban.  CBRE’s conclusion was particularly interesting as it pointed out that younger people often want urban amenities but still a suburban setting (emphasis mine):

The remarkable discrepancy between population data and the prevailing narrative raises questions about the preferences of young people in the U.S. What do they want? Simply put: space and an urban feel. One recent survey showed that 81% of young people (defined as millennials and those born in the late 70s) want three bedrooms or more in their residence. Their responses regarding geography reflected this preference: two-thirds of respondents stated a desire to live in the suburbs, while only one in ten wanted to live in a city center. Such findings are corroborated by the results of another survey, in which nearly two-thirds of millennial-aged respondents self-identified as suburbanites or rural people.

Still, millennials have a reputation for appreciating the perks of urban life, such as easy access to public transportation, shops, restaurants and offices. This does not necessarily translate into demand for downtown real estate, however. Suburbs too, can develop in ways that appeal to younger demographics, by incorporating elements of urban life in suburban areas. This is occurring in metros across the country. New terms have even been coined to describe quasi-urban areas in the suburbs——among them, ‘‘hipsturbia’’ and ‘‘urban burbs.’’

I highly suggest reading the entire piece.  IMO, the reason that the media gets this wrong is that urbanization is primarily happening in the areas where they tend to be based: NY, LA, SF, DC, etc.  Influencers live in these places, witness urbanization occurring and assume that it’s happening everywhere else as well.  These large, wealthy, mostly coastal cities do not look like the rest of the US from a demographic standpoint and their demographic trends shouldn’t be extrapolated to everyone else.  I hate to break it to many of you but the average Millennial isn’t a mustachioed hipster wearing skinny jeans and drinking organic kombucha in a Brooklyn organic juice co-op.  He or she actually looks a whole lot more like you and I than we’ve all been led to believe.

Economy

Changing Tune: Barry Ritholtz of Ritholtz Wealth Management, The Big Picture Blog and Bloomberg View was a critic of banks as a risk to the US economy long before the crash in 2008.  Now that the crisis has been over for several years, he’s finally giving the all-clear as banks have finally deleveraged a bit and refilled the FDIC’s deposit insurance fund.  See Also: A longtime proponent of financial industry regulation thinks that regulators may have taken things too far in the wake of the Great Recession, leading to mountains of red tape and rising compliance costs.

Full Turn: Inequality in the US used to be most evident in the South.  Today, it’s most pronounced along the coasts.

Eating Well: How foodie culture defied expectations and not only survived but thrived post-recession.

Commercial

Slip Sliding Away: Walmart killed off rural downtowns when they started offering goods for cheaper prices.  Walmart’s position has been steadily eroded in recent years by big box stores like Costco and e-commerce, primarily Amazon.  Two interesting related stories this week:

  1. Costco is struggling as online bulk shopping provides strong competition. (h/t Mike Nash)
  2. Amazon, which is a primary culprit in the decline of Walmart, big box stores and malls is now starting it’s own delivery fleet, which could pose an existential threat to UPS and FedEx.

Residential

If Headlines Were Honest: Alternative headline from Bloomberg early this week: Housing Boom to Keep Going Even if Rates Rise Says CEO of Highly Levered Public Home Building Company.

Staying Away: Beazer made a tender offer to buy back $300MM in debt due in 2018 in yet another example of public builders spending money on pretty much anything except for land.

Profiles

Explains a Lot: Florida resident Dave Barry recently wrote a book about his freak-show of a state, a portion of which was excerpted by the Wall Street Journal last week in a well-titled article called – Florida: The Punchline State.  I recommend that you read the whole thing if you consider yourself a connoisseur of weird Florida news.  My favorite excerpt (emphasis mine):

The point is that, yes, Florida, because of its unique shape and warm climate, does have an unusually high percentage of low-IQ people doing stupid things, frequently naked. But most of these people came here from other states, the very same states that are laughing at Florida. Those of us who live here have to contend with not just our native-born stupid, but your stupid, too. We are like Ellis Island, except instead of taking the huddled masses yearning to breathe free, we take people who yearn to pleasure themselves into a stuffed animal at Wal-Mart.

House of Cards: Some Great investigative reporting from Nick Bilton of Vanity Fair on the downfall of Theranos and founder Elizabeth Holmes.

Can You Hear Me Now: New study finds that your dog knows exactly what the hell you are talking about.

Chart of the Day

Myth Busters – Urban Migration Edition

Millennials in the Suburbs 1

WTF

Swedish Meatballs: A guy got his testicle stuck in an ill-designed Ikea chair and took to Facebook to complain about it (h/t Mandy McDonnell)

Inside Joke: North Korea just banned sarcasm. Seriously.

Bad Selfie: A battery suspect was apprehended after he used the police department’s “wanted” poster as his new Facebook profile picture, because Florida.

Misdirected Anger: A woman who was angry with her ex set the wrong car on fire,  because, once again, Florida.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 9th – Misunderstood

Landmark Links September 6th – Not As It Seems

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Shorter Links today due to the Labor Day Weekend holiday. Also, some of you long-term readers might recognize the picture from last year….arguably our all-time favorite.

Lead Story… I’ve continuously heard comments over the past few years that, at some point interest rates need to revert to “normal.” In this case normal obviously meaning substantially higher than where rates are today. But what if we have the entire concept of “normal” wrong? This weekend, I read a thought provoking piece by energy investor Gregor MacDonald  which made a compelling argument that low rates are actually the normal state of affairs and that the exponential population growth of the past two centuries, brought about by new technologies like energy extraction from fossil fuels created the anomaly of high interest rates:

19th and 20th century growth and development was so transformative that it now constitutes our only available inventory of intellectual history, and (understandably) dominates our expectations. When will interest rates return to normal? Why are central banks not letting interest rates rise? And, look at all these awful policy decisions preventing growth? These sentiments are artifacts; signatures of recency bias and the availability heuristic. In an excellent post last year by Neil Irwin at the New York Time’s Upshot blog, Why Very Low Interest Rates May Stick Around, it’s gently pointed out that high interest rates, not low interest rates, are history’s anomaly.

Annual Global Population Change in Millions 1970-2014 | UN Medium Variant Forecast 2015-2050

Just something to consider the next time that you  find yourself in a conversation with a member of the “rates have nowhere to go but up” crowd.  The whole thing is very much worth a read.

 

Residential

Danger: The US mortgage market is still a hot mess but now it’s a nationalized hot mess.

Profiles

Portal to Hell Discovered in SW US Desert: I can’t think of a single event that sounds less appealing than Burning Man. This years skirmishes between hippies and plutocrats/celebrities doesn’t help.

Yet Another Reason: Dogs can help reduce anxiety in kids.  IMHO, every dog needs a kid and every kid needs a dog.

If at First You Don’t Succeed: Jack Ma, founder of e-commerce giant Alibaba and China’s richest man was once denied a job at disgusting fast food chain, KFC.  Last week, he announced that he’s buying a part of it instead.

Chart of the Day

Where does your team fall on the College Football Grid of Shame?

WTF

Self Aware: Pamela Anderson (yes THAT Pamela Anderson) wrote an oped in the Wall Street Journal railing against porn.  Apparently she has absolutely no sense of self awareness or clue as to why she is famous.

Closing the Deal: A real estate agent near Houston recently sold a home.  This wouldn’t be news except that the night after the transaction closed she brought her boyfriend to the house for a late night rendezvous.  Unfortunately for them, the neighbors thought that the house was being robbed and called the cops who caught her and the boyfriend in the act.  Safe to say that the buyer probably won’t be using her services again.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 6th – Not As It Seems

Landmark Links September 2nd – Clueless

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Lead Story… On Tuesday, I posted a piece about how construction unions actively undermined a measure that CA Governor Jerry Brown had presented to help solve California’s affordable housing crisis by making it easier to gain approval for residential projects that would provide a certain number of affordable units.  I have limited time to write today’s blog post but I want to revisit that story, which the WSJ reported on (they wrote about a similar proposal in NY as well that was nuked by the unions) because the utter absurdity of it is so mind boggling (highlights are mine):

For both measures, construction unions were key to the defeat, as they won over key allies with their argument that the government shouldn’t be aiding apartment development without also guaranteeing union-level wages. Unions, particularly in New York, have been facing a gradual erosion of their market share on residential developments, and now developers that a generation ago would have been union shops are able to fill jobs with nonunion workers, which can lower construction costs by an estimated 20%, according to New York-based Citizens Housing and Planning Council, a low-income housing group.

Robbie Hunter, president of the State Building and Construction Trades Council of California, said policies like the one pushed by Mr. Brown should allow construction workers to make a decent living “rather than drive those workers into the need of affordable housing itself.”

Allow me to clarify: the reason that the unions killed both deals was that NY and CA wouldn’t stipulate that all projects that fell under the proposals be built by union workers at a so called “prevailing wage” which is really just a fancy way of saying overpaying.  Notice in the passage highlighted above that the unions have lost market share in recent years.  I wonder why.  Could it possibly be that residential projects (especially in CA with it’s high impact fees) typically aren’t viable at “prevailing wage” standards?  Often, in residential developments, the only time that you see union labor being used are when a union pension fund provides the equity behind the project.  Otherwise we just don’t see it that often because numbers simply don’t work.  By the way, when a union pension fund provides the equity, they almost always have to take a substantially lower return in order to subsidize the above market “prevailing” wages paid for construction.

The real story here should be that unions are facing declining market share because they refuse to adapt.  Governor Brown’s proposal would have undoubtedly created more construction jobs in California, leading to more demand for labor and higher wages.  If construction labor unions were at all flexible in their compensation demands, many of those jobs could have gone to union  workers.  However, rather than trying to expand their ranks, which ironically would lead to more power, not less, construction unions have dug in their heels in an effort to preserve the unsustainable wage structure of existing members.  The rest of us pay the price since a proposal that would have provided a starting point for dealing with CA’s growing housing crisis is now toast.  Looks like the status quo of runaway housing cost wins again.

Economy

Looking Up: Federal income tax withholding data indicates that both wages and economic growth are on the rise.

(Skilled) Help Wanted: As skill requirements increase, more and more manufacturing jobs are going unfilled.

Commercial

Rise of the Machines: How CoStar is using spy planes to get an edge in tracking new development for rent projections.

Evolving: Some malls are starting to look a bit like theme parks as landlords try to cope with high vacancy from traditional tenants.

Residential

Closed for Business: Message to tech firms from Palo Alto’s anti-jobs mayor: go away.  See Also: Formerly middle class Palo Alto has gotten so expensive that not even techies can afford to live there anymore.  For example, someone is listing a 790sf studio for $1.3MM.  Turns out that the housing bubble of the aughts really didn’t mean much at all in Palo Alto:

Proof is in the Pudding: The next time someone tells you that adding units, including luxury ones to the housing stock doesn’t help affordability, direct them to these:

Exhibit A: Manhattan condo developers are offering discounts, concessions and perks in an effort to keep sales robust in the midst of a glut.

Exhibit B: How Brooklyn’s luxury apartment boom is turning into a rental glut.

Profiles

Hero: 40 years ago John Bogle of Vanguard was sick of Wall Street overcharging for shitty performance.  He did something about it and started the first index funds despite ridicule from his peers.  Today, index funds hold nearly $5 trillion in low fee assets while much higher fee investments languish. 

Hot Item: How the premium Yeti Cooler, also known as a “Redneck Rolex” became a prime target for thieves.

Get Off My Lawn: Baseball’s fan demographics keep getting older, raising the question: can a game with a 19th-century tempo survive in the age of instant gratification?

Chart of the Day

WTF

Funny, In a Sad Sort of Way: Rapper Tyga got his leased Ferrari repossessed while he was at the dealership shopping for a new Bentley.

In Soviet Russia… Vladimir Putin was arrested at a Florida grocery store on trespassing charges, because Florida. 

Seems Like a Reasonable Response: A Pennsylvania woman was arrested for biting her husband and stabbing him with scissors after she caught him drinking her beer.

Again, Seems Reasonable: Meet the father who destroyed his daughter’s car with heavy construction equipment after catching her in it with a boy.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 2nd – Clueless