Landmark Links October 25th – When Will The Empire Strike Back?


Retraction: Before we get to today’s post, Leonardo DiCaprio’s rep announced that he doesn’t support the anti-density initiative that I spoke about on Friday, despite his name being all over it’s literature. ¬†Maybe he is a regular Landmark Links reader and didn’t like getting called outūüėČ

Lead Story….¬†Since I began writing this blog last year, one of my main areas of focus has been how the historical relationship between primary and secondary markets has broken down in this cycle, especially in CA. ¬†In the past, the inland production markets would heat up when prices rose¬†along the coast. ¬†This lead to a virtuous cycle where housing starts beget jobs which beget more employment, wage growth and ultimately more household creation and home buyers. ¬†This cycle has been different for several reasons:

  1. Difficulty of inland builders to develop affordable homes profitably due to low FHA caps and high impact fees
  2. Growth in preference for urban living among wealthier adults
  3. Declining home ownership percentage impacts the marginal entry level buyer more than the affluent one and historically, the marginal buyer is more likely to look inland for housing.

It’s become fairly common in our industry to look to increases in FHA limits¬†as the salvation of the secondary markets. ¬†However, for that to occur in any substantial magnitude (all indicators point to a small increase next year), ¬†Congress would have to¬†revise the statutory formulas that they set back in 2008 to govern FHA limits. ¬†As my colleague Larry Roberts wrote in OC Housing News, that is far easier said than done:

Through the lobbying efforts by the National Association of Homebuilders or the National Association of Realtors, Congress knows exactly how the conforming loan limit impacts home sales and new home development.I recently spoke with Scott Meyer and Michelle Hamecs of the NAHB. They provided me their NAHB Issues Update that detailed the FHA loan limit issue (click here for that document). It isn’t ignorance to the problems the prevents Congress from raising the limit.

The conforming loan limit demonstrates the tug-of-war between two conflicting desires of policymakers.  On one side, advocates for the housing industry and advocates for expanded housing opportunities to all Americans want to push the loan limit higher. On the other side, the more fiscally conservative lawmakers want to lower the limit to restore the prior mandate of insuring loans only for lower- and middle-income Americans. Further, they want to reduce the potential liability for the US taxpayer, who would currently cover all the losses if the market crashes again.

If the conforming loan limit were reduced, it would decrease the potential liability for taxpayers and reduce the size of the GSE operations and make it easier to someday dismantle them; however, the last time the conforming limit was dropped, Irvine, CA witnessed an 84% decline in sales volume in the price range no longer financeable with GSE loans. Ouch!

There is no doubt that increasing FHA limits would help. ¬†There is nothing particularly healthy about having a market that is 100% reliant on government-backed loans to function but unfortunately that’s the hand that we have been dealt. ¬†Raising FHA limits attacks the problem from the bottom of the prospective home owner pool by allowing buyers at lower price points to purchase homes with much lower down payments than what’s available using a conventional mortgage. ¬†Today, I want to look at a different scenario that could play out in the next few years. ¬†It’s more from the upper end of the pool¬†where coastal renters could find themselves once again looking inland if prices continue to rise. ¬†Today, I’m going to focus on Orange County and the Inland Empire but the demographic dynamics that I’m going to focus on could apply to many affluent coastal regions and their less-affluent inland neighbors.

On the surface, things look great in Orange County. ¬†Economic growth is strong as is employment¬†and home prices are now above their prior peak. ¬†Development is humming along and occupancy levels are extremely high in commercial and multi-family projects. ¬†In addition, OC has diversified it’s economy quite a bit as finance and tech have taken a large role as¬†the County has become less dependent on real estate. ¬†However, as the OC Register detailed last week, Orange County has a growing demographics problem and I think that the Inland Empire just might be the prime beneficiary. ¬†The problem isn’t that Orange County isn’t creating jobs. ¬†It is and we actually have the lowest unemployment rate in Southern California. ¬†It’s that the jobs being created often don’t come with wages that would allow someone to live here. ¬†Combine that with relatively few new housing units being built and the cost of existing units rising quicker than inflation and you have a recipe for what economists predict will be a¬†declining population of prime workforce age population (25-64 year olds) from 2010 – 2060. ¬†From the OC Register (emphasis mine):

‚ÄúThey say demographics are destiny,‚ÄĚ Wallace Walrod, the Orange County Business Council’s Chief Economist told the conference. ‚ÄúIt is imperative that everyone in this room understand the consequences of pending demographic shifts.‚ÄĚ

The national trend of aging baby boomers moving into retirement, he said, is ‚Äúmagnified and exacerbated‚ÄĚ in Orange County, where the over-65 population is on track to nearly double by 2060 to ‚Äúa staggering 26.2 percent.‚ÄĚ

Unlike California as a whole, every age cohort other than seniors is shrinking in Orange County, where the median age has risen from 33 to 38 since 2000.

Most worrying, the prime working-age population ‚Äď 25-to 64-year-olds ‚Äď is expected to dip by 1 percent by 2060, even as overall population grows by 15 percent.

By contrast, working-age groups in Riverside and San Bernardino counties are on track to grow by 61 percent and 47 percent, respectively.

‚ÄúWe are losing not only our 25 to 34 year-old workforce ‚Äď millennials ‚Äď but also losing K-12 and the college-age cohort as well,‚ÄĚ Walrod said.

The trend, he warned, ‚Äúcould devastate O.C.‚Äôs pool of workers, creating talent gaps as large swaths of the workforce retires, leaving open positions that will likely go unfilled.‚ÄĚ

The Register went of to identify the the obvious culprit: housing. ¬†I frequently¬†hear friends, neighbors and co-workers and neighbors who live in Orange County complain that the area is being over-developed. ¬†The stark reality of simple math shows¬†that view couldn’t be more wrong. ¬†Again, from The OC Register¬†(emphasis mine):

A severe housing shortage has turned Orange County into one of the most expensive markets in the nation, with median home prices exceeding $650,000 and average monthly rents at about $1,900. Higher-density developments that could alleviate the shortfall are often opposed by current homeowners.

Rising values are ‚Äúgood news for current homeowners, but bad news for those looking to afford to relocate to O.C. or to buy a house and stay here, especially millennials,‚ÄĚ Walrod said.

As a result, he added, ‚Äúdomestic outmigration has been accelerating.‚ÄĚ

The report projects that “new job creation will significantly outpace projected new housing units over the next two and half decades, resulting in a housing shortfall that will grow from a current reading of 50,000-62,000 units to a staggering 100,000 units by 2040.

‚ÄúMany workers are being forced into neighboring counties to find more affordable housing, increasing their commute and complicating their work-life balance.‚ÄĚ


According to the report, it takes an hourly wage of $32.15 to afford a two-bedroom apartment in Orange County, putting it out of reach for minimum-wage workers in the county’s fast-growing service sector, given the current California wage floor of $10 an hour.

The story goes into much more detail about a developing skill gap and low wage job boom. ¬†However, I want to keep the focus on housing for this post. ¬†Note the above projections about working age populations in Riverside and San Bernardino Counties (growth of 61% and 47% respectively¬†from today until 2060). ¬†Those are massive numbers that will create a strong demand for housing and not all of it will be entry level. ¬†If you take the median income required to buy and rent a median-priced home in Orange County today, it is around $100k (assuming you can put down 20%) and $70k, respectively, so there are a lot of people with well-paying jobs that fall below that amount. ¬†Given the fierce opposition to density in the OC, it is likely that those numbers will only increase. ¬†Also, keep in mind that the averages above are for the entire county. ¬†The most desirable areas with the best school districts can easily be double those amounts which is incredible when you consider that median income to afford an apartment in the neighboring IE is around $55k. ¬†At some point, something has to give. ¬†My guess is that it’s a move towards more relatively affordable¬†housing markets, in this case the Inland Empire.

I want to make an important caveat about what I wrote above: I haven’t a clue as to when this change will actually take place and more affluent workers will start to look inland to buy or rent. ¬†However, one thing that I’ve learned witnessing¬†our current market is that things¬†change incredibly quickly once they hit a critical mass. ¬†Just a few short years ago we were subject to an endless barrage of “renting is superior to buying” articles in the mainstream and business press. ¬†Just this week, Bloomberg ran a piece that argued that it’s almost always better to buy. ¬†Such an article would have never seen the light of day in 2011. ¬†Both types of articles are virtually assured to be wrong since they argue in absolutes. In reality¬†it’s sometimes better to buy and sometimes better to rent¬†but that level of nuance doesn’t¬†lead to¬†many page views.

My comment about how quickly things change goes for regional and local trends as well.  For example, 15 years ago, pretty much no one with a college education wanted to live anywhere near downtown LA.  Within the past 10 years that has changed rapidly and an area which was once in the grips of urban decay has become one of the most desirable locations for young, affluent home owners and renters in the US.  Some of the same conditions that created the LA gentrification/urban renewal boom have caused the Inland Empire to lag: delayed household formation by Millennials, preference for urbanization among high earners and a downward trend in the percentage of Americans who own a home.  However, I have serious doubts that these are permanent trends and there are other factors at play already that could begin to create more inland demand:

  1. Addition of urban elements and amenities to existing CBD and downtown regions. ¬†This is already happening in downtown Riverside as more density and foodie oriented retail are on their way. ¬†There are other urban areas out in the IE that could experience the same thing over time, downtown San Bernardino for example. ¬†It’s probably difficult to imagine right now but that’s ok. ¬†Downtown LA as it currently exists was¬†didn’t seem feasible back in 2001 either and I doubt that many of us foresaw luxury condos and apartments going up next to Skid Row.
  2. Self driving cars could help to ease commute stress in markets without mass transit infrastructure.  The technology is advancing rapidly and the Inland Empire will arguably be the region that will benefit the most in the US.
  3. Bank lenders are starting to compete with the FHA for low down-payment loans to entry level buyers. ¬†Bank of America has been so successful with their 3% down program that they are doubling it. ¬†These lending programs are still tiny by comparison but it wasn’t long ago that they didn’t exist at all.
  4. Millennials are getting older.  Many of the oldest Millennials are now entering their mid to late 30s which are the prime household creation years.  Once people start families, studies show that they are more likely to favor the stability of owning over the mobility of renting and the family-friendly single family home over an apartment.

The Inland Empire is down but I wouldn’t count it out over the long term. ¬†The current trends that have hurt the¬†housing market there aren’t likely to last forever and the region is adjacent to¬†too many incredibly expensive areas¬†to not experience some spillover as even relatively high earning families eventually get priced out of the coastal regions. Conventional wisdom is that only an increase in the FHA loan limit can revitalize the IE housing market. ¬†In the short term, that may very well be the case but a sustainable recovery just might come from higher earners moving into the region.


The Walking Dead: How bankrupt oil companies that are continuing to pump could keep a lid on oil prices.

Stay In:¬†It’s getting more expensive to eat out even as grocery prices are falling.


The Spigot: Pension funds have been steadily increasing commercial real estate allocations¬†for the past few years and that isn’t likely to change in 2017 despite signs of a maturing market. ¬†See Also: REITS have become a¬†more attractive target for activist investors.

High Times: A San Diego based medical marijuana landlord just filed for an IPO.


Further Afield: High prices and low yields near the coast have investors looking for rental homes in cheaper locations through management and investment services like Home Union, Investability and Roofstock. ¬†However, a lack of local knowledge can lead to out of area investors paying the dumb tax by thinking that they are getting a good deal when they aren’t.


Pull the Lever: How smart phones and app developers create digital addiction by mimicking slot machines.

Paradise: The Cubs paved the way for the Dodgers to come to LA by hosting their spring training on Catalina Island. See Also: For the Cubs oldest fans, this year could be their last chance. And: There are people trying to get 6 figure ticket prices for a single seat at World Series games at Wrigley Field.

Chart of the Day


Hard at Work: Meet the TV weatherman who got bored with his job after 23 years and decided to become a porn star.

Not a Detail Person: Russian oligarch has giant hideous boat built at a German port on the Baltic Sea. Ship draws too much to get out of the straits at the entrance to the Baltic. Epic FAIL ensues.

Lawsuit of the Year Nominee: A woman is suing KFC for $20MM because she felt that her bucket of chicken wasn’t full enough.

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

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Landmark Links October 25th – When Will The Empire Strike Back?

Landmark Links October 21 – Dense Hypocrisy


Lead Story…¬†There is little that I enjoy more than reading (or writing) about¬†the hypocrisy of self-important celebrities. ¬†However, one of my primary rules¬†for¬†writing this blog is to avoid politics – unless it’s land use politics (or water politics). ¬†As such, I haven’t had the opportunity to write much about celebrity hypocrisy, despite frequent gnawing temptation to do so. ¬†Today’s blog will be different.

At this point in his career, Leonardo DiCaprio is almost as well known for his environmental activism as he is for his acting, or, for that matter the number of supermodels that he’s slept with. ¬†This is despite the fact that his anti-fossil fuel stance is frequently juxtaposed against his high-rolling lifestyle of flying around the world on carbon-spewing¬†private jets and spending his vacations on yachts rented or borrowed from oil sheikhs, all of which is evidenced by his massive carbon footprint. ¬†¬†¬†However, the above examples may not even be his most egregious examples of hypocrisy since they only deal with his individual actions and lifestyle. ¬†His views on land use politics are far more disturbing and far more destructive from an environmental prospective.

So, now we come to the land use part of this story. ¬†It’s not a controversial notion that the best thing that a city can do to cut down on pollution is build more density in it’s core as higher density in urban centers leads to less automobile use, which leads to less carbon emissions. ¬†If residents are¬†located closer together, there is less need to transport people and goods over further distances. ¬†Therefore energy use is reduced, as well as water usage for that matter since higher density typically means less large lawns to water. ¬†This is roughly as objectionable as someone making an argument that water is wet or that orange juice tastes like oranges. ¬†So, imagine my surprise (end sarcasm here) when I recently read a story on Curbed LA about how self-styled environmental crusader Leonard DiCaprio (among other celebrity “activists”) had signed onto an anti-development¬†campaign known as the Neighborhood Integrity Initiative demanding the following: ¬†From Curbed LA¬† (emphasis mine):

(1) Direct officials to halt amendment of the City’s General Plan in small bits and pieces for individual real estate developer projects, and

(2) Require the City Planning Commission to systematically review and update the City’s community plans and make all zoning code provisions and projects consistent with the City’s General Plan, and

(3) Place City employees directly in charge of preparation of environmental review of major development projects, and

(4) For a limited time, impose a construction moratorium for projects approved by the City that increased some types of density until officials can complete review and update of community plans or 24 months, whichever occurs first.

This list of demands was presented to Mayor Eric Garcetti.  The group claims that they have enough signatures to get their measure on the ballot should Garcetti not submit to their demands.  This is NIMBYism, plain and simple.  There is just no other way to describe it  From Curbed LA (emphasis mine):

So, quite literally, the single best thing that a city can do for the planet is locate destinations‚ÄĒhouses, jobs, grocery stores, schools‚ÄĒcloser together so its residents expend less time, less money, and fewer fossil fuels traveling among them.

That‚Äôs how LA needs to think about density‚ÄĒas a long-term solution for climate change that will also deliver short-term social and economic benefits.

The problem with anti-density campaigns is that their boosters aren’t thinking about our city in a way that looks beyond what they see on their own block today.

Santa Monica’s anti-density measure, LV, is the most troubling, as it would require a citywide vote to approve any new structure over 32 feet. This would make it politically (and economically) difficult to erect buildings more than two stories tall in a prohibitively expensive city that already has limited room to grow, pushing workers farther and farther away from their jobs.

Again, as stated previously, the fact that increasing density in urban cores is good for the environment is not particularly controversial, nor is it an issue opposed by those on either the right or the left….until it happens near when they live. ¬†In this case, it’s a matter of wealthy¬†hypocrites who claim to be environmentalists trying to stop development because it happens to inconvenience their lifestyle a bit, despite the fact that the development would have a substantial positive impact on the environment that they claim to care so much about. ¬†Again, from Curbed LA¬†(emphasis mine):

Restricting building height and planning for cars goes against everything that environmental leaders and sustainability experts have been saying for decades: If you’re erecting a multi-use structure in a dense, transit-accessible neighborhood with centralized freight delivery systems, the environmental impact of that structure is lessened significantly over time.

Building a two-story building surrounded by a city-mandated parking lot on an extra wide street is not the worst thing you could do for the planet. The worst thing you could do for the planet is codify this kind of development into the land use and planning policies of your city to make building anything else impossible.

That’s why many cities and states are incentivizing dense, transit-accessible development as part of a larger climate-friendly mandate to not only decrease emissions, but also improve public health, clean the air, and slash energy costs.

My broader point here is that you can’t have it both ways. ¬†This isn’t an issue where there is a credible case that increasing density in urban cores isn’t better for the environment than doing the opposite: incentivizing¬†sprawl by making it impossible to build in urban areas. ¬†You can’t be an environmental advocate only when it suits your personal interests and expect not to get called out on your hypocrisy, especially when you stake out as hard-line of a position as DiCaprio has.


Watching the Horizon: According to Bloomberg, odds are that the next financial crisis will come from depressed lenders, shadow banks or China.

Conscientious Uncoupling: How a massive surge in divorce rates in couples over 50 years old is forcing people to work longer and putting retirements at risk.


Rise of the Machines: Industrial robots are driving some major changes in both warehouse design and workforce composition.


History Lesson: The New York Times published a fairly balanced history of the story behind the prop 13 tax revolt and it’s consequences.

Bad Rap: Luxury condos and apartments get a bad rap when it comes to the increasing cost of housing when restrictive zoning is more often the real culprit.

The Missing Middle: By continuing to focus primarily on housing prices in San Francisco and NY, the media is missing a bigger story – rentals are becoming un-affordable nation-wide for middle class families.


What’s the Story? ¬†HGTV has achieved something incredible: a bunch of hit shows with no¬†serialized narrative drama that is the hallmark of the modern successful series.

Video Of the Day:¬†Meet Rox Zee, the Boise State football team’s kickoff tee fetching Labrador Retriever. ¬†In related¬†news, I think that I just became a Boise State fan.

Troll So Hard: Twitter’s infamous army of anonymous trolls played a roll in Salesforce passing on offering to acquire the troubled social media platform.

Farm to Cart: Target is experimenting with so-called vertical farms where produce is grown in-store.

Chart of the Day


Political Metaphor:¬†A Hillary Clinton tour bus was busted dumping human waste down a storm drain in an Atlanta suburb, resulting in a hazmat team getting dispatched to the site. ¬†If you’ve ever seen National Lampoon’s Christmas Vacation, you are aware that this¬†can end really, really terribly. ¬†On a personal note, I can’t wait for this election season to end.

Revealing Protest: Porn actors (I never understood why they are all called stars) are picketing on the streets in Hollywood to protest a ballot proposition which would impose mandatory condom use for any adult video filmed in the state.  Los Angeles passed a similar law in 2012 that decimated the adult industry, causing permits to plunge from 480 in the year it was passed to just 25 last year.

Pack a Day:¬†Meet Azalea, the chain smoking chimp who has become the¬†star of North Korea’s new national zoo in Pyongyang.

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

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Landmark Links October 21 – Dense Hypocrisy

Landmark Links October 18th – On Point


Lead Story….¬†A bit short on time this week so I’m going to outsource the lead story. ¬†Joe Bosquin of Builder Magazine wrote a wonderful summary about¬†how California priced itself out of the market for entry-level home buyers titled¬†The Unintended Consequences of Law. Spoiler: it has everything to do with Prop 13 and CEQA. ¬†Bosquin’s piece as good as an explanation for our absurd housing prices in the Golden State as you will find. ¬†Yours truly gets a bit more than a quick mention and they included an article ¬†that I had written for Builder (and Landmark Links) back in May about why our impact fees are so high¬†compared to the rest of the country. ¬†By the way, the non-partisan Legislative Analyst Office published a piece in September in which they confirmed my thesis¬†about the relationship between Prop 13 and impact fees.

Here’s an excerpt from Builder but you should really check out the entire article. ¬†It’s a quick and easy read even if you aren’t a housing and development nerd:

According to a widely referenced 2015 report from the California Legislative Analyst‚Äôs Office (LAO), the Legislature‚Äôs nonpartisan fiscal and policy analysis arm, since 1980, California has built half of the housing units it needed‚ÄĒabout 100,000 per year‚ÄĒto keep up with demand. And that‚Äôs just in aggregate. In high-demand locales like the San Francisco Bay Area and Los Angeles, the housing deficit is even greater. ‚ÄúMost of California‚Äôs coastal counties needed to build three times as much (or more) housing as they did,‚ÄĚ the report claims.

Stated differently, during the past 36 years, California did not build the additional 3.6 million homes that it needed to keep its skyrocketing prices in check. To put that number in perspective, it would take the collective efforts of every home builder in the country, building nonstop at 2016’s projected pace of 1.26 million housing starts, three years to put a dent in the state’s problem.

The report concludes that NIMBYism, local communities’ lack of financial incentives to approve more housing, and anti-growth proponents who go to daunting lengths to block development have contributed to the problem, as well as more inveterate challenges such as a scarcity of suitable land along the coast and an ever-increasing population.

The LAO report found that the average cost of homes in California is two-and-a-half times higher than the rest of the country, and rents are 50% higher. It also points to evidence that high housing costs were making it difficult for companies to recruit employees, even in Silicon Valley, and threatened the state’s jobs base. Other reports that came out in its wake highlighted a net migration of 625,000 people out of the state from 2007 to 2014, primarily among lower income earners, attributed to housing costs.

All of which leads to the question, how did California get to a place where it tacks $75,000 onto the cost of a new home in the midst of a housing crisis that’s eroding its jobs base and pushing the country’s most populous state into an unwinnable war of the haves and have nots?

First off, major thanks to Joe Bosquin for writing this. ¬†Also, a big shout out to Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association for calling the rest of us who cited facts in the article “morons” after he apparently couldn’t counter the points that we had made on factual grounds. ¬†I’ll wear that one as a badge of honor.


Glass Half Empty: The downside of our technology revolution is a lack of job creation.

Warming Up:¬†Wage growth is now at the highest level that it’s been in a year but the stock market might not be thrilled.

Visual Representation: 27 fascinating charts that will change how you think about the American economy.

Useless: The WSJ surveyed economists and found that 59% believe that there will be a recession in the next 4 years.  For those not familiar with this sort of methodology, 4 years is an incredibly long horizon in which to forecast such things.  The incredibly-accurate Bill McBride thinks that we are in the clear for 2017 and likely 2018 as well (although he cautions that even 2 years out is too far to accurately forecast).


Bucking the Trend: While most benchmarks have remained low this year, LIBOR has climbed substantially mostly due to new money-market rules which could lead to an uptick in financing costs for commercial real estate.

Supply Exceeds Demand: Rents in Manhattan are falling as listings surge 35%.


Selection Bias: All of the Urban revival stories that you read these days are really about the amount of money flowing into urban centers than the number of people.

Viva Mexico:¬†A condo boom in Tijuana, coupled with easier border crossing rules for regular commuters could help ease a housing shortage in San Diego….but is not without it’s risks to American buyers.

The First Step: The Federal Reserve has now acknowledged that we have a housing affordability crisis.  Admitting that you have a problem is the first step to recovery.


Prime Time: Nearly 60% of US households and 75% of those that make over $112k per year are now Amazon Prime members.  Let. That. Sink. In.

Screen Shot 2016 10 14 at 11.00.26 AM

Pay For Play:¬†For-profit college Devry University has finally agreed to stop using the bullshit claim that 90% of it’s graduates seeking employment found jobs in their field within 6-months of graduation. ¬†The action came as part of a settlement with the Department of Education over misleading advertising. ¬†That claim would be impressive (and improbable) if it was made by Harvard, let alone a lowly for-profit school that may or may not be a diploma mill depending on who you ask.

Foot in the Door: How Uber plans to conquer the suburbs by partnering with cities to ease parking congestion.

But First, Let Me Take a Selfie: Companies are starting to use facial-recognition apps that utilize smartphone snapshots to verify identity.

Chart of the Day

Things that we want are getting cheaper.  Things that we need are getting more expensive.


Hero:¬†Regular readers know that I’m a sucker for a great headline. ¬†Man ‘High on LSD’ Saves Dog From Imaginary House Fire¬†is among the best that I’ve seen.

The Softer Side:¬†That Russia is a bizarre place is pretty much self evident. ¬†This new Vladamir Putin calendar featuring the Russian leader cuddling with kittens won’t do anything the change that perception.

Parent of the Year: A Pennsylvania woman¬†has been charged with child endangerment after refusing to feed her 11-month old son anything other than fruit and nuts. ¬†I’ve said it before and will say it again: veganism is a mental disorder.

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

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Landmark Links October 18th – On Point

Landmark Links October 14th – What’s the Solution?


Lead Story… A pudgy, mustachioed, red-sweater-wearing star was born during Sunday’s Presidential Debate. ¬†Kenneth Bone was selected to ask the candidates one of the final questions of the night and, his earnest question about how to balance fears of fossil fuel job loss with environmental concerns, combined with his appearance resulted in him essentially taking over the internet…and cable news…and late night TV…and leading to a bunch of hysterical memes. ¬†Mr. Bone was somewhat of a breath of fresh air in a night otherwise marred by childish personal attacks and enough bullshit to fill a rodeo ring. He¬†put a serious question on the table at least for a few minutes and acted as a reprieve from all of the tiresome mudslinging.

Unfortunately, housing has played little if any role in this election cycle despite the critical role that it plays in the US economy and the supply and affordability crisis that we are now facing (to it’s¬†credit, the current Administration has at least taken a public position advocating for more much-needed development even while the candidates rarely if ever mention it). ¬†Among the biggest problems facing the industry today is a¬†massive labor shortage. ¬†That got me thinking:¬†what if the housing industry had it’s own Ken Bone at the debate last weekend? ¬†Rather than focusing on energy policy, his question would have gone something like this:

“What steps will your housing¬†policy take to address the construction labor shortage, while at the same time increasing affordability for American families?‚ÄĚ

Industry website¬†posted a story based on the recent¬†Construction Management Association of America’s National Conference & Trade Show in San Diego that essentially asked just that. ¬†From Construction Dive (emphasis mine):

While the majority of the conversation around the construction labor shortage has focused on the trades, firms are struggling to snag qualified professionals and white-collar workers as well. A nationwide survey¬†of 1,459 contractors ‚ÄĒ conducted by the Associated General Contractors of America during July and August ‚ÄĒ¬†found that 69% are having difficulty finding workers to fill hourly craft positions,¬†38% are having difficulty hiring salaried field positions and 33% are having difficulty hiring salaried office positions.

“We‚Äôre already pressed in terms of the ability to service all the clients with what‚Äôs currently on the docket, let alone what‚Äôs coming,” said Allyson Gipson of Artemis Consulting, in San Diego.¬†She noted that the recession led to a “geographical depletion of talent,” as well as a large void of industry expertise.¬†

The aging workforce is also a primary concern for construction professionals, as baby boomers are retiring, but a new generation isn’t filling their place.

On the construction services side, the recession brought increased competition as “everybody was scrambling for work,” Gipson said. Interest rates have remained consistently low,¬†energy credit tax provisions have been extended and private sector spending has risen. All these factors have spurred a boom in multifamily, highway, retail and office construction, she noted.

However, with that increased construction spending comes more demand for services from an industry already struggling to keep up with current projects. Myrna Dayton, deputy director and deputy city engineer for the City of San Diego, said that despite the agency’s efforts to improve recruiting efforts, “We always seem to be short. It’s a constant struggle.”¬†

Construction Dive then laid out three potential tactics to help solve the labor shortage sumarized below:

Partner with schools and encourage internships to develop the next generation of industry professionals

The gap between graduation and employment can be especially daunting in the construction industry, where students must transition from a classroom environment to the field. Without classes that prepare them for real-life tasks and challenges of a day on the job site, students often struggle to succeed in the industry.

Change hiring requirements to adapt to current conditions

Experts also said standard hiring requirements are often out-of-date for the current industry environment. With owners mandating countless certifications, “those people who have the skills set are going down the road,” Gipson said. “The best construction managers running a building program aren‚Äôt all necessarily licensed architects.”

Find ways to attract millennials to the industry

The construction industry has consistently struggled to attract younger workers to fill the gap left by retiring professionals.¬†“We have an industry that is less appealing to millennials,”¬†Gipson said. “We‚Äôre not really a sexy industry.”

She encouraged companies to focus on cultivating interest in construction among middle school and high school students. As millennials seek to use their creativity in a work environment that offers autonomy, the industry can tout its ability to offer those kinds of roles.

While the above tactics¬†are a good start, there is a simple reality that needs to be addressed: construction worker pay needs to increase in order to attract more workers. ¬†In an environment where some coastal cities are moving towards a $15/hour minimum wage there is simply no way to entice someone to do manual labor if it doesn’t pay substantially more than making lattes. ¬†However, unlike your typical fast food restaurant or coffee joint, home builders aren’t currently in much of a position to pass additional labor costs on to consumers since 1) They are constrained by mortgage qualifying criteria; and 2) Home building profit margins are already low leaving little room to¬†raise prices and slow absorption without taking a major hit to the bottom line. ¬†That being said, there is common sense solution that would allow builders to attract more workers while not driving prices higher or eating into thin¬†margins: reduce the growing regulatory burden associated with new home building which has soared nearly 30% since 2011 to a whopping $85,000 per new home. ¬†This was partially addressed in the Obama Administration’s Housing Development Toolkit that was released last month. ¬†Reforms that reduce the regulatory burden back to even their 2011 levels¬†at least theoretically allow for construction wages to adjust higher in order to attract workers to fill the many vacant construction positions today without driving up prices or killing builder returns. ¬†Reducing red tape and it’s associated costs, along with the three strategies that Construction Dive outlined above would go a long way towards solving the construction labor shortage and allowing the construction industry to once again become the economic growth driver that it has historically been.


Stable and Slow: Great post and chart from Cullen Roche of Pragmatic Capitalism about how economic expansions are getting longer despite (or perhaps because of) slower growth rates.


See Also: Millennials aren’t as big spenders or risk takers as prior generations were and that is likely to have a profound impact on the economy.

Running on Empty: Nearly 7 in 10 Americans have less than $1,000 in savings including 29% of those who make over $150k and 44% of those who make between $100k and $150k.

Right on Schedule: So far, 2016 is going pretty much exactly as Bill McBride of Calculated risk predicted it would: slow, steady growth.


Shady Subprime Redux: Why the hell is the Federal Government allowing solar panel loans with 10% interest rates to get senior priority to GSE backed mortgages in the event of a default?

Under Pressure:¬†Deutsche Bank says that rising mortgage rates in Japan, resulting from the BOJ’s plan to push long term yields higher¬†could cause Tokyo condo prices to fall 20%.


Water, Water Everywhere: Israel is one of the driest places on earth.  However, their focus on advances in desalination technology has provided them with something that would be unimaginable just a decade ago: a water surplus.

Fire In the Hole!  Samsung is ending production of the Galaxy Note 7 because the damn things keep lighting on fire.  See Also: Samsung is sending fireproof boxes and gloves to Galaxy Note 7 owners for their recall in case the devices spontaneously combust in transit.

Hope for the Future: A new study finds that only one of five Millennials has actually tried a Big Mac.

Chart of the Day

A 5,000 year low.

Even the ancient Egyptians didn't enjoy the low interest rates we see today.


Bone Zone: A porn company has offered red-sweater-wearing, presidential debate star Ken Bone $100k to appear in an adult film.

Peak Florida:¬†“A 350-pound Florida man ran from a Walmart with two stolen TVs, but his getaway was compromised when his pants–containing his ID–‚Äúfell off as he ran away,‚ÄĚ according to cops who yesterday apprehended the suspect, who had a crack pipe stuffed with Brillo buried in his anus at the time of his 3:43 AM arrest.”

Clowning Around: A couple in Wisconsin left their 4 year old kid at home alone while they terrified a neighborhood dressed as creepy clowns.  They are now facing child neglect charges.  See Also:  A British woman was so terrified by a creepy clown that jumped out of the bushes that she went into premature labor.

That’s Loser with an “L”: Some guys are paying over $1,200 a¬†year for a fake girlfriend to text and Snapchat with them. ¬†You can read the article if you’d like or just take my word that it’s every bit as pathetic as you are assuming.

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

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Landmark Links October 14th – What’s the Solution?

Landmark Links October 11th – Put Your Money Where Your Mouth Is


Lead Story…¬†As I wrote¬†a couple of weeks ago, the Obama Administration took the unprecedented action of calling on cities and counties to re-think their zoning laws. ¬†¬†This was a concerted¬†effort to increase affordability and fight back against NIMBY’s who have successfully stopped development in some of America’s most productive cities. ¬†The proposal is bold in that governors don’t often involve themselves in land use issues, let alone a sitting president. ¬†However, the toolkit presented by the Administration is somewhat toothless because cities are ultimately still ultimately free to do as they please and they ultimately have control over local land use policy.

An additional way to achieve more density is actually quite straight forward: cash.  If the Federal Government really wants denser, more walkable mixed use development then they need to incentivize it by amending FHA rules that currently make it very difficult to build product that fits that description.  From The Washington Post (emphasis mine):

Main Street-style development ‚ÄĒ the ‚Äústorefront on the first floor, apartments rented out above‚ÄĚ style that forms the core of any older town‚Äôs historic center ‚ÄĒ is a residential building form that uses first-floor commercial space to serve community members and enliven a neighborhood. This low-rise density helps prop up the balance sheets of towns responsible for running utilities all the way out to suburban developments, as former city planner and engineer Charles Marohn has repeatedly demonstrated. It also keeps a constant set of the ‚Äúeyes on the street‚ÄĚ that Jane Jacobs identified as necessary for safe streets; renters keep an ear out for burglars after business hours and shopkeepers keep the same at bay during the day. It is, in other words, the core of any successful town-building.

Yet for 80 years, Main Street development has been effectively driven from the market by the growth of federal housing policy hostile to mixed use. Ever since Herbert Hoover‚Äôs Commerce Department helped promote the spread of model zoning codes that physically separated people and their community institutions, the federal government has poured its energy and resources into encouraging the growth of widely dispersed single-family homes and large, centralized tower blocks. To this day, FHA standards for loans, which set the market for the entire private banking sector, prohibit any but the most minimal commercial property from being included in residential development. As a groundbreaking report by New York City‚Äôs Regional Plan Association found, these standards are ‚Äúeffectively disallowing most buildings with six stories or less.‚ÄĚ And depending on the program, a building could have to reach to 17 stories before it is eligible for participation in the normal housing markets. Without the FHA‚Äôs blessing, projects are granted the ‚Äúnonconforming‚ÄĚ kiss of death unless their developers can persuade a local bank to write an entirely customized loan for them, one whose risk the bank would have to keep entirely on its own books.

These caps on commercial space and income should be raised to level the playing field for housing development and let small developers invest as much in their home towns as huge corporations will in big cities. Caps currently limited to 15 and 25 percent should be raised to more than 35 percent to legalize even just three- and four-story buildings. As small towns and secondary cities across the country seek to revitalize their downtowns to become more competitive job markets, unreformed financing restrictions act as an invisible barrier, suffocating local efforts to invest in smaller communities. And while the housing affordability crisis has reached the most acute levels in a handful of coastal cities like New York, San Francisco and Washington, the White House admits that ‚Äúthis problem is now being felt in smaller cities and non-coastal locations.‚ÄĚ

The current financing restrictions make it so that the tail frequently¬†wags the dog in mixed use residential construction. ¬†Cities often want ground floor retail to be included to add to their¬†tax base and ¬†increase walkability but it’s incredibly difficult to finance. ¬†Instead what happens, is the developer gets¬†stuck trying to thread the needle between building just enough retail to appease the city but keeping it at a low enough percentage of the total project square footage to avoid the dreaded non-conforming label. ¬†The end result is that functional retail space is sacrificed in order to comply with FHA rules. ¬†So, rather than having a well-designed retail concept, you¬†end¬†up with small, non-functional retail¬†components¬†in all but the largest projects. ¬†The space has little¬†actual economic value except as a means to obtain financing. ¬†By way of example, a project one block from our office was recently¬†denied by Newport Beach’s city council due to a lack of ground floor retail. ¬†No doubt that the developer was designing to the financing constraints but didn’t include enough retail to get the City on board. ¬†The federal government took a step in the right direction earlier in the year by making it easier to finance condos. ¬†This is the next logical step if they are serious about increasing density and making housing more affordable. ¬†Time to put your money where your mouth is.


Meh: The September Jobs Report was sort of a dud.

Here to Stay? ¬†I love this explanation from Bloomberg’s Noah Smith on why low interest rates don’t necessarily cause excessive risk taking:

What is it that allows rates to hover around zero indefinitely without causing investors to do bad things with cheap money? It depends on why rates are low in the first place. If money is cheap because central banks are using their powers to keep rates lower than what the market would bear on its own, it stands to reason that investors will take cheap money and invest it in riskier things than they otherwise would. But if rates are low because of natural forces in the economy, and central banks actually have little to do with it, then there’s no reason business people would be taking extra risk.

Crude Math: An agreed OPEC production cut has oil back above $50/barrel but large, recently discovered reserves are likely to create yet another glut in the not-too-distant future.


Over the Hump?  Apartment rents fell for the first time in a very long time in the 3rd quarter.

Dumpster Fire:¬†Bottom tier¬†retailers Kmart and Sears are technically still in business but both stores are utter disasters. ¬†Rating agencies just put Sears Holdings, the company that owns both on death watch and the only way that it’s keeping the lights on¬†is by selling the¬†best assets that it owns. ¬†Part of the problem is that Sears Holdings¬†still own or lease approximately 2,500 properties so this mess will be very difficult and time consuming to wind down.



Beneficiaries:¬†Vancouver’s home sales are down 33% after they introduced a foreign buyer tax. ¬†Seattle is likely to benefit. ¬†See Also: New York is overtaking London as the #1 destination for international property investment thanks to Brexit.

White Knight? ¬†Tech firms, often considered villains when it comes to housing issues in the Bay Area are now throwing their weight behind pro-development groups to push for more housing construction. ¬†See Also: The housing shortage is going to start negatively impacting economic growth in California more seriously if something isn’t done.

NIMBY Awards:¬†The Bay Area Metropolitan Observer put together a list of their top 10 Bay Area NIMBY moments of 2016. ¬†It would be funnier if it wasn’t so sad.


Payday:¬†Everyone’s favorite sexting app, also known as Snapchat is working on an IPO rumored to value¬†the tech firm at $25 billion.

GTL is Cancelled: Tougher regulations and taxes are hitting tanning salons hard and there are 30% less of them than there were in 2008.

Chart of the Day

NIMBYs gone wild: LA Edition

Greg Morrow Capacity Graph

Source: Greg Morrow of UCLA


Best Excuse Ever: A Canadian pole vaulter who tested positive for cocaine just days before the Rio Olympics and nearly didn’t get to attend claimed that it happened because he made out with a girl that he met on Craigslist.

Wings (and Heads), Beer, Sports: Green Bay Packers tight end Jared Cook ordered some food at Buffalo Wild Wings and received a deep fried chicken head on his plate.

People of Walmart:¬†Walmart was selling a shirt on it’s¬†website that said: “I’d Rather Be Snorting Cocaine off a Hooker’s Ass.” ¬†Sadly, it was taken down once management realized what was going on.

Bad Idea:¬†Entering a Florida Walmart is a bad idea in the best of times. ¬†Doing it before a major hurricane when people are stocking up is just asking for trouble as you’ll see in the¬†video of the day.

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

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Landmark Links October 11th – Put Your Money Where Your Mouth Is

Landmark Links October 7th – Urban Legend


Lead Story…  Chances are that you’ve heard tales about alligators living in the NY sewers, Coca Cola’s magical ability to dissolve teeth overnight, that Elvis Presley is still alive and in witness protection, or even the old  Weekly World News standby of a bat child found living in a cave. These urban legends and others like them have spawned a virtual cottage industry of cable TV shows and websites seeking to either prove or debunk their claims.  Likewise, if you’ve attended development industry conferences in the past 4 years or so, you’ve probably heard some variation of the following on a capital panel: “There is too much money chasing too few deals.”   It’s been repeated so frequently through the past few years that the concept of “too much money chasing too few deals” is almost universally accepted as truth in the residential development industry.  However, just like tooth-dissolving cola, it falls apart under further scrutiny when discussing for-sale residential real estate development.  When viewed from 30,000 feet, the previous sentences probably looks crazy.  Many private equity funds, hedge funds, etc have raised money to invest into housing development.  However, it’s not the amount of money raised that’s been problematic in recent years.  Instead it’s that the type of money available is often a poor fit for projects in need of financing in today’s relatively stable housing market.

In the years before the housing bubble and subsequent bust, private home builders typically utilized bank debt and pension fund capital to build subdivisions and master-planned communities.  The debt component was readily available and attractively structured and pension fund capital had relatively long investment horizons and reasonable return expectations when compared to opportunity fund money which was typically used for entitlement projects and other, more risky ventures.  It wasn’t unusual back then to have decent sized private builders in California build and sell several hundred homes a year or more.  With a couple of notable exceptions, they were not going to compete with public home builders when it came to cost of funds.  However, they were still substantial players in the market and were able to build at decent levels of production while often delivering higher quality homes than their public competitors.  This all changed when the housing market crashed.  Banks reduced exposure to the home building and development space by a substantial amount, as did pension funds.  Some left the space entirely.

At the same time that pension funds and banks were pulling back, opportunity funds ramped up their fundraising in order to capitalize on the carnage that the Great Recession wrought on land values.  They offered their prospective investors high-octane returns that would be realized when they bought trophy properties at bargain-basement prices in a distressed environment, to develop or sell as the market began to recover.  This capital was and is well suited for opportunistic investments brought on by a market crash – thus the label opportunity fund.  What it isn’t a great fit for is investing in home builder and land development deals in a stable market.  In reality, the window to buy distressed assets wasn’t quite as long as many had anticipated and the doldrums of 2010-2011 quickly gave way to a run-up in transactions and land values in late 2012 into early 2014.  All of which brings us to where we are today: a stable market with tight inventories where there is a ton of capital that has been raised – but very little of that capital has a return profile that fits where it is needed most: lot manufacturing and production home building.  There are several reasons that this is happening:

  1. Unrealistic Investor Returns in a Stable Market – As stated above, much of the capital that has been raised to deploy for home building and land development in the market today is much better suited for a distressed market than a stable one.  However, there is something bigger at play: equity funds are targeting the same mid-20% IRR returns with the 10-year Treasury yielding 1.75% that they were when the 10-year was yielding 5%.  All returns are relative, meaning that, in real terms, today’s targeted returns are actually substantially richer than they were when the 10-year was substantially higher.  This has more to do with fundraising and marketing than anything else.  Funds are reluctant to pitch investors at the returns they are likely to achieve (mid to high teens) since their competitors will still promise mid-20%s, meaning that they won’t be able to raise capital, even if the underwriting that they are using to get to those returns is aggressive BS.
  2. Private Builders Get Squeezed Leading to Less Competition – In order to offer high returns to investors in a lower return environment, funds need to grab a bigger piece of a smaller pie, leaving less for builders and developers.  Typically, this means putting steep minimum multiple hurdles in their waterfalls.  Ironically, minimum equity multiples are incredibly short sighted as it encourages builders to push prices rather than absorption since the multiple hurdle is almost always substantially higher than the IRR hurdle, leading to longer sell out periods.  As if that isn’t enough, the few bank lenders left in the space are typically quite conservative and require a full persona guarantee.  So if you are a builder, you now have to put up 10% of the equity or more in order to get a deal done and put your balance sheet on the line to finance it and you’re getting a smaller piece of the returns.  Eventually, you have to wonder what the point is.  This is a huge reason that there are very few decent sized private builders left – in many cases the reward simply isn’t worth the risk.
  3. Lack of Debt Capital Resulting in Broken Deal Structures – Many land deals purchased during the aforementioned 2012-2014 run-up were bought under the assumption that either debt would be available to improve lots or public builders would purchase paper lots.  Fast forward to 2016 and the public builders still don’t have much of an appetite for paper lots nor is there debt readily available for horizontal development.  That means that the owner is either going to need to sell for a substantially lower number than they had in their proforma (sometimes even a loss), or improve the lots themselves by raising additional equity.  As a result, many of the sites that were bought in 2013 with a business plan to entitle and flip are effectively underwater.  Mind you that home prices have almost universally INCREASED during this time frame but a lack of reasonably-priced development debt or public home builders with an appetite for paper lots has caused a stealth land correction of sorts that has been playing out for months.
  4. No Investor Appetite for Long Duration Deals – Ask an opportunity fund investor what they fear most and you will probably hear something about getting stuck in a multi-cycle development project.  High octane capital needs to get in and out relatively quickly in order to make the out-sized returns promised to investors.  Many opportunity funds are of the mindset that we are getting late in the cycle since prices have risen so substantially from the bottom despite the fact that housing starts in key production markets haven’t picked up much and inventory is still bumping along near record lows.  Many funds have been looking to trim project duration in an effort to ensure that they are out when the cycle inevitably turns.  As a result, there are some incredible opportunities out there that require capital to execute a 5-7 year business plan that no one will touch due to duration.  We have seen several of these sort of projects where sponsorship is strong and land basis is very attractive due to a lack of bidders.  However, it’s incredibly challenging to find capital that is willing to go out that far, even if the returns are exceptional.  This short-term mentality has left a large hole in the market for anything but bite-sized infill deals.

If this actually were a  market with the aforementioned “too much capital for too few deals” we would expect to be seeing increasing transaction volume and increasing land prices as the supply of capital led to a seller’s market. However, neither of these are occurring in all but a select few markets (at least on the west coast).  Instead, we are seeing light (at best) land transaction volume.  In order for the land market to turn the corner, either  the public builders need to regain their appetite for buying paper lots and developing them or we need more sources of capital that are properly aligned with the projects that they are financing under normal market conditions.

Home building and land development can both provide great returns in a healthy market. However, trying to finance these ventures with little-to-no debt and opportunistic capital raised to buy distressed assets is like trying to fit a square peg in a round hole.  Does this sound like a market with too much capital to you?  Better keep searching for those sewer-dwelling gators.


Pay Up: A look at who pays the most for housing, healthcare, energy and groceries by state.

Lag Time: How the psychology of the Housing Bubble helps to explain today’s odd labor shortage.


Office Space: Open office concepts are becoming a bit less open as many tenants build out more private space.


Delusional Narcissism: Celebrities really suck at selling homes, mostly because they dramatically overestimate the value of their fame on the house they are trying to sell.

Flattening Out: Residential construction spending was down again in August despite strong gains in multi-family.

The Pendulum: There is a fairly strong demographic argument that we are approaching “peak renter.”


Clowning: The clown industry (yes, there is such a thing) is not happy about all of the creepy clown sightings occurring across the US. See Also: Penn State students lose their minds after creepy clown sighting.  And: Someone even started a Clown Lives Matter movement, complete with organized protests.

Useless: Robo-callers and internet scammers have turned the National Do Not Call List into one big joke.

Soul Crushing: The average white collar worker will spend 47,000 hours on work email over his or her career.

Scapegoat? Meet the whiz kid behind the sketchy Russian mirror trades that are causing Deutsche Banks whole bunch of trouble that it really doesn’t need right now.

Chart of the Day



Bite to Eat: Some lunatic threw an alligator through a Wendy’s drive thru window. Because, Florida.

Incestuous: A 68 year old man unwittingly married his 24 year old biological granddaughter. They don’t plan on getting divorced. Once again, because, Florida.

Crimes Against Humanity: Today’s video of the day is a bunch of adults beating the crap out each other in a massive brawl at a Chuck E Cheese in, you guessed it: Florida.  Kudos to the guy in the Eli Manning jersey who appears to have a much better arm than the real Eli Manning.  (h/t Ethan Schelin).

P.S.  I know that we spend a lot of time laughing at Florida’s expense on here. However, please keep Florida residents (including my parents) in your thoughts and prayers as they batten down the hatches to deal with Hurricane Matthew. Hopefully everyone will be ok so that they can get back to their goofy antics ASAP. 

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

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Landmark Links October 7th – Urban Legend

Landmark Links October 4th – I Guarantee It


Lead Story… When home owners take out a mortgages and can’t afford to put down 20% or more of the purchase price, the lender makes them get something called Private Mortgage Insurance or PMI which protects the lender in the event of borrower default in exchange for a monthly premium. ¬†It’s a well established insurance product that has been widely used for years. ¬†Traditionally, rental landlords have not had a comparable form of insurance¬†to rely on should a tenant default. ¬†Typically, a landlord requires that a prospective tenant make¬†an annual income of greater than 40 times the monthly rent with a credit score of no lower than 700. ¬†If a prospective tenant can’t meet that requirement, they must find a guarantor who earns 80 times the monthly rent in order to qualify. ¬†As you can imagine, this is not easy in markets where rent is high and vacancy is tight, especially for someone who is recently entering the workforce and has neither a substantial credit or income history. ¬†Enter a relatively new business plan¬†– payment insurance for apartment hunters from a startup called TheGuarantors. ¬†From the Wall Street Journal:

TheGuarantors, launched in New York in 2014, sells payment insurance to tenants, providing landlords with a guarantee they will be made whole if the tenant becomes delinquent.

The offering is a symptom of a pricey market in which rents have risen faster than incomes and landlords can be picky about the qualifications they demand. Rents have climbed about 20% nationwide over the past five years while incomes have only recently started to rise.

The insurance, similar to the private mortgage insurance many lenders require of borrowers who have small down payments, provides a new level of protection for developers putting up new buildings in pricey markets where the applicant pool might be thin.

It could be a boon to landlords in places like San Francisco and New York in particular because rent growth has far outstripped income gains in recent years. Cliff Finn,executive vice president of new development at Douglas Elliman in New York, said 10% to 30% of the tenants in buildings he is leasing are now insured through TheGuarantors.

The premiums work out to somewhere between 2 weeks and 1 month’s worth of pay a year depending on the degree of risk and the program allows for borrowers with as little¬†income as 27 times monthly rent and as low as a 630 credit score. ¬†The balance sheet capital that TheGuarantors uses is from Hanover Insurance Group, a $5 billion dollar insurance company based in Massachusetts. ¬†Another company, called Insurent is the largest in the industry, having issued over 13,000 guarantors since 2008. ¬†A few¬†of thoughts on this:

  1. If widely adopted, this type of insurance is likely to result in higher rents since it increases demand by creating more eligible renters without increasing unit count.
  2. Even considering point 1 above and the increase¬†cost of living for a renter through the insurance premium, I would tend to think it’s a net positive for the economy since it allows for more household creation at the margin. ¬†In other words, the kid who is living in his or her mom’s basement is likely able to qualify for their own apartment sooner. ¬†That being said, the slippery slope here is that landlords make their qualification criteria more difficult and start effectively forcing the product on those who don’t really need it.
  3. This could be highly lucrative for the insurer assuming that renters are underwritten correctly and they are selective about markets. ¬†It’s also not clear if the insurer is able to sublet the unit¬†in the event of default during the period that they are on the hook for the guarantee. ¬†If they are, it would be much easier to mitigate risk, especially in a market with low vacancy.

Overall, this seems like a fascinating business plan and definitely something that we will be keeping a close eye on to see how it plays out through the economic cycle.


Dropping Like a Rock: Grocery prices are plunging at rates not seen since 2009.  Great news for consumers, not so much for stores and suppliers.

The Haunting: The ghost of the Lehman Brothers failure haunts troubled Deutsche Bank, however the some of the parallels are a bit misleading.


Running on Full: Despite somewhat of a construction boom, America is running out of apartments as occupancy hits a near-record  96.5%.


Reversal: Banks are starting to hold onto loans again and growing loan profitability is the reason why.  Data that was published by the Urban Institute last week showed that portfolio loans or loans that portfolio loans, or loans that banks make to keep on their books grew to 34%, the highest level since 2002.

Rise of the Machines: New technologies like self driving cars, ride sharing apps and drones could be a catalyst for suburban growth.


The Prodigy: Theo Epstein became a hero in Boston after he put together the blueprint for the Red Sox to win two World Series championships after¬†86 years of frustration. ¬†He’s now the general manager of the Cubs and has the team poised to end a 107 year World Series drought. ¬†If they pull it off, he’ll become a legend.

Assholes: Emirates Air is going to start charging families for the privilege of sitting together on a plane.

Chart of the Day

Banks are actually holding loans on their books again.


Slow News Day: The Washington Post actually published an article last week posing the question of whether or not dog Halloween costumes are sexist.  I give up.

Cultured Idiots: Unwitting attendees at the NY Symphony Orchestra gave a rousing¬†standing ovation for a North Korean propaganda song that is an ode to dictator Kim Jong Un because they didn’t know any better.

When Nature Calls: A woman from Memphis came home one day to find her front door open.  She walked inside to find that, not had her house been robbed, but the two burglars were having sex on her couch.

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

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Landmark Links October 4th – I Guarantee It