Landmark Links June 27th – Out of Your Element


Lead Story…. It seems like everything in the real estate development industry is moving slowly of late.  Projects that would have taken a couple of months to close back in 2013-2014 now tend to linger for 4-6 months for one reason or another.  I’m of the opinion that there isn’t any one culprit but rather a collection of factors that add up to some big timing headaches.  City planning departments are understaffed, there is a massive labor shortage and it seemingly takes an act of Congress to get a bank to issue a term sheet on loans where they have indicated a strong interest.  Either way, extended delays seem to have become the norm and it’s making deals more difficult to get done.

Today I want to focus on an aspect of development that is causing timing headaches and is often a substantial impediment to a successful transaction: the different cultures of commercial real estate sellers and residential developers when it comes to due diligence.  It’s something that I had never really given much thought to until a client who is an infill developer brought it recently.  However, it’s something that we are seeing more of lately..

As most of you are aware, there is a lot of re-development going on in urban regions of the US where underutilized sites are re-developed from commercial to residential or mixed use.  As such, these transactions often involve a commercial owner/user or landlord selling to a residential developer who will take the site through the re-entitlement process.  Although no transaction is easy, commercial deals tend to have a fairly straight forward DD process: the buyer obtains copies of in-place leases, gets a property condition analysis, seismic report, Phase I Environmental and title report.  Attorney’s put together lease abstracts and estoppels.  The lender providing the acquisition loan has an appraisal done.  There’s a lot to get done but it’s fairly well defined process and most of the timing issues are within the control of the buyer.

Residential entitlement and re-development plays are pretty much the opposite in that they are anything but straight forward.  A residential developer needs to do all of the same DD that a commercial real estate investor does in addition to a whole lot more including: a market study, entitlement memo, planning department meetings, site plan draft, city council member meetings (if possible), engaging an entitlement consultant, etc.  The list goes on and on and many of these items are not completely within the developer’s control (city meetings, for example).  The environmental standards for residential are also higher (for obvious reasons) which means that additional testing is often required, especially if there has been any type of industrial use.

Everything is fluid in an entitlement deal.  The developer typically has a high-level concept of what the development will look like but specifics don’t get nailed down until later in the process.  Still, they have to court potential investors with a business plan that is still subject to change, based upon due diligence findings that ultimately won’t be fully known until the 11th hour.  It is often a sprint to the finish line in a somewhat chaotic fashion.  Entitlement projects are fun to work on but definitely not for the faint of heart.

The due diligence period for commercial deals is fairly straight forward and waiving DD is typically not to traumatic of an experience as unchecked items often get re-classified as conditions to close.  The culture around commercial transactions is usually for non-refundable dollars to be released fairly quickly since the buyer has a pretty good idea of what they are buying upfront.  Sellers and their brokers know this and it’s what they have come to expect.  On the other hand, feasibility dates for residential developers are something of a formality as they almost always get extended.  The inside joke among many residential developers is that a feasibility date is little more than the date when you ask for your first extension.  It’s almost expected that DD feasibility will get extended on an entitlement play.  No one particularly likes asking for or granting extensions but residential buyers, sellers and brokers recognize it as “business as usual.”

As you can imagine, this is creating a ton of friction as infill re-entitlement opportunities continue to become a larger part of the market.  Commercial buildings are typically sold by commercial brokers who have limited experience in residential entitlement and therefore expect a normal feasibility period where the buyer will go non-refundable at the conclusion rather than a request for an extension.  At the same time, residential developers have become accustomed to offering an aggressive feasibility period – they know that they won’t win the deal otherwise – and then asking for an extension as they would on a typical residential project.  The end result is a ton of frustration, conflict and dropped escrows.

This probably goes without saying but it really doesn’t have to be this way.  First off, if commercial sellers want to realize the additional value driven by selling their property to a developer who will entitle it for a higher and better use then they need to accept the down side as well – more moving pieces requiring more feasibility time.  Second, the expectations have to be set better upfront – feasibility for entitlement plays takes longer.  Period.  However, sellers want to have their cake and eat it too and buyers understand that they have to play the game with regards to over promising on timing and then hope that they are able to eek out a feasibility extension without having the deal fall out of escrow.  As much as I wish that it weren’t the case, I don’t see it changing soon.  Just chalk it up as another impediment to getting deals done in a challenging environment.


Taking Over: The latest report from the Census Bureau shows that Millennials have taken over in the US when it comes to demographics.

Delusional: Investors still think that they can make average annual returns of 8.6% per year investing in bonds and dividend-yielding stocks despite mountains of evidence to the contrary.

Too Far? Economic studies on Seattle’s 2016 minimum wage hike are starting to pop up.  The jury is still out but the results don’t look particularly good thus far for low wage workers.

Who’s In? An interactive history of US labor force participation.

Size Matters: Low gas prices and cheap financing have Americas back in love with  SUVs and pickups that many wrote off a few short years ago.


Transformation: How Tampa, Florida turned a dead zone into a vibrant downtown.  See Also: Reno is starting to look more like Silicon Valley.

Under the Radar: Elimination of interest deductability could wreak havoc on the real estate industry.


Priced Out: There is an increasing list of cities in the US where land prices and regulation have made it too expensive to build apartments.  See Also: Why can’t they build more homes where the jobs are?

The Verdict is In: California’s zoning and entitlement rules are a disaster for affordability.

San Francisco’s metropolitan area added 373,000 net new jobs in the last five years—but issued permits for only 58,000 units of new housing. The lack of new construction has exacerbated housing costs in the Bay Area, making the San Francisco metro among the cruelest markets in the U.S. Over the same period, Houston added 346,000 jobs and permitted 260,000 new dwellings, five times as many units per new job as San Francisco.


Caveat Emptor: Initial coin offerings are a thing and I don’t see how they could possibly be a good thing:

Since the beginning of the year, 65 projects have raised $522 million in these offerings, according to Smith & Crown, a research firm focused on the new industry.

It is a frothy, sprawling and completely unregulated way of funding start-ups, leaving even veteran technology watchers scratching their heads.

“It’s kind of like when you are a little kid and you know you are getting away with something,” said Chris Burniske, an industry analyst at ARK Invest. “It’s not going to last forever, but it’s fun in the interim. The space is giddy right now.”

Last month, a small team of computer engineers in Lithuania raised $14 million in 45 minutes by selling a coin, known as Mysterium, that is intended to give access to an encrypted online data service that is still being built.

The next day, a group of coders in the Bay Area pulled in $35 million in under 30 seconds of online fund-raising. The coders were offering Basic Attention Tokens, which will one day work on a new kind of ad-free web browser.

Then this week, a team in Switzerland raised around $100 million for a coin that will be used on an online chat program that has not yet been released, known as Status.

This will end in tears.

Wrecking Ball: News of Amazon moving into a market segment has resulted in $69 billion of lost market cap for competitors.

Culture Shock: Walmart acquired in an effort to compete with Amazon.  Then it banned office drinking.  This went over poorly.   If there is a better illustration of the difference between cultures in the old and new economy, I have yet to find it.

Unintended Consequences: Canada’s legalization of pot has resulted in a marijuana shortage.

Chart of the Day

Amazon now has a nearly 1% market share of ALL warehouse space in the US.  


Hot For Teacher: A teacher at a Christian pre-school in California was fired once it was discovered that she was working as a porn star at the same time.  All that I can say is that those parent teacher meetings must have been awkward when dads recognized her.

Seems Reasonable: Teen accused of pulling gun on Jack in the Box employees over missing chicken nugget.

FAIL: A fake cop pulled over a real cop and ended up behind bars because, Florida.

Please. Make. It. Stop.: Millennial men are bolstering the plastic surgery industry.

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

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Landmark Links June 27th – Out of Your Element

Landmark Links June 23rd – Don’t Get High on Your Own Supply

Stoned Cat

Lead Story… Today I want to address one of the most annoying hot takes currently making the rounds in the financial blogosphere: the idea that today’s housing supply is not in fact all that low.  The rationale goes something like this: monthly housing supply is actually higher today than it was in 2005 at the height of the housing bubble, therefore the market isn’t really as tight as is being reported  As the chart below shows, this is indeed the case, at least on the surface.  Supply in 2005 ranged between 4.3 and 4.9 months.  Today, it sits at 5.7 months.  However, this statement is also a gross oversimplification of what is really going on in the market.

fredgraph (2).png

Source: Federal Reserve Bank of St. Louis

So, given the above chart why do I have an issue with the way that supply is being characterized?  First off, there are two components to supply: sales rate and the number of units available.  Let’s say that there are 100 homes available in a city at any given time and there are an average of 20 homes sold a month (this includes new and existing inventory).  In that case, the 100 homes would equal 5 months of supply.  Now lets assume that a recession hits and that sales rate drops in half to 10 homes a month.  In that case, the supply balloons to 10 months even though the actual units of supply didn’t increase at all.  While months of supply was lower in 2005, the total number of units being sold was much higher than it is today, making the market more susceptible to a demand-crushing downturn than it is in 2017.  Now, let’s take a look at both new and existing home sales:

Source: Calculated Risk

As we stand today, existing home sales have recovered some but new home sales are still way, way off from where they were in 2005.  Back then, there were 7,072,000 existing homes and 1,280,000 new homes that sold for a total of 8,352,000 or 696,000 per month.  For 2017, we are on track to sell 5,570,000 existing homes and only 569,000 new homes for 6,139,000 in total or 511,583 home sales per month.  That means that there are a projected 26.4% less home sales for annualized 2017 than there were in 2005.  In other words, 2005 had a lot more physical inventory (much of which was coming from new homes that were adding to the total housing stock) and required many more buyers to achieve it’s low supply than what we need today.  That being said, there is even more to this story.


Source: Trading Economics

First off, let’s consider population.  The population of the United States was roughly 295 million people in 2005.  Today, it’s roughly 325 million.  It’s increased 10.2% in the years in between, meaning that the difference between the number of home sales in 2005 and 2017 annualized is actually substantially larger when adjusting for the increased population size since a larger population has more people to house.  Side note: some of this has been blunted by the home ownership rate falling from 69% in 2005 to 63.6% today but the number of actual homeowners is still higher today than it was back then even when taking this into account.


Source: Calculated Risk

Next, we go back to my favorite chart from Calculated Risk.  Notice how the primary household formation demographic of 30-39 years old was bottoming out in 2005 but on the rise today?  This suggests to me that there are more potential buyers on the proverbial sidelines today than there were in 2005 since there are more households being formed, meaning that additional supply can be absorbed in a way that it couldn’t back then.  These are likely people who either can’t afford a home or aren’t ready to buy yet.  However, despite the whole “young people will be renters for life” media narrative, most every study done on the subject show that Millennials do indeed want to own homes at some point.


Source: Mortgage Bankers Association

Finally, consider the issue of credit availability.  The chart above, combined with the demographics chart suggest that the 2005 market was tapped out.  Prime household formation demographics were waning and credit availability was off the charts.  Anyone who was a potential home buyer was already in the market since financing was easy and the demographic headwind limited household formation.  Compare that to today when credit is still very difficult to come by on a relative basis and we have a demographic tailwind.  In other words, there is room for credit easing today while it had nowhere to go but tighter in 2005.

Although the months of supply was lower in 2005, the number of homes on the market was much greater and actual units of inventory were expanding at a quicker rate due to booming new home starts.  As such, number of sales required to keep months of inventory suppressed was much higher as well.  2017 is a very different story.  It has been characterized by a relatively low number of sales (especially when adjusting for population growth) and far fewer properties on the market.  As such, a recession would likely have a substantially smaller impact on months of inventory than what happened in 2007/2008 when inventory shot up above 12 months as credit vanished and so did prospective buyers.  I’m not writing any of this to suggest that parts of the housing market aren’t un-affordable and getting worse as interest rates rise.  Instead, I’m merely suggesting that the supply situation is much tighter than the monthly supply metrics suggest and very difficult to compare to the wild days of 2005.


Downswing?  Amazon has at least one Fed official rethinking the idea of widespread technology-induced disinflation.

Upside Surprise? Federal employment and income tax withholding data indicate that wage gains are more substantial that currently being reported.

Hitting Pause?  The Fed is unlikely to raise rates in September as weak personal consumption measures become a cause for concern.


Win / Win: Yes, the online retail boom means more robots but it provides more jobs for humans as well.


Child’s Play: Think that home prices in the US are insane?  Canada’s housing boom makes even the housing bubble of the aughts look tame by comparison.

Don’t Call it a Comeback: Adjustable rate mortgages, long considered a villain of the housing crash, are making a comeback.

Defying Gravity: US home sales are picking up despite low supply.


New Age: Sprawling business empires like GE were supposed to be relics of a bygone era.  However, the conglomerate is still alive and well in 2017 and it looks a lot like Amazon.

Taking Aim: Goldman Sachs is starting to go after the fintech industry startups that have been encroaching on it’s turf.

Survival of the Fittest: As Amazon continues to devour the retail universe, Goldman Sachs takes a look at what can’t or won’t be bought online.

Chart of the Day

That’s expensive, eh?

Source: Bloomberg


Vegan Biological Weapon: I’ve found a bug worse than mosquitoes – one bite from the Lone Star Tick can make you allergic to meat.

I Give Up: Mattel revealed dad bod and man-bun Ken dolls this week because, hipsters.

LOL: I have a headline of the year candidate – Psychic hit by car inside restaurant says he didn’t see it coming.

Sign of the Times: Colleges in China are offering courses on how to go viral on the internet.  And here I thought that American college students were the absolute worst.

Feel Good Story of the Day: Canibal killer finds love in prison.

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

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Landmark Links June 23rd – Don’t Get High on Your Own Supply

Landmark Links June 20th – Imminent Threat


Lead Story…. I was about to start writing this blog post about something else and then this came across my iPhone on Friday: Amazon to Buy Whole Foods in $13.7 Billion Cash Deal.  The news ripped through grocery stocks like tornado and sent them plummeting as reality set in that Amazon is getting into the grocery business and they are getting in now.

Source: Fox News

Regular readers of this blog are probably aware by this point that retail disruption via technology in general and the Amazon effect in particular have long been fascinations of mine.  I’ve been an Amazon Prime subscriber for years and have been using Amazon Fresh – their fledgling grocery delivery service that is only available in a handful of states – for a bit more than a year.  If you have young children and don’t at least have Prime, you might as well be living in the dark ages.  I suspect like many others, my wife and I became slowly hooked on Amazon’s convenience and pricing until suddenly we woke up one day and realized that we couldn’t live without free two day delivery on pretty much anything that we could ever want.  As huge of a player as Amazon is now, this latest acquisition is a game changer.  Today, I’m going to explain why.

For most of my adult life, there has been a prevailing sentiment in the financial world that the legacy players in the grocery business were in trouble.  However, their main threat wasn’t Amazon but Walmart.  The behemoth from Arkansas had devoured smaller retail competitors by opening up big box locations with lower prices and more selection than mom and pop stores could ever offer.  The result was that Walmart effectively killed Main Street USA by offering better selection at a cheaper price.  Walmart got into the grocery  business in the late 1980s and was far and away the dominant force by the early 2000s. However, although Walmart is still the proverbial 800 lb gorilla, they have struggled to gain traction in upscale market segments and have been losing market share in recent years.  Amazon’s acquisition of Whole Foods sets the stage for a battle between the eCommerce giant and Walmart for supremacy in the grocery space.  The two have been encroaching on each other’s turf for a while now with Walmart moving into eCommerce and Amazon into brick and mortar.  This feels a bit like the beginning of the end for a lot of legacy players caught in between the two giants.

Amazon has a couple of advantages upfront.  First off, they have mastered both last mile distribution and branding in a way that Walmart has not.  While upscale consumers look down their noses at Walmart, the same cannot be said of Amazon.  Buying a well known upscale brand like Whole Foods as a way to get into the brick and mortar grocery business is not going to hurt this image.

There were two things about the transaction that really stood out to me:

  1. Amazon rarely buys high profile existing brands.  When they see a space that they want to be in, they typically invest heavily to build it out organically rather than buying a legacy competitor.  The only other time that they did something similar to this was purchasing online shoe retailer Zappos which was a fraction of the size of Whole Foods. In fact, this would be Amazon’s largest acquisition by over $12.7 billion.
  2. The transaction was air-tight. How did this not get leaked?  This will be a merger of two incredibly high profile brands.  Almost the entire hedge fund and investment bank set shops at Whole Foods and subscribes to Prime yet nothing leaked about the two companies even being in conversations.  This is sort of amazing in and of itself

The Amazon/Whole Foods deal dominated the financial news on Friday in a way that I haven’t seen for an acquisition announcement.  However, if you step back and think about it, grocers are far from a sexy business.  They have low margins and inventory that goes bad quickly.  The space is also very competitive and highly site specific – being on the wrong side a the road for home-bound commuters can be death for a grocer.  Also, Whole Foods was struggling.  It had been well documented that the grocer had sliding sales as other competitors entered the organic space that it used to dominate at cheaper price points.  So, why did Amazon pay up for them?  I have a few ideas:

  1. Location is everything.  Whole Foods is well known for their rigorous site selection.  Their +/- 460 stores are in some of the most coveted and upscale locations in the US.  This presents a distribution opportunity for Amazon – a company obsessed with last mile delivery.  They are not only purchasing those 460 stores, they are also purchasing the ability to transform them into distribution hubs for other products that they sell outside of groceries.  This is a great real estate play for Amazon to establish a brick and mortar beachhead in upscale neighborhoods.
  2. Amazon understands volume.  As previously stated, grocers do not typically have great margins.  They do however, drive an incredible amount of foot traffic when compared with other retailers.  Grocers are one of the few retail experiences that we take part in each an every week.  We may not go clothes shopping or go out to eat on a weekly basis but nearly every American goes to the grocery store and does so in high frequency.  This makes a highly trafficked grocery store a potential goldmine for a retailer that relies on high volume like Amazon who already does cross selling and low margin volume retailing better than anyone else.
  3. Name Brand.  Despite recent struggles, Whole Foods is still a very well regarded brand – especially among the affluent demographic that Amazon covets.  Buying an outfit like Whole Foods gives Amazon a foothold in the industry that they can build on without having to re-brand a larger legacy grocer without the name cache of Whole Foods.
  4. Marginal Moves: Despite the recent struggles, Whole Foods has substantially fatter margins than other grocers. Amazon is accustomed to thin margins.  Don’t be surprised to see post-acquisition Whole Foods drop prices in order to drive competitors out of the organic grocery space.

It wouldn’t surprise me if another grocer threw their hat into the ring to increase the price of this acquisition.  It’s highly doubtful that anyone could ultimately beat out Amazon’s bid but there are many competitors who would love to make them pay up as Amazon’s entry into the space becomes a matter of survival.  In fact, Whole Foods is trading above the level of Amazon’s bid in expectation of a bidding war.

We’ve already seen what Amazon and other online retailers have done to the malls despite still being just north of 12% (but quickly rising) of the total non-food services retail market.

The result has been struggling big box stores, soaring vacancies and plunging property values.  The grocers may not be able to avoid this fate but I doubt that they are going to go down without a fight.  By some estimates, Amazon is now going to be one of the five largest grocers within a year of the Whole Foods deal closing.  They are going to be in a position to wreak absolute havoc on the space and weak grocers or owners of poorly positioned grocery anchored centers can’t be sleeping too well tonight.  The ongoing disruption of the mall and big box models have been painful for the retail sector to say the least.  Grocers have now officially been served notice and pharmacies could be next.  The only things that I’m certain of when it comes to retail in the US is that we still have way too much of it and it will look very, very different about 10 years from now.


Pancaked: Yes, the yield curve is still flattening but that does not necessarily mean that it’s going to invert.

Letdown: The temperature of the US economy is running quite a bit cooler than economists had expected.

Low Expectations: Investors appear to be coming to the conclusion that oil prices are going to stay low as OPEC production cuts fail to work.


Make it Rain: China’s real estate investors are now on a $200 billion global spending spree.


Dark Cloud: The continuing hedge fund shakeout means that no one can sell their mansions in previously high-flying Greenwich.

Get Out of Here: The Bay Area’s sky high cost of living is fueling a housing boom in Sacramento.

Out in the Cold: The housing recovery has skipped over poorer regions of the US while values soar along the coasts.


End of the Line: Amazon’s Whole Food acquisition could lead to a bunch of cashiers getting laid off.

Not Even Close: Those who say that tech companies today are in a bubble reminiscent of the late 1990s clearly didn’t live through the tech bubble of the late 90s.

Get In Line: Meet the entrepreneur who started a business by standing in long lines for hire waiting for everything from iPhones to tickets to food.

Chart of the Day

The Agony of Defeat: Cavs fans had an interesting way of dealing with their NBA Finals Loss. (side note: I had a bunch of economic charts that I wanted to use but none was nearly as entertaining as this).

Source: Busted Coverage


If at First You Don’t Succeed: A daredevil who made history in 2003 as the first person to to over Niagara Falls with no protection and survive tried it again last week.  It went poorly.

A Picture is Worth A  Thousand Words: This mugshot of a man who traded meth for a stolen Chrysler looks exactly like what you would think someone who traded meth for a stolen car would look like.

When in Rome: A woman killed an attacking rabid raccoon with her bare hands because, Maine.

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

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Landmark Links June 20th – Imminent Threat

Landmark Links June 16th – Back to the Future

Back to the Future

Lead Story…. Wikipedia defines a Company Town as:

a place where practically all stores and housing are owned by the one company that is also the main employer. Company towns are often planned with a suite of amenities such as stores, churches, schools, markets and recreation facilities.

The best examples of company towns have had high ideals; but many have been regarded as paternalistic or exploitative. Others developed more or less in unplanned fashion, such as Summit Hill, Pennsylvania, one of the oldest, which began as a LC&N Co. mining camp and mine site nine miles from the nearest outside road.

There was a time in American history where company towns were quite normal and that time was back before advent of the 30 year mortgage when most Americans couldn’t afford a home. These towns were typically built and managed by companies in extractive industries (coal, metal mines, lumber, etc) which were often located in rural areas. Building a town with living accommodations and amenities solved the issue of housing a large number of people in regions that had little infrastructure save for the large extraction companies themselves.  It also had the ancillary benefit of giving a company more control over it’s workforce.  Company towns were fairly commonplace in the 1800s but began to disappear in the early 1900s as growing affluence and the rise of the automobile allowed for more mobility.

The notion of the company town has become little more than an entry in the history books.  However, it could be on it’s way back thanks to the nation’s most innovative but also most expensive and chronically under-supplied regions from a housing standpoint: the Bay Area.  The average Alphabet (Google parent company) employee makes somewhere between $80k and $200k per year in annual salary (two important caveats: first this is nationwide – not just the Bay Area which is likely higher, second there are typically benefits and stock compensation on top of this).  However, even Google’s highly paid, highly educated workforce is struggling to find housing in the Bay Area.  Laura Kusisto of the Wall Street Journal wrote a story earlier this week about how the tech giant is looking to a creative solution – modular homes – to address it’s employees housing woes.  From the WSJ (emphasis mine):

The Mountain View, Calif., company is finalizing an order to buy 300 apartment units from Factory OS, a modular-home startup, in a building likely to serve as short-term housing for Google employees, according to executives from both companies.

The expected value of the deal is $25 million to $30 million, according to Rick Holliday, founder and chief executive of Factory OS. It would be the first order for the company.

Modular-building technology, essentially factory-built homes that are pieced together onsite, could help reduce the cost of construction in the Bay Area by 20% to 50%, experts said.

“Anything that can help us to move forward with a greater knowledge of how we can produce housing more effectively is something we’re interested in,” said John Igoe, director of design and construction at Google. “We absolutely are confident that it will work. Hopefully it doesn’t become false bravado.”

To be sure, modular-building companies in places like California and New York have failed over the years, and the approval process can be just as difficult if not more so, because the technology is still developing. And so far, the cost savings haven’t been as big as developers have hoped, though experts predict costs will come down sharply as the industry evolves.

I find it rather interesting that a modern day tech juggernaut is turning back the clock to employer-owned housing to solve a shortage that is now plaguing highly compensated employees.  For those of you who don’t reside in a crazy, supply constrained market things really have gotten this bad.  There is no small irony that some of the best paid employees on earth are going to be relying on a housing arrangement that was initially created as a means to shelter (and potentially take advantage of) poor laborers.

I’ve pointed out several times recently how the construction industry in the US is woefully inefficient and has failed to incorporate modern technology.  Modular construction is one potential solution and this is hopefully a step in the right direction.  I have serious doubts that Google’s company town model is the way to go but I am encouraged to see that a tech giant is investing a substantial amount of money that could help to bring the still-developing technology into the mainstream.


Disconnect: The Federal Reserve raised rates another quarter point this week despite slowing inflation and sluggish economic data, calling the slowdown transitory.  See Also: Either the Federal Reserve is wrong or the bond market is wrong because they both can’t be right.

Disincentives: America is the land opportunity but are we encouraging the wrong kind of entrepreneurship?

Meh: How minimal corporate pricing power, lackluster productivity growth and an aging workforce undercut employers’ ability to increase wages, complicating the Fed’s plans.


Slowing: Commercial real estate owners paid off maturing loans at a slower rate in May as they found it harder to refinance their buildings


This Ends in Tears: Subprime is making a comeback but not many brokers are still around who remember how to put together a subprime loan.  IMO, regulations have over-corrected and there is definitely a place for lending to people with less than stellar credit.  That being said, if you don’t see the problem with the passage below, kindly remove your head from your ass and come back to read the rest later:

“I knew a mortgage was a loan for a house,” said Mr. Boyd, who was recruited by his boss, Jon Maddux, after selling him a Calvin Klein suit at a local outdoor mall. “I came in just a blank slate.”

Before he co-founded Drop Mortgage, the parent company of FundLoans, in 2014, Mr. Maddux ran the website between 2008 and 2012. The site charged homeowners on the brink of foreclosure $995 to learn how to leave their debt behind.

Moving Out: Immigration is not enough to stem the exodus from US cities.  But See: Developers lure buyers to cites, even as prices stall.


Bargain Basement: Amazon is pushing into Walmart’s turf by slashing the price of Prime membership by almost 50% for people on federal welfare.

Rise of the Machines: Human stock investors are going extinct as stock picking by people drops to only 10% of trading volume.

Pop: Last summer, Pokemon go was the fad that peaked hard and then vanished.  This summer, it looks like it’s going to be fidget spinners.

Drama: This story about the Big Short War between Bill Ackman, Dan Loeb and Carl Icahn over Herbalife makes hedge fund titans sound like a bunch of vindictive teenagers.

Chart of the Day


How is This Possible?  A brawl at a Waffle House led to the arrest of five female relatives and it didn’t happen in Florida.

Aspiring Cereal Killer: A northern California man was arrested after shooting another man with a flare gun shell stuffed with Rice Krispies.

I Give Up: A new survey from The Innovation Center for U.S. Dairy found that 48% of respondents aren’t sure where chocolate milk comes from and 7% of respondents think that it only comes from brown cows.  These were adults.

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

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Landmark Links June 16th – Back to the Future

Landmark Links June 13th – Pretty Much Useless


Lead Story…

There are basically three types of economic sentiment indicators:

  1. Mostly Useful – I put the NAHB Homebuilder Survey in this category.  When builders are confident, it typically means that they have purchased lots or are in the market to buy lots.  It’s typically a pretty good gauge of where housing starts are headed.  However, there are some potential issues with methodology that I’ve pointed out before that make it less reliable than it used to be.
  2. Mostly Useful But for the Wrong Reasons – The Investor’s intelligence Survey is a classic example of this.  It’s a survey of financial newsletters that asks how bullish or how bearish they writers are on the stock market.  However, it’s often a contrarian indicator when respondents are extremely bearish or extremely bullish and often foretells a market move against the herd.
  3. Mostly Useless – I consider the housing question in the University of Michigan Consumer Sentiment Survey to be in this category.  Today, I’ll explain why.

Recently, The University of Michigan published it’s Consumer Sentiment Survey for May. It’s a survey of Americans and one of the questions is intended to determine whether or not they feel that it’s a good time to buy or sell a house.  The most recent survey showed a 6-year low among those who think it’s a good time to buy a house, while those who said it was a good time to sell were at a 12-year high.  Cue the inevitable financial media hyperventilating.  Danielle DiMartino Booth of Bloomberg interpreted this survey as confirmation that we are now in a buyers’ market in an article entitled The Housing Moment Investors Dread Is Here (emphasis mine):

The May University of Michigan Consumer Sentiment survey showed a six-year low among those who think it’s a good time to buy a house and a 12-year high among those who say it’s a good time to sell. Disparities of this breadth tend to coincide with break points and that’s just where we’ve landed in the cycle.

The beginning of May officially marked the advent of a buyers’ market, defined simply as sellers outnumbering buyers by a wide enough margin to trigger falling prices. Yes, it’s the moment buyers have been waiting for. It is also the moment private equity investors, those who’ve crowded out natural buyers, have been dreading.

So, if the above is true, one should easily reach the conclusion that home owners are listing their homes in droves, pushing up inventory and keeping a lid on prices.  However, out here in the real world, exactly the opposite is happening: prices are rising and inventory continues to fall.  How can the survey be so wrong?  I would suggest that it’s not a sample size error or people being dishonest about whether or not they want to buy or sell.  Rather, the question of whether or not someone thinks it’s a good time to buy or sell is a highly nuanced.  Kudos to the economists at Fannie Fannie Mae whose National Housing Survey resulted in nearly identical data  as the University of Michigan survey but came to a completely different conclusion due to real world observations: a strong sellers’ market (emphasis mine):

“High home prices have led many consumers to give us the first clear indication we’ve seen in the National Housing Survey’s seven-year history that they think it’s now a seller’s market,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “However, we continue to see a lack of housing supply as many potential sellers are unwilling or unable to put their homes on the market, perhaps due in part to concerns over finding an affordable replacement home. Prospective home buyers are likely to face continued home price increases as long as housing supply remains tight.”

Bingo.  Housing is a unique asset in that it represents a form of shelter, investment and consumption at the same time.  If someone prefers to sell as stock, bond or other investment, there is always a ready alternative: cash.  However, it someone sells a house they then have to find another place to live.  When both the rental and for-sale markets are characterized by a lack of available units, this is problematic.  Sure, the house that you purchased a few years ago may be worth substantially more than it is now.  In a vacuum, it may be a great time to ring the register, sell it and make a profit.  However, in the real world, you now have enter into a competitive market and pay up for another home or rental.  In a place like California this is doubly bad because the tax basis in your new home will likely be higher than it was in your old home.  If you only look at the sentiment data, you would conclude that we are in a buyers’ market but the conditions in the real world are much, much different.

The same concept applies in a bad market.  From 2007 – 2013, almost no one thought it was a good idea to sell a home, according to the index (see chart of the day).  It should stand to reason then that inventory would be low.  However, the market was flooded with inventory because people didn’t have a choice and were forced to sell due to personal circumstances, as shown in the chart below.  Again, the sentiment data was basically useless.

When looking at any sentiment index or survey it’s important to remember that life doesn’t happen in a vacuum.  The questions that surveys attempt to answer are often multi-layered and far more complex that what is actually being asked.  Models and indexes tend to show the world as a place where everything is black and white.  The real world is a far more nuanced and complex place.  Sometimes what is going on in real life is the exact opposite of what the model or survey suggests.


Because I Said So: The Fed is likely to raise rates this month despite falling inflation primarily because they already said that they would do so.  So much for flexibility.

Diminishing Returns: With low yields and rich equity valuations, the biggest problem that investors today face is the prospect of low future returns.

Not What It Seems: American household debt has risen to record levels.  On the surface, this looks bad.  However, income has risen even more.


Dragged Down: America’s dying malls are weighing down retailers as they continue to slide.

Tough Going: It’s really, really difficult to raise capital if you’re a new real estate fund manager right now.


Flipper: Home flipping loan volume is now at a 9-year high as developers cash in on low inventory.

Not How It’s Supposed to Work: Oakland should be building 870 affordable units a year.  Last year they only built 40 resulting in hundreds of senior citizens waiting in line for a shot at the subsidized housing wait list last week.  Just an unfortunate reminder that there are real life consequences to not building enough housing.


I Would Actually Try This: Despite my intense dislike of vegans and all of the crap that they spew I will try the Impossible Burger once it’s available.

If You Don’t Have Anything Nice to Say: Sam Panopoulos, the inventor of the Hawaiian Pizza, (who was Canadian and of Greek ancestry, by the way) a monstrous creation made with pineapple rather than decent toppings passed away last week.  So, if you like terrible toppings on your pizza, go get a slice in honor of him.

RIP: Adam West passed away this weekend.  Apparently he was Batman in the streets and Wilt Chamberlain in the sheets.

Unintended Consequences: Ultra-low rates fuel booming business for guarding cash in Japan.

Chart of the Day

Source: The Wall Street Journal


The Crappiest Place on Earth: A flock of geese shit all over a crowd of 17 people at Disneyland last week, resulting in a hazmat response when it was initially reported that someone had thrown human feces.  Welcome to 2017.

Bad Kitty: A bobcat broke into a New Jersey house and trapped a mother and her two young children in a bathroom for an hour until police arrived. This is how it begins….

When You Gotta Eat: A Texas woman called 911 to complain that a fast food restaurant took too long to get delivered at her local McDonalds.  She went home hungry.

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

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Landmark Links June 13th – Pretty Much Useless

Landmark Links June 9 – Headed in the Wrong Direction

Wrong Way1

Lead Story…  Regular readers of this blog have probably noticed that I’ve been geeking out over the past couple of weeks on articles about how inefficient the American construction industry has become .  I recently read an opinion piece by Bloomberg’s Noah Smith that looked for reasons why this is so (emphasis mine):

There is reason to suspect that high U.S. costs are part of a deeper problem. For example, construction seems to take a lot longer in the U.S. than in other countries. In China, a 30-story building can be completed in only 15 days. In Japan, giant sinkholes get fully repaired in one week. Even in the U.S. of a century ago, construction was pretty fast — the Empire State Building went up in 410 days.

Yet today, it takes the U.S. many years to spend the money that Congress allocates for infrastructure. New buildings seem to linger half-built for months or years, with construction workers often nowhere to be found. Subways can take decades. Even in the private sector, there are problems — productivity in the homebuilding sector has fallen in recent decades.

That suggests that U.S. costs are high due to general inefficiency — inefficient project management, an inefficient government contracting process, and inefficient regulation. It suggests that construction, like health care or asset management or education, is an area where Americans have simply ponied up more and more cash over the years while ignoring the fact that they were getting less and less for their money. To fix the problems choking U.S. construction, reformers are going to have to go through the system and rip out the inefficiencies root and branch.

First off, I have to confess that I had no idea that the Empire State Building was finished that quickly (I’m not going to comment on China because 15 days seems sketchy and China building standards are, shall we say loose).  By way of comparison, the Freedom Tower in lower Manhattan, which isn’t that much larger than the Empire State Building took a whopping 7 years to complete once ground was broken and technology today is far, far beyond where it was back in 1930.  Also, the quality of workmanship in the Empire State Building is quite impressive – as anyone who has been there can attest, it’s not as if they were cutting corners.  To take this a step further, it takes over a year (nearly the same amount of time to build a 100 + story tower in the 1930s) to build a 3 story custom house in my hometown of Newport Beach.  Side note: I only wish that statement was hyperbole.  If this isn’t indicative of the structural inefficiencies Smith mentioned in the passage above, I don’t know what is.  Smith concluded:

The U.S. construction sector is sick, and the disease must be diagnosed. Otherwise, infrastructure debates will continue to seesaw between those who are willing to spend too much and those who are willing to let the system crumble because it costs too much to repair.

I wholeheartedly agree.  We can’t solve a problem that we don’t even fully understand.  I suspect that the culprit here is incremental changes to the way that we develop and construct over time that have been championed by strong constituencies (corporations, labor unions, utilities, etc) and eventually became the norm.  The inefficiencies have now calcified to the point that it’s nearly impossible for incremental reforms to make a difference.  Constituencies are now so well-entrenched that pretty much any effort to truly diagnose the problem gets written off as being agenda driven.  That needs to stop but probably won’t any time soon.


Depressing: Drug related deaths are soaring in America, shedding light on both the opioid epidemic and the reason that so many people remain out of work in a multi-year recovery.

Trouble Ahead?  After bingeing on credit for a half decade, U.S. consumers may finally be feeling the beginning of the hangover.

The World’s $100 Trillion Dollar Question: Why is inflation still so low across the globe?  Hint: look at demographics in the world’s leading economies.  See Also: Adults in wealthy nations do not expect their children to earn more than they do.


This Seems Obvious: New data shows that performance on construction loans is much more sensitive to the economic cycle than the performance for commercial real estate debt backed by income-producing properties.

It’s All About Who You Know: Banking relationships are even more important as the multifamily market tightens according to PNC.


Enough Already: Repeat after me if you have any knowledge of basic laws of supply and demand – luxury development is not to blame for San Francisco’s (or anywhere else’s) affordability crisis.


Hipsters Gonna Hipster: Millennials are increasingly taking relatively low-paying old-timey jobs such as butchers, barbers and bartenders primarily because 1) They are now considered to be cool again; and 2) Their parents are still subsiding them.

Staying Power: After an epic, record setting winter, there is still 8 feet of snow left in parts of the Sierra Nevada Mountains in June.  Looks like Mammoth is going to stay open daily into August.

What A Mess: Post-bankruptcy Puerto Rico is a complete dumpster fire.

Chart of the Day


You Might Have a Problem If: The emergence of the ‘pornosexual‘: internet users who shun sex with real people.  And then we wonder why population growth sucks in first world countries.

Mother of the Year: A mother let a snake bite her daughter while posting a live feed to Facebook because, Florida.

Extra Toppings: An Alabama cop found a metal bolt in his Arby’s roast beef sandwich after taking a bite.  The sandwich was promptly taken to a lab for testing where it was determined that it was the healthiest part of the meal.

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

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Landmark Links June 9 – Headed in the Wrong Direction

Landmark Links June 6th – Outdated


Lead Story…. One constant throughout human history has been the increasing reliance on technological innovation in order to drive productivity.  From agriculture to manufacturing to software and technology, machines have gradually taken over jobs that people used to do as a means of adding efficiency and scale.  This has generally increased quality of living but has also often resulted in job losses – at least initially.  As a result, it has led to no small amount of push back starting with the Luddites smashing mills in early 1800s England out of fear that said machines would render human labor obsolete.  This concern continues today over such technologies as driverless cars and trucks, automated food service and eCommerce delivery that increasingly utilize robots rather than human beings.  However, there is one industry that has proven largely resistant to the robotic revolution: construction.  Daniel Gross of Strategy + Business posted an article last week that pondered why (emphasis mine):

Home construction is one of America’s bedrock industries. After being laid low during the housing bust and the Great Recession, America’s homebuilding complex is back on its feet. Housing starts have been rising (pdf). Yet homebuilders complain that a shortage of workers is impairing their ability to keep building. The usual solution for industries facing labor shortages is to apply technology — reengineer business processes so that a home can be built with less human labor. But the reality is that in the U.S., at least, home construction seems to be remarkably resistant to technological improvements. Anybody who has ever conducted a frustratingly slow remodeling project can sense this intuitively. But there is data to support it.

So, why is construction so resistant to advances in technology when other industries adopt it so seamlessly? According to Gross, the highly unique nature of most construction in the US has a lot to do with it (emphasis mine):

Well, there is something unique about housing. Typically, home construction activity is custom work — remodeling, renovation, teardowns replaced by a single home, maybe a few homes built on a cul-de-sac. And it is difficult to gain economies of scale — or to automate processes — when every job, or close to every job, is unique. If every T-shirt were made to order — different sizes, styles, cuts, fabric — it would be very hard to get a $3 T-shirt. Think about the sheer, overwhelming amount of choice people have when building a home: gravel or asphalt in the driveway, 500 different shingle styles to choose from, gas or electric heating, landscaping, appliances, bathrooms, and windows. To be sure, there are plenty of planned developments and apartment buildings built in the U.S. But even here there is a great variation from project to project, and within projects.

In addition, there are important differences between home manufacturing and, say, car or appliance manufacturing. Factories create their own artificial environments that are conducive to the task at hand: The whole structure is designed for the optimal flow of people and materials, and these factories can run around the clock stamping out hundreds, thousands, or millions of units of the exact same product. As a result, operators can systematically experiment with and apply technology, tweaks, and improvements to make the process run more efficiently. Voila! Productivity gains!

But with housing, by definition, the manufacturer often has very little control over the environment in which it operates. And so it has to operate slowly and carefully. Workers may be remodeling a kitchen while the family is living there — which means they have to tread lightly. Builders often put up a new house on a street filled with homes, which means they have to be careful about not disturbing the neighbors, or messing up the infrastructure. In many areas, you can’t do construction work on the weekends, at night, or in the early morning hours. Bad weather also interferes.

Because sites are typically small, construction has to take place in discrete, linear stages. Here, the industry’s historic mode of operating via small, specialized subcontractors also plays a role in limiting productivity gains. You call in one team to excavate the foundation. Then, when they’re finished, the concrete pourers arrive. Next, the framers do their thing. Later come the roofers, the plumbers, and the electricians. Each has to work sequentially to a large degree — so a single delay with a single trade, or poor coordination between trades, can throw the schedule off.

Of course, it’s hard to reap significant gains in productivity if you don’t use modern technology to its fullest. And, here, again, home construction seems rooted in an analog phase. Workers show up to job sites with specs and blueprints printed out on paper. In my experience, the preferred mode of communication on construction sites is yelling or talking on walkie-talkies or the phone. Although some mechanized equipment is used, and although some builders are experimenting with prefabricated efforts, a significant part of the work is done on-site and with human hands.

The irony is that this all seems to work quite well for the construction industry. And that may explain some of the complacency homebuilders seem to demonstrate when it comes to automation and efficiency. When the market is generally expanding, as it is now, and homebuilders are able to make profits by doing business as usual, there isn’t much impetus for change — especially when they can’t be disrupted by cheaper, more efficient foreign competition. Despite the complaints about worker shortages and the lack of productivity growth, the National Association of Home Builders sentiment index is near a record high.

It sure doesn’t look like robots will be taking construction jobs any time soon.


Can’t Stop Won’t Stop: Despite a ton of angst about the economy, there is a very solid case that we won’t see a recession until at least 2020.

Endless Supply: Deep Sea oil drilling is getting less expensive.  Add this to OPEC’s growing list of woes.  See Also: This is what the demise of oil looks like.

Yield Curve Update: It’s still flattening out even as the Fed (likely) continues to increase short term rates.


Put Your Money Where Your Mouth Is: Several prominent mayors and governors have been very vocal in their opposition to President Trump pulling the US out of the Paris Climate Change Agreement.  However, there is a very easy way to accomplish their climate goals even without Washington on board: allow for more high density housing in urban cores by allowing more density and streamlining approvals.  Of course, it is highly unlikely to happen because, NIMBYs.  See Also: San Francisco’s Sierra Club is a bastion of faux environmentalism.

Stuck in the Mud: Why the sales side of the real estate market has been so resistant to cost-saving technology.…and why that’s ripe for a change.  See Also: Realtors are losing their minds over Zillow’s new Instant Offers feature claiming that it will hurt home owners.  Color me skeptical.


The Guru: This LA Times profile of John Burns is excellent.

Stop Digging: From harassment lawsuits to hemorrhaging cash to several bouts of terrible PR, Uber can’t seem to get out of it’s own way.

Chart of the Day

Refinance origination volume was off 45% from Q4 2016 to Q1 2017

Source: Black Knight via Calculated Risk


Amazin’: A creepy, dead-eyed mascot with a giant baseball for a head flipped off fans at a baseball game because, the Mets.

This Made My Year: Watch morbidly obese failed football coach twins Rex and Rob Ryan get caught on film fighting random townies in a Nashville Bar.  This is a perfect illustration of why these two slobs can’t get a job in the NFL anymore.

Seems Legit: An Australian cosmetics company is now selling a type of snake venom as an alternative to Botox.

Pork Fried Battery: A woman was arrested for assaulting her ex-boyfriend with a plate of pork fried rice because, Florida.

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

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Landmark Links June 6th – Outdated