Landmark Links February 20th – Bogged Down


Lead Story…. In the midst of the Great Recession, delinquencies spiked on all types of consumer debt as unemployment rose and wages stagnated or fell.  Then, starting in roughly 2011 delinquencies began to fall on mortgages, car loans and credit card debt as the economy continued its slow but steady recovery.  The improvement in consumer credit default rates happened across the board with one very notable exception: student loans.  The United States economy is trapped between a rock and a hard place when it comes to student debt.  On one hand, the return on investment for a college education is still excellent when compared to only having a high school degree.  On the other, the ballooning amount of debt is an economic drag that is only getting worse and will continue to act as an impediment to both consumption and investment for those encumbered with it.  Josh Mitchell of the WSJ wrote an article last week entitled The Rise of the Jumbo Student Loan which contained some very disturbing facts about the growth in high balance loans (emphasis mine):

During the housing boom of the 2000s, jumbo mortgages with very large balances became a flashpoint for a brewing crisis. Now, researchers are zeroing in on a related crack but in the student debt market: very large student loans with balances exceeding $50,000.

A study released Friday by the Brookings Institution finds that most borrowers who left school owing at least $50,000 in student loans in 2010 had failed to pay down any of their debt four years later. Instead, their balances had on average risen by 5% as interest accrued on their debt.

As of 2014 there were about 5 million borrowers with such large loan balances, out of 40 million Americans total with student debt.  Large-balance borrowers represented 17% of student borrowers leaving college or grad school in 2014, up from 2% of all borrowers in 1990 after adjusting for inflation. Large-balance borrowers now owe 58% of the nation’s $1.4 trillion in outstanding student debt.

The most disturbing part about these debts increasingly not getting paid down – in fact principal balances are rising thanks to interest accrual – is that it is happening during a time of economic growth.  I hate to think what this would look like if we were in a recession.  Perhaps the second most disturbing part is that this isn’t just an issue with students at low-end for-profit colleges or those with bullshit majors that result in employment as a highly educated barista.  In fact, the problem is particularly bad among grad school students and alums.  Again, from the WSJ (emphasis mine):

The problem is particularly acute among borrowers from graduate schools, who don’t face the kinds of federal loan limits faced by undergraduate students. Half of today’s big balance borrowers attended graduate school. The other half went to college only or are parents who helped pay for their children’s education.

Grad school borrowers tend to be among the best at paying off student debt because they typically earn more than those with lesser degrees. But the rising balances unearthed in the latest study suggest that pattern might be changing.

Overall across the U.S., one-third of borrowers who left grad school in 2009 hadn’t paid down any of their debt after five years, compared to just over half of undergraduate students who hadn’t, federal data show.

Mr. Yannelis and Mr. Looney, a former Treasury Department official under President Barack Obama, built the research out of exclusive access to federal student-loan and tax data.

The findings on graduate schools are particularly noteworthy because the government offers little information on the loan performance of grad students, who account for about 14% of students at universities but nearly 40% of the $1.4 trillion in outstanding student debt.

Hot financial topics of late are growth and inflation and based on current economic data, rightfully so.  However, I have to ask: is this sort of trend in the midst of a prolonged economic recovery really going to allow for strong economic growth in the long run?  Every dollar spent on student debt is a dollar that does not go back into the economy to fuel consumption and investment.  That’s fine if the rising debt balances result in higher incomes which in turn go to retire the loans more quickly.  However, that clearly is not what’s happening (higher incomes – yes, repayment of debt – no) and the long term consequences of having an indebted generation that can’t get out from under it’s obligations to lead normal adult lives are bleak.


Bad Correlation: The US economy is soaring but the deficit is as well and that is a bad combinationSee Also: The long term cost of the tax overhaul has bond investors spookedAnd: Rising yields combined with a falling dollar have Japanese fixed income investors fleeing US Treasuries.

Up, Up and Away: Some level of inflation is a natural consequence of a strong and growing economy, but too much of it can lead to a bust.

In the Long Run: As Boomers continue to age, it’s going to be difficult to maintain even 2% growth let alone today’s lofty targets.


Office Space: Slowing construction starts and strong absorption have resulted in the lowest US office vacancy rate in a decade.

Takeover? WeWork started out as a co-working company.  However, it’s eventual ambitions are far, far larger.


Under Pressure: Low priced homes are still rising in value faster than high priced homes and many signs point to the shortage driving this dynamic intensifying (h/t Aman Lal)  See Also: The barbell of Millennial first-time buyers and Boomer move-down buyers is crushing the supply of affordable homes.

Good News: US home construction rose 9.7% in January and builders showed signs that they are planning to ramp up construction later this year as tax reform will positively impact the bottom line.


Massive Game of Telephone: The Dutch tulip mania is often held up as the most absurd bubble of all time.  However, a bit of new research indicates that much of what we think we know about it may be a tremendous exaggeration. from sources that are dubious at best if not outright satirical.

Bigger Idiots: Blockchain may very well be the way of the future.  However, many speculators are buying into ICOs backed by questionable technology that they do not understand in the hope that someone else will pay more down the road.

Chart of the Day

Shrug it Off – builders don’t appear to be affected by higher mortgage rates yet.


Hot Boxing: A flight from Dubai to Amsterdam made an emergency stop in Vienna when an elderly, obese man refused to stop farting, eventually causing a brawl.  (h/t Steve Sims)

Frivolous: A woman who claims to have seen Bigfoot is suing the government to recognize Sasquatch as a species because California.

Juiced: An Olympic curling competitor (yes, curling) was busted for performance enhancing drugs because Russia.

Ironic: A meth trafficker in Michigan who was busted wearing a D.A.R.E t-shirt is getting a minimum of 15-years in prison and the mug shot is incredible.

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

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Landmark Links February 20th – Bogged Down

Landmark Links February 16th – Getting High with Low Supply


Lead Story…  Back when I first made the jump from commercial real estate finance to residential development finance, I had a view of the way that the housing market worked that was straight out of an economics textbook: namely that interest rates and housing prices have a predictable and consistent economic relationship.  In particular, when rates fall and wages stagnate or do not go down, prices should rise and when rates rise quicker than wage growth, prices should fall.  I was the guy who always scoffed at those who made a variation of the statement “it’s a good time to buy while rates are still low,” believing that it was an unsophisticated argument.  Of course prices would fall to offset the increase in interest rates and home affordability as measured by monthly payment would remain relatively constant.  Over the years, I’ve come to question my textbook economic logic, primarily because it never seems to actually work out that way in the real world.

The first time that I became acutely aware of the complicated relationship between rates and home prices was in the mid 2000s when the Federal Reserve began relentlessly raising rates in 2004, yet the housing market kept soaring through 2006.  However, much of this could be written off to the fact that:

  1. Longer term rates didn’t go up much and the yield curve actually inverted; and
  2. Home owners and buyers increasingly took out risky pick-a-payment loans to keep (temporary) monthly payments un-naturally low as the market surged.  Once the market stopped surging and the teaser rates adjusted, the resulting defaults, coupled with robust new construction flooded the market with inventory as financing dried up

Then you have our current cycle where rates have been rising (albeit in a choppy fashion) since July 2016, yet home prices have continued to rise as well.  Why? Because, generally speaking, inventory has been falling as rates have risen.  Rick Palacios, Jr of John Burns Real Estate Consulting covered this in a research note last week entitled Rising Rates Should Have Minimal Impact on Housing.  Many of you may read this and think that it’s Pollyanna realtor talk.  However, anyone familiar with JBREC would acknowledge that they are anything but perma-bulls.  From JBREC (emphasis mine):

Mortgage rates have risen 1.0% or more ten times in the last 43 years, with little impact on home sales and prices when the economy was also strong. Here is the paper we shared with our clients a few years ago. Historically, rising confidence, solid job growth, and higher wages have more than offset reduced demand for housing resulting from higher mortgage rates. When rates rise during a weak economy, home sales and prices get crushed.

Today’s economic backdrop clearly supports continued home buying demand. Confidence among consumers and businesses continues to hit multiyear highs. Job and wage growth remains solid, with an increasing number of workers rejoining the workforce.

Home builders agree. In our survey of 300+ home builders this month, 85% said sales would decline less than 10% if rates were to rise all the way to 5.0%. 29% (generally luxury and active adult builders whose buyers are quite affluent) don’t believe sales will fall at all.

Builder stocks typically overreact very strongly to rising and falling rates, so don’t follow builder stock prices to assume what will happen to new home sales and pricing.

For perspective, mortgages rates have increased from 3.78% in September 2017 to 4.32% today, equating to a 6.7% increase in one’s mortgage payment. Rates rose even more last spring, jumping from 3.41% in July 2016 to 4.30% in March 2017 (11.5% spike in mortgage payment). Despite rising rates, housing had its best spring since 2013 last year, with a strengthening economic backdrop more than offsetting reduced demand from higher rates. All signals point to a similar scenario for builders as we kickoff spring 2018, with rising rates unlikely to ruin housing’s recovery.

Note what the author is saying above: all rate increase cycles are NOT created equal.  If rates are rising because of good economic growth, the impact on housing demand is historically relatively benign.  However, if rates increase due to an external shock in bad economic conditions, look out below.  One of the major reasons that there is such a difference in rate increase scenario outcomes is the impact of inventory.  In a weak economy with flat or falling real wages and rising unemployment, home owners may not have a choice as to whether or not they sell since their economic situation could dictate that decision.  If such an economy is bad enough, it can lead to an increase in inventory at the worst possible time – when rates are high – eventually leading to lower prices.  However, in a good economy, home owners are less likely to sell a home if rates increase substantially.  Doing so would result in an increased cost of living, even when making a lateral move.  As such, more resale inventory is kept off of the market at the margin.  In an already tight market with suppressed new home construction like we have today, it could actually contribute to exacerbating an inventory shortage, leading to higher prices.


Boom and Bust: California has accounted for about 20% of the nation’s economic growth since 2010 but an over-reliance on high income earners to fund the state budget coupled with a dramatically underfunded pension liability could spell trouble in the next recession.

Punching Above It’s Weight: How Pittsburgh promoted its leading university, robotics and the arts to attract younger educated workers and spark a Rust Belt rebound.

Last Best Hope: In order for Millennials to do as well as their parents, they desperately need a bear market….and the nerve to invest after the bust.


A Tale of Two Malls: Malls are dying a slow and painful death in America but are booming in Mexico thanks to a growing middle class that is leaving open air markets and gravitating toward more formal retail.

Paradigm Shift: From more efficient small-scale distribution and delivery to easier commutes, a driver-less future could change everything you know about real estate.


Don’t Call it a Comeback: Two thirds of all US housing markets are now at record high home prices.


Over It’s Skiis: HNA was a 3rd tier airline in China before cozy government ties spurred banks to enable it to become a massive and poorly run conglomerate staring into the financial abyss.  If Beijing wants to make the Chinese economy more productive and efficient, it’s time to let HNA fail.

Under the Radar: Despite months of warnings to pay their taxes on cryptocurrency profits, American Bitcoin investors clearly aren’t in a hurry to tell Uncle Sam what they owe.

What Not to Do: The downfall of the Vanderbilt family is a fascinating look at all the things that people can do to squander a massive fortune.

Chart of the Day

Things that we need are getting more expensive.  Things we don’t need are getting less expensive.


Pizza, Pizza: An Indianapolis couple found mouse droppings in their pizza, leading to a health inspector shut down because, Little Caesar’s.

Stand Off: A British man who is suspected of concealing drugs on himself before his arrest has refused to poop for 24 straight days (a British inmate record) in an effort not to release incriminating evidence.  I could have ended this in 20 minutes with a bag full of Taco Bell takeout.

Kingpin: A wheelchair-bound 75-year old woman from Tennessee who looks like she belongs in a nursing home was busted for running an opioid distribution supermarket from her residence.

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

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Landmark Links February 16th – Getting High with Low Supply

Landmark Links February 13th – Lame Disguise


Lead Story…. There are no shortage of places in the United States that could be considered different, eclectic, or just plain weird.  However, when it comes to having a bat-shit crazy populace, Berkeley is clearly in a class all it’s own.  Berkeley, of course is as really far to the left politically but one could write that about plenty of cities.  What makes Berkeley unique in this regard is that certain factions there that border on anarchism, making the place a magnet for all sorts of controversy.  There is a reason that anytime a right wing troll wants exposure for their “brand,” he or she schedules a speaking engagement at UC Berkeley, knowing full well that the ensuing riot will garner national press attention, spark a First Amendment debates on cable news and eventually result in more book sales, higher speaking fees or some other self-serving outcome.

Berkeley (both the city and university) has become even more of a cultural hot button since the last presidential election and most stories about California seceding from the rest of the US tend to originate there, or at least gravitate towards it.  That brings us to last week’s news that Berkeley has decided that they need their own cryptocurrency in order to gain financial independence from the Federal government.  From Melia Robinson on Business Insider (emphasis mine):

The City of Berkeley, one of the epicenters of liberal California, is considering a turn to cryptocurrency to reduce its reliance on federal funding in the Trump administration.

Berkeley would become the first city in the US to hold an initial coin offering (ICO) — a type of crowdfunding campaign that’s become popular in the past year. The city would raise funds by selling digital assets called “tokens” that are backed by municipal bonds, a type of security issued by the local government. Buyers might spend these tokens at shops and restaurants or even pay rent at apartment rentals that participate in Berkeley’s cryptocurrency ecosystem.

The goal is to raise funding for vital city projects like affordable housing and support services for the city’s growing homeless population. Someday, homeless people might receive tokens to buy goods and services from local businesses that accept the currency, according to city leaders.

It’s all talk for now, but according to Berkeley City Council Member Ben Bartlett, the creation of the city’s own financing mechanism is a key part of building resiliency in the Trump era.

“Berkeley is the center of the resistance, and for the resistance to work, it must have a coin,” Bartlett told Business Insider.

Bartlett has formed a committee with Berkeley Mayor Jesse Arreguín, financial technology startup Neighborly, and the UC Berkeley Blockchain Lab to hatch a strategy for the ICO. Neighborly’s cofounder and COO Kiran Jain said the city could launch its ICO, which it’s calling an “initial community offering,” by mid-May if the necessary approvals come through.

Wow!  What a revolutionary concept.  Sell a security (I know some of you may disagree but, especially in this case the currency is acting as a security, as you’ll see below) and use the proceeds to fund public work projects.  It’s amazing that no one has ever thought of this until now!  Oh, wait.  They have.  It’s called a municipal bond and it’s a capital raising tool that has been used by cities since at least the early 1800s  In fact, what Berkeley is proposing amounts to little more than putting bonds on the blockchain because, apparently there was some issue that no one is aware of with traditional municipal bond financing arrangements. It’s little more than packaging a municipal bond in a crypto wrapper.  Berkeley officials admit that this is what they are up to later on in the article.  More from Business Insider (emphasis mine):

Jain said the “initial community offering” will differ from traditional initial coin offerings.

In the same way the dollar was once backed by gold, a token from Berkeley will be backed by a security called a municipal bond.

When governments need money to finance projects that serve the public good, they raise funding by issuing municipal bonds. Cities, states, and counties use the money to build schools, highways, and affordable housing, and they pay back bondholders with interest over time.

The city of Berkeley is effectively leveraging the blockchain — the technology at the heart of bitcoin and other cryptocurrencies — to sell municipal bonds. Bonds don’t offer enticing returns compared to stocks and other investments, but the city hopes a tokenized version might appeal to residents who care about building affordable housing and helping the homeless.

“Unlike most of the ICOs which deliver coins for a future value or service, these coins will represent a real security issued for a specific purpose,” Jain said.

The exploratory committe behind the ICO will announce the full deal terms this spring.

In addition to the above, there are two other obvious problems with this approach:

  1. Berkeley has as strong of a NIMBY contingent as any place in the US and has shown little to no willingness to build affordable housing for years.  If you think that this will change because the funding mechanism is a municipal bond that is being called a cryptocurrency, then I have some oceanfront property in Las Vegas to sell you.
  2. Since this scheme is really just a municipal bond, the proceeds will have to be converted into dollars or at least have an established exchange rate in order to be used as a medium of exchange to pay for affordable housing.  As such, nothing being proposed here allows Berkeley any more independence from the Federal government when it comes to funding than simply issuing municipal bonds (like every other city in the US).

If I start calling one of my legs an arm, how many arms do I have?  The correct answer is two but if you think it’s three, perhaps you are a good candidate to buy some Berkeley crypto coin.  If Berkeley wants to issues bonds on the blockchain, that’s fine.  However, calling them something that they are not and then acting like they are somehow a revolutionary act of resistance against the Federal government is just lame.


Coming Next: Why wage growth (and interest rates) could be about to spikeSee Also: US Budget Director warns that interest rates may spike on widening deficit.

Correlation: Bonds are suddenly trading in a very high correlation to stocks and not providing the downside protection that they typically do during corrections.

Re-Alignment: Tax cuts could change the electoral map by spurring migration to blue cities in red states.


Backlash: There is growing push-back against the insane giveaways that cities are offering Amazon for their 2nd headquarters.

Higher Ground: Malls that cater to rich people are doing just fine.


Winds of Change: California’s transit density bill would result in a radical statewide upzone that would change housing in the state for the better.

Funny Math Beverly Hills was one of only 13 California jurisdictions that met its affordable housing goals according a report from the Office of Housing and Community Development.  So how did one of the most expensive places to live on earth pull this off?  It turns out that the incredibly affluent city set their own housing element bar so low – only having to build 3 affordable units in the entire city – that it was impossible to miss.

Nowhere to Go But Up: From property banks to reclaimed land, distressed Detroit has become the ultimate incubator for housing policy.


Swimming Naked: There is an old Warren Buffett saying that you find out who has been swimming naked when the tide goes out.  The tide has been receding on cryptocurrencies of late and it turns out that plenty of questionable participants have been swimming sans clothing.

Taken Out: How delivery apps are making life much more difficult for restaurants.

The Breakup: The capitalist case for breaking up Amazon, Apple, Facebook and Google.

Chart of the Day

A negative yield curve is an incredibly accurate predictor of recessions.  The good news is that it has started to widen again of late.


We’ve Got Spirit: Garbage discount airline Spirit finds itself in hot water after a rep  told a college student that she couldn’t bring her “comfort hamster” Pebbles on a flight.  When the student asked what she should do with the rodent, the Spirit rep (allegedly) told her to flush it down the toilet, which the student eventually did, leading to this gem of a quote:

“She was scared. I was scared. It was horrifying trying to put her in the toilet,” Aldecosea said. “I sat there for a good 10 minutes crying in the stall.”

Still not sure who the hell is comforted by a hamster.  Anyway, RIP Pebbles, and only fly Spirit if you are both cheap and a masochist.

Boys to Men: A young boy got stuck inside a claw vending machine because, Florida.  Remember, Florida Man was once Florida Boy.

Tastes Like Chicken: A poacher was mauled to death and eaten by the pride of lions he was hunting in a South African game reserve because karma is delicious sometimes. (h/t Steve Sims)

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

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Landmark Links February 13th – Lame Disguise

Landmark Links February 9th – Round We Go Part II


Lead Story…  Really short on time this week so didn’t have a whole lot of time to blog but I did find an interesting tidbit that I wanted to share. A couple of weeks ago, in a post entitled Round We Go, I discussed how a correction in a large capital market (real estate, stocks, bonds, etc) could lead to a recession since capital gains are fueling much of the underlying growth and investment in today’s economy.  In other words, the economy may look great on the surface but we could still be subject to a reduction in hiring and investment if capital gains and asset appreciation were to reverse course.  Since that post, the stock market has been in a volatile tailspin and bond yields have surged.  Greg Ip of the Wall Street Journal wrote a story this week that used some data from Goldman Sachs to show just how much of US growth in 2017 was based upon inflating asset prices (in this case the stock market).  From the Wall Street Journal (emphasis mine):

Even before he became Fed chairman this past Monday, Jerome Powell had observed how recent expansions ended not with inflation but collapsing asset bubbles. And they don’t need to bring on a financial crisis to do damage. Goldman Sachs estimates that higher stock prices added 0.6 percentage point to U.S. growth last year via the wealth effect—households spending their stock winnings. By Goldman’s calculation, a 20% hit to prices this year could knock 1.1 points off growth. That would more than wipe out the stimulative effect of the tax cut.

Again, consider that this is only talk about growth generated by higher stock prices – it does not include housing, commercial real estate or the cheaper capital cost from rising bond prices and declining yields.  The point that I’m trying to make is that the economy is arguably more fragile than it appears currently due to a reliance on capital appreciation to fuel growth.  I have no clue if the current stock and bond market volatility will be the eventual economic turning point in this cycle but it bears watching as economic fundamentals (employment rate, wage growth, GDP, etc) still look strong but are perhaps more vulnerable to a market downturn than typically acknowledged.


On the Rise: The prime working-age population made a new peak for the first time since 2007 in January.

Keep Truckin’: Buoyed by strong demand and flush with cash from recent tax overhaul, trucking companies accelerating plans to replace or expand fleets and ordered the most big rigs of any time in the past 12 years in January.

No Silver Lining: The median young family has almost zero net worth.


Funny Money: Google is buying the iconic Chelsea Market building in NYC for over $2 billion because, why not.

Your Daily Productivity Killer: This Bloomberg video game where you buy a mall and have to make leasing decisions to keep it from going under (all while hunting rats and cyber punks) is strangely addictive.  Bonus points for the kitschy 80s graphics.  Also – spoiler alert – there’s a great Jeff Bezos graphic at the end when you inevitably lose.


Residual Damage?  The housing market is not in a bubble.  However, continuing stock market volatility could cause the market to cool off.

Crickets: Portland’s bet on forcing developers to build affordable housing is getting awful results.  As usual, inclusionary housing provisions = less housing built.


Who Blinks First? Bitcoin’s recent price plunge means that mining the virtual currency is no longer profitable and the only way for it to become so again – excluding higher prices – is to have less miners.  However, existing miners all seem to want to be the proverbial “last man standing” and are soldiering on despite the losses in what has turned into a giant game of money-losing chicken.

Backstory: Why the volatility apocalypse on Wall Street earlier this week was not exactly what it seemed and how Credit Suisse likely made a lot of money despite being the underwriter of a failed product.

This Will End In Tears: Millennials are afraid that stocks are too risky so they are investing in Bitcoin and other cryptocurrencies instead.

Just Another Brick in the Wall: Tack on a massive most massively underfunded pension plan, of any S&P 500 company to GE’s ongoing woes.

Chart of the Day

Student debt forgiveness is becoming a very expensive problem for the federal government with no end in sight.


Eye of the Tiger: Scottish police were in a standoff with what they thought was a real tiger for an hour before they discovered that it was just a massive stuffed animal.

Chicken or the Egg?  An alleged drunk driver totaled a lime green Lamborghini in Costa Mesa last weekend when he crashed into a construction trailer.  This raises an interesting question that I’ve often pondered: does one have to be a massive douche bag in order to buy a Lamborghini or does the act of buying a Lamborghini turn one into a massive douche bag?

Gotta Hear Both Sides: A legal associate, fired for allegedly stealing money returned to the firm she was dismissed from to allegedly steal more money to buy sex toys. (h/t Darren Fancher)

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

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Landmark Links February 9th – Round We Go Part II

Landmark Links February 6th – In a Hole


Lead Story…  Ever since the late 1960s, California has required it’s local governments to adequately plan to meet the housing needs of everyone in the community on a periodical basis.  This is a common-sense approach except for the fact that there has historically been no enforcement mechanism for cities and counties that don’t comply with their own housing element, meaning that the entire thing ends up being little more than an exercise in political Kabuki Theater.  Last year, the state of California passed Senate Bill 35 which grants developers a streamlined approval process in jurisdictions that are not meeting their housing goals so long as certain conditions are met, meaning that there is finally some teeth to the housing element.  As part of the new bill, the state housing department released it’s first report showing how many California cities and counties are meeting their local home building goals.  The results were predictably pathetic.  From Jeff Collins at the OC Register (emphasis mine):

The conclusion: More than 500 local jurisdictions — 98 percent of those in the state — are failing.

As a result, local governments will be required to expedite the approval process for new home developments that include affordable housing units, the California Department of Housing and Community Development announced on Thursday, Feb. 1.

Just 13 local jurisdictions made the list of those that have approved enough housing for all income levels, including sufficient affordable housing. The cities of Beverly Hills, San Fernando and West Hollywood made the list, as did Carpinteria and the San Diego County town of Lemon Grove.

The rest – 526 California cities and counties – either failed to meet their minimum housing goals or have yet to submit their 2016 progress reports, the state report said.

It would have been surprising if any significant number of local jurisdictions were actually in compliance.  In fact, I’m somewhat impressed that even 13 jurisdictions were there.  Some of the other findings were just as predictable.  Again, from the OC Register (emphasis mine):

State reports found local jurisdictions frequently give in to pressure from constituents who flock to city halls and county governments to protest new developments in their neighborhoods. So-called NIMBY’s, or “not in my backyard,” supporters, are reluctant to accept new housing in their communities, particularly affordable housing, fearing it will bring increased traffic, congestion and crime. State environmental regulations and “impact” fees imposed on developers also have been credited for slowing homebuilding in the state.

Back in June of 2017, I wrote a blog post about how I thought that SB 35 was a step in the right direction but was skeptical of the real impact it would provide since:

  1. Under SB 35, the streamlined approval process only applies to projects that already comply with existing zoning – and much of California’s urban landscape has been dramatically down-zoned since the 1960s; and
  2. Under SB 35, the streamlined approval process only applies to projects that pay prevailing wage, which would make it financially unfeasible for many projects to be built – especially those that have a large affordable component.

In hindsight, I may have underestimated the real motivation in SB 35 for cities: they do not want to lose any local control.  It’s not that the down zoning and cost issues are not very real problems – they are.  Rather, there is a good chance that cities will allow more projects to get built just to avoid getting placed on the streamlined list in the first place.  If that turns out to be the case, the law will be a success not because more units will be built under the streamlined guidelines but rather because cities pushed to get more units approve to avoid dealing with the consequences of losing jurisdictional control over planning.


Unbalanced: Half of the new jobs created in 2017 were in five states with California, Texas and Florida leading the way.

What a Mess: US infrastructure has gotten so bad that even the president of the US Chamber of Commerce is now pushing for an increased federal gas tax in order to use the proceeds to make repairs and upgrades. See Also: With the Chamber of Commerce on board, the odds of fixing US infrastructure just got betterBut See: Why we should have tackled infrastructure when the economy was much weaker and rates were lower.

So Much for Deficit Hawks: The U.S. government is set to borrow nearly $1 trillion this year, an 84 percent jump from last year.

Risky Business: An opaque ETF that allowed investors to short stock market volatility crashed hard last night, plunging 84% in after hours trading after dumb money piled in during a massive 2017 run-up.  REMINDER: Stories like this one about a Target manager who made $12MM shorting the XIV and kept doubling down almost always end in tears.


Not What It Seems? A new report from the Economic Policy Institute finds that Amazon fulfillment centers do not generate the broad-based economic growth that they are perceived to.

On Sale: The recently-passed tax reform law appears to be driving favorable commercial real estate loan pricing.

Insatiable: Evolving technologies and consumer consumption are driving massive data center demand.


Priced Out: The South San Jose school district has decided to close three schools due to plunging enrollment since parents can no longer afford to live thereSee Also: People aren’t having babies because they can’t afford to.


This is Already Ending in Tears: Unsophisticated investors are viewing Bitcoin as a way to make up for low investment returns elsewhere and wading into a market that they really don’t know anything about.  See Also: Major banks are banning the buying of Bitcoin with credit cards.

Big Tree Fall Hard: GE was once a corporate American icon.  Today it is a complete mess.  The Dow is up around 40% from November 2016 yet GE stock has lost 46% of it’s value over that same period.  Here’s what went wrong.

Ingrained: How Amazon rebuilt itself by incorporating artificial intelligence into every division of the company and in turn became part of our everyday lives.

Lord of the Flies: Crypto bros are attempting to create a crypto utopia in hurricane torn Puerto Rico.

Chart of the Day

So much for the downfall of California


Fire in the Hole!  Someone left a loaded grenade launcher at a Goodwill Store because, Florida. (h/t Travis Weber)

Stay Classy: Watch a (hopefully very drunk) Philadelphia Eagles fan celebrate his team’s improbable Super Bowl victory by eating horse feces off the street.  See Also: 10 scenes that show how crazy Philly got after their Super Bowl win.

Hero: To the Texas middle schooler who called a stripper to his school as a prank, I salute you!

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

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Landmark Links February 6th – In a Hole

Landmark Links February 2nd – At Your Service


Lead Story…. 

Quick Programming Note: Your chance to get a lifelong Giants fan (me) to don an Eagles or Patriots jersey and root for one of those teams, while doing just a little bit to end homelessness is quickly running out.  For those of you interested in humiliating me for a really good cause, here’s the GoFundMe link.  HomeAid is an incredible charity that was founded in 1989 with the stated mission to end homelessness.  Your donation will go straight to families in need!

Legal Disclaimer: Nothing that I write here should EVER be considered investment advice.  Do your own due diligence before investing in anything.  If you make an investment solely off of something that you read in a blog that often features funny pictures and borderline vulgar Florida crime stories then you are an idiot and deserve what ever is coming to you.

Now that the fun part is out of the way, I want to write a little bit about interest rates in general and a segment of the real estate universe that will likely benefit from their upward march in particular.  The falling interest rate environment over the past few decades has undoubtedly been great for real estate owners as we have seen the value of real property (and pretty much everything else) go up as the cost of capital has fallen.  However, since late last year, the dreaded “I” word (inflation) that has been missing in action for years despite the protestations of gold bugs has become a topic of conversation again.  The Federal Reserve has raised short term rates, causing treasuries at the short end of the curve to move upward substantially leading to concerns in the real estate world about both the cost of capital moving higher along with an increase in residual cap rates, ultimately leading to a potential decrease in value.  However, there is one segment of the real estate market that should do quite well if rates continue to increase: servicers.  John Dizard of the Financial Times posted an excellent piece about why they view Mortgage Servicing Rights or MSRs as an excellent hedge against rising rates.  The article focused on residential mortgage servicing but some of the same dynamics should be at play in the commercial servicing segment as well.  First a bit of an overview on how servicing rights work from the Financial Times (emphasis mine):

Briefly, though, an MSR is the right to earn fees by “servicing” a bundle of US mortgages. That means collecting the payments, mailing out the paperwork, and, if necessary, putting them through the foreclosure process and at least temporarily covering those costs. That will earn the MSR holder about 25 basis points on the outstanding principal of the mortgage. The principal and interest payments go to the owners of mortgage-backed securities.

The servicing rights come to an end when a mortgage is refinanced, most often in a period of falling interest rates. That means that the stream of income from the MSRs typically becomes shorter in a falling rate environment, and longer in a rising rate environment. This “negative convexity” makes MSRs a good thing to own when rates go up.

In today’s world, the yield on investment can amount to around 7% – 8.5% on your investment which can be enhanced with leverage.  However, the key is that these steady cash flow streams become more valuable as rates go up.  We could be entering a perfect scenario for servicers.  Here’s why:

  1. Property owners are less likely to refinance into a higher rate if they don’t have to.  Sure, they are going to refinance (or sell) if their loan is maturing but, if rates truly are going higher, the days of refinancing to a lower payment are likely over for the foreseeable future.  This means that marginally less loans will be getting refinanced, which leads to more steady streams of income from servicing rights.
  2. (For Commercial Loans Only) The hurdle for capital gains treatment has gone from 12 months to 36 months under the new tax bill meaning that hold periods for properties are likely going to increase as investors look to continue to avoid getting taxed at earned income rates.
  3. (For Residential Mortgages Only) The new tax law reduces the mortgage interest write off from $1MM to $750k.  However, existing home owners are grandfathered in.  This means that a home owner can continue to claim an interest deduction on a loan of up to $1MM until he or she sells or refinances.  This gives home owners in high cost markets an incentive to stay in place longer and again leading to marginally less rollover in a servicer’s portfolio.

Mortgage servicers got hit hard back in the Great Recession days and their multiples plunged after they cam under scrutiny for the subprime debacle and faced legal issues for the bad deeds of a few but have been recovering for a while.  According the the FT (emphasis mine):

Back in the bubble days of 2007, MSRs could be valued at about six times their annual fees. By early 2009, they were going for a multiple of 2 or 2.5 times. Even worse, there were many expensive legal actions against servicing firms, some of which had done careless work. MSRs became a radioactive asset.

Gradually, though, the regulatory environment has improved, and the litigation costs for the mortgage business are mostly in the past. US regulators are likely to raise the ceiling on bank holdings of MSRs to 25 per cent of capital, reducing the forced selling. The Trump administration is nicer for mortgage bankers and servicers. MSR valuation multiples have risen to about 4.25 times the fee income.

Even so, MSR intensive Reits such as PennyMac Mortgage Investment Trust and New Residential Investment Corp are still yielding more than 11 per cent. Usually returns in that range tell you that something bad is about to happen. I believe the “something bad”, that is, the decline in rates and the regulatory risk, has already happened.

It’s been a long road for servicers since the bottom fell out ten years ago.  However, if rates really are headed on a sustainable run higher, coupled with the other two factors mentioned above, the servicing industry could be in a very good position going forward.


Toxic Brew: Love them or hate them, there is no doubt that the market likes the Trump tax cuts.  Consider this a reminder that politics and investing are a toxic brew when mixed.

The Pause: The Federal Reserve opted not to increase interest rates this week but raised their inflation projections and indicated that more hikes are on the way.

Accelerating: According to an Atlanta Fed forecast, the economy could grow at a breakneck 5.4% pace in the 1st Quarter of 2018.

Drawn In: Individual investors are coming back to the stock market, led by young people with interest in cryptocurrencies and cannabis stocks.


It Was the Best of Times…: Retail may be struggling on a national level but the most valuable malls are still raking in billions in sales.


Inflection Point?  The home ownership rage rose in 2017 for the first time since 2004.

Told Ya So: Minneapolis changed it’s zoning code back in 2015 to allow for residential projects near transit to be built with less off-street parking than previously required.  The result was a reduction in rents and more mid-rise, non-luxury development.

Out of Favor: Manufactured homes should be flying off the shelves at a time when housing has become so expensive.  However, a combination of restrictive zoning, financing difficulties and lower potential for appreciation have the industry stuck in the doldrums.

In Decline: The iconic bungalow courts of Los Angeles are vanishing thanks to soaring land prices.


Growing Pains: Amazon’s order-to-shelf inventory management system means that less food is spoiling in Whole Foods storage rooms.  However, it also means that the high-end grocer is chronically running out of certain items.

Under Scrutiny: The SEC recently froze $600MM of  crypto assets from a company that boxer Evander Hollyfield had endorsed that was suspected of ICO fraud as regulators continue to close in on the space.

Charts of the Day

Great update on the state of the housing market in the US from The Daily Shot.

• Home prices continue to climb at two-and-a-half times the wages, with more Americans being priced out of the market. The Case-Shiller housing index rose faster than expected last month.

• Nonetheless, the homeownership rate is now on the rise as some of the higher-income Millennials are starting to buy. This trend is likely to continue as long as mortgage rates remain low.

The number of owner-occupied units is climbing at the fastest rate since 2005.

As a result of this rising housing demand, the number of seasonal housing units is falling (often converted to full-time units).

• Of course in some of the more expensive areas, homeownership rates are still falling. Here is California, for example.

• Rental vacancies were starting to climb as more Americans chose to buy. But soaring home prices sent more households into the rental markets last quarter. The vacancy rate is now back near multi-decade lows.

• The housing shortage is worsening. Here is the annual growth of the US housing stock – there aren’t nearly enough homes being built.

As a result, the total stock of housing, adjusted for the population growth, is near the lowest level in decades.


For the Birds: A (possibly insane) woman flying out of Newark Liberty International Airport tried to bring a peacock on a United Airlines flight for “emotional support.”  United was not amused.  The whole emotional support animal thing has gone way too far. (h/t Ryland Weber)

No Words: A man is suing the Hustler Club in New York for $1 million in damages, claiming that a stripper punched him and knocked out a tooth. Perhaps it was something that he said?

 “I guess it is sort of insulting to tell a woman she is a bad mother,” he admitted. “I felt we had that kind of rapport.”

And Now For Some Good News: Pizza is generally healthier for breakfast than cereal is.  You’re welcome.

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

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Quick programming note: Your chance to get a lifelong Giants fan (me) to don an Eagles or Patriots jersey and root for one of those teams, while doing just a little bit to end homelessness is quickly running out.  For those of you interested in humiliating me for a really good cause, here’s the GoFundMe link.

Lead Story…

“It’s tough to make predictions, especially about the future.” – Yogi Berra

One of the reason that I began writing this blog is because of my strong agreement with the quote above attributed to Hall of Fame Baseball player and great American philosopher Yogi Berra.  Accurate predictions are incredibly difficult because they involve synthesizing all of the facts and data that we currently know but cannot take into account other factors that we do not necessarily even know exist. That’s where the blogging part comes in for me.  The Lead Story section of Landmark Links typically consists of my opinion on a current topic while the links portion typically features economic and real estate (and other) stories which I may or may not agree with.  My only requirement is that they come from credible sources.  Writing the blog in this format forces me to read things that I may not agree with and challenge my beliefs and opinions.  That’s why I often post things that can seem conflicting – it’s not that I agree with both but rather that I’m trying to provide different sides of an argument.  In other words, “Gotta Hear Both Sides” is more than just a catch phrase for some of the more outlandish stories posted in the WTF section.

One recent example of posting conflicting opinions has been recent stories about how many (all?) economists seem to think that recession risks are extremely low for 2018 while also periodically pointing out the Minskyite truth that long periods of stability can themselves be destabilizing when investors become too complacent and take unwarranted risks.  And that brings me to an blog post that I read last Friday from Josh Brown of The Reformed Broker entitledStock Market Reversals Can Cause Recessions Too The post referred to a somewhat infamous Barrons article by Jack Willoughby called Burning Fast from March of 2000 which was the first mainstream financial media outlet to point out that many high flying tech companies were burning way too much cash and would soon run out.  The Barrons article was unique because it was among the first to point out an argument against web stocks that wasn’t valuation based and is often considered the starting point of the dot com crash which led to the tech recession of 2001.  I found this passage to be the most interesting part of Brown’s post (emphasis mine):

What makes this apropos to today is the idea that, while there is no recession in sight economically, a stock market reversal could certainly cause one. After all, it was the early 2000 reversal in growth stocks that caused the recession then. So much capital expenditure and consumer spending was being fueled by equity gains that when the gains went away so did all the demand in the real world. It wasn’t the first time that speculative market activity spilled over into the economy with disastrous consequences, and it won’t be the last time.

Brown is talking about stocks here but the same could be said of any large capital market with substantial capital gains such as fixed income or real estate.  It’s relatively easy to look at the economy from 30,000 feet and say that things will be stable for the foreseeable future since inflation is tame, wage growth is starting to pick up and unemployment is low and falling.  The far bigger challenge is to know how much of that virtuous cycle of capital expenditure and consumer spending is being financed by assets themselves that are increasing in value.  When those same assets fall in value, the capital gains fuel that was being burned to grow the economy dries up, which can lead to a recession even though economic conditions looked wonderful at the time that asset values began to fall.  What’s more, it’s very difficult to know just how much values would have to fall due to some unforeseen shock in order to have a material impact on the economy that could result in a recession.  The problem is that we often don’t know what the answer is until after it’s too late.  Towards the peak of the subprime housing bubble, there were more than a few talking heads claiming that the economy could survive a housing downturn because unemployment was low and economic expansion was robust with the consumer leading the way.  The problem was that very few people ultimately saw that those factors were largely being driven by real estate gains that were fueled by bullshit.  When those gains slowed and ultimately stopped, the result wasn’t pretty.  I think that Brown ended his post on a perfect note:

Sometimes markets are a leading indicator, and sometimes they actually cause changes in the economies they are meant to reflect. George Soros calls this reflexivity. It’s a thing.

Indeed, George Soros became a billionaire many times over by figuring out this reflexive cycle better than pretty much anyone else.  There is nothing wrong with being bullish on the economy, just keep in mind that things can and do sometimes turn sour for reasons that don’t seem obvious ahead of time.


Rise of the Machines: A new tax incentive that allows companies to immediately deduct the entire cost of equipment purchases from their taxable income is encouraging capital investment which means replacing old equipment by putting more robots on factory floors.

Hand Brake: Are too many mergers in America’s heartland to blame for pay raises lagging economic growth over the past few years?

Chugging Ahead: It may not be spectacular but the US economy continues to grow at a steady pace.


Unbalanced: There is plenty of office space getting built in the US but almost none of it is in the suburbs with downtown taking a disproportionate share.

Few and Far Between: Colony founder Tom Barrack sees an environment where hardly any real estate is underpriced.


Hypocrites with a Capital H: The Sierra Club now opposes Scott Weiner’s transit density bill – possibly the most important climate and environmental bill in California.  I wonder why…. (hint: it starts with N and rhymes with Quimbys).

Back to Break Even: The US housing market has gained back all $9 trillion in value lost during the Great Recession, but an uneven recovery means that some market still lag.


Dodging Bullets: Bitcoin miners in Venezuela face insane risks like government extortion and police raids on a daily basis as they fight for survival amid national chaos.

It’s All a Lie: People are spending a ton of money to buy armies of bot “followers” in order to make their social media influence appear much larger than it really is.

Can’t Have it All: Sir Isaac Newton was a scientific genius but a really shitty investor.

Chart of the Day

It would be an understatement to say that the housing market is tight right now.

• New home prices (both the mean and the median) hit a record high.

• Sales of new luxury homes have picked up.

• New homes don’t sit on the market for very long.

Source:The Daily Shot


Fishy Situation: Security cameras caught a pet store thief shoving live fish down his pants because, Florida.

Bottom of the Barrel: A new ranking by the website Thrillist finds that “Florida is the worst state in the nation in every way,” which is only surprising if you have never been to a non-coastal part of Florida or do not have an internet connection.

Assault and Burrito: Police are looking for a Taco Bell worker in South Carolina who hit his manager with a burrito during an argument (h/t Steve Sims)

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

Visit us at

Landmark Links January 30th – Round We Go