Landmark Links May 26th – Backlash

Office Space Copier

Lead Story…. Office has been a challenging commercial asset class in which to invest in recent years.  Re-tenanting and maintenance costs are sky high, and market vacancies are often in the double digits even in a good market.  However, perhaps the most challenging aspect of investing in traditional office space (there are subsets like medical office that are different) is that average square footage per employee has been in long term decline.  According to the LA Times, businesses used to average a massive 500-700 sf per employee back in the 1970s.  Today, that footprint has sunk to a measly 151 sf per employee on average in North America.  It was 225 sf as recently as 2010.  It doesn’t take a genius to figure out how troubling this math is for an office landlord.

It turns out that a majority of companies in 2017 are trying to emulate a tech startup or Wall Street trading floor by going to open floor plans.  Call me skeptical or simply old fashion but I’ve always viewed this as more of a trend driven by economics (companies trying to save on rent by reducing space) than preference (workers actually wanting to get rid of walls and sit out in the open).  Don’t get me wrong, this statement isn’t meant to be once-size-fits-all.  In fact, I can see where open offices would be a net benefit in the aforementioned collaborative tech or finance spaces.  However, I don’t think they are for every industry.  I can’t imagine working without the semi-private space of an office or cube.  Then again, I’m a really loud talker and am on the phone a lot so my co-workers would probably want to gag me if we had an open floor plate at Landmark.

I’ve been waiting for push back against this trend for a while and was surprised that it had taken so long.  According to Vanessa Fuhrmans of the Wall Street Journal, that push back is now starting to come from management (emphasis mine):

Nearly 70% of U.S. office spaces are open-concept, according to the International Facility Management Association, compared with 64% two decades ago. Led by CEOs such as Michael Bloomberg, AB InBev NV’s Carlos Brito and Inc.’s Tony Hsieh, more executives have ditched the corner office for an open desk to project camaraderie with the masses.

But as employees and managers squeeze closer together, productivity and morale have suffered. In a review of more than 100 studies of work environments, British researchers found that despite improving communication in some instances, open-office spaces hurt workers’ motivation and ability to focus.

Employees seeking privacy resort to conference-room squatting or ducking into “focus” booths, quiet refuges that companies are increasingly building into open offices.

The result is that many bosses are now pushing for enclosed spaces rather than fully open floor plates or move back to private offices for senior management.  Performance studies are endorsing this approach.  Again, from the WSJ (emphasis mine):

“When you’re in a territory that’s clearly yours, you perform better,” says Sally Augustin, an environmental psychologist and principal at La Grange Park, Ill.-based consulting firm Design With Science.

Even watching a boss and co-worker move into a separate space for a meeting can be distracting, she adds.

“People’s minds never go to ‘Bob must be getting a promotion,’” she says. “It’s, ‘Bob must be in trouble. This is the beginning of the end for Bob.’”

I don’t think that there will ever be a full rollback of open office spaces.  They make up the vast majority of office space in North America, are generally more economical for tenants and are clearly here to stay.  However, most every trend goes a bit too far and it looks as if open space office layouts are finally poised for some push back from senior executives who want just a tiny bit more privacy.


Write It Down: It’s really difficult to find a scenario under which the Federal Reserve doesn’t raise interest rates in June.

Changing Tides: Goldman Sachs sees autonomous vehicles shifting job creation from retail and transportation to other sectors rather than causing mass unemployment. Contra: Heres why autonomous vehicles are a major global threat to employment.

A Better Mousetrap: Quant funds have grown rapidly in recent years and now dominate Wall Street, continuing to expand while traditional funds contract. See Also: Old school hedge funds are going quant primarily because nothing else seems to be working.

Fading Away: Between retail store closures and a growing emphasis from college admissions on extracurricular activities, teen summer jobs are going the way of the dodo.


Up in Smoke: Marijuana business owners stormed Capitol Hill last week to lobby Congress for access to the banking system.

Home Stretch: Amazon is considerably ahead of other retailers in terms of developing its own delivery network, but third-party logistics companies could be the next significant occupiers of smaller warehouse space.


Generational Battle: Baby Boomers and Millennials are increasingly competing for the same homes….and the wealthier Boomers are often winning.

Slim Pickins: Existing home sales were down 2.3%, continuing to reflect seemingly ever-declining inventory.


In the Dark: CalPERS is the nation’s largest pension fund.  However, they have no clue how much they are paying in private equity fees.

Sliding Scale: Uber is using data science to charge customers what it thinks they are willing to pay (think: people going to or from a rich neighborhood will pay more).  However, they are cutting drivers out of some of the upside which is sure to cause more issues for the embattled ride hailing app.

Too Much of a Good Thing: Maine has more lobsters than they know what to do with and that glut means that lobster fishermen aren’t making any money.

Chart of the Day

Divergence (h/t Tom Reimers)



Clever: An Ohio man was arrested after telling investigators that he was being extorted by a child porn website he visited for thousands of dollars.  Thank God for stupid criminals.

Lurking: A woman found a python wrapped up in a blanket while doing laundry, because Florida.  (h/t Steve Sims)

Money Well Spent: Meet the real estate executive who pleaded guilty to stealing $1.6MM from his company to pay for cocaine and strip club binges. (h/t Steve Sims)

Welcome to the Thunderdome: Two middle school teachers outside of Atlanta got into a full-on brawl in the classroom as students looked on.  Thanks to the magic of technology, the entire thing was caught on video.  Both have been arrested.  I really wish that school was this interested when I was a kid.

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

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Landmark Links May 26th – Backlash

Landmark Links May 23rd – Amateurs


Lead Story…. I’ve written a lot over the past couple of years about how home building has not kept up with demand – especially along the coasts – and how it’s contributing to a massive affordability crisis. I’ve also noted how institutional buyers purchasing large home portfolios to rent and people staying in their homes longer, further are drying up entry-level inventory.  However, there is another factor at play here that I hadn’t really considered until recently.  CNBC did an interview with Glenn Kelman, CEO of Redfin about the lack of available inventory and Kelman had a very interesting point:

The number of homes for sale in America has been falling steadily for the past year, but the situation is apparently getting much worse as spring demand heats up.

“The inventory is reaching historic lows. It’s never declined faster than it did last month. It’s freaking us out — it’s affecting our business; it’s limiting our sales,” said Glenn Kelman, CEO of Seattle-based Redfin, a real estate firm. “We’re going to be fine in terms of market share, but I think the overall industry for the first time is seeing sales volume really limited by the inventory crunch.”

Kelman considers Redfin more as a technology company and touts his ability to track closely the more than 80 metropolitan markets it covers. He blames the lack of inventory on a new dynamic in housing.

“It’s a new landlord nation where everybody is renting out their basement. When somebody moves up they don’t sell their old place, they rent it out to somebody else, and it’s because they want to keep that 30-year mortgage for 30 years, and it’s because they can easily find somebody on Airbnb who will take the place,” Kelman said.

That last quote from Kelman is a succinct description of logical move-up buyer behavior in today’s housing market.  What makes me think that?  Because it’s something that I’ve actually done myself.  In a “normal” housing market, move up buyers sell their entry level homes and use the equity for a down payment on their next house.  That entry level home then becomes a starter home for someone else, helping to perpetuate a positive cycle.

However, put yourself in this situation: you bought a starter home several years ago and have an incredibly low interest rate on a 30-year loan.  You’ve also seen rents go straight up since and have substantial equity in the house through a combination of amortization and price inflation.  If you have saved up a large enough down payment to purchase a new home and the rental income from your starter home will provide positive cash flow, why would you sell?  My family went through this decision a couple of years back and ended up keeping our home when we moved to our new place.  Sure, it made the budget quite a bit tighter but the old house is in a great neighborhood and we have really good tenants.  I can’t be certain but I suspect that we will be glad that we held on to it.

While I doubt that move up buyers holding on to starter homes as rentals is as large of a contributor to low starter home inventory as other factors like institutional rental pools or people choosing to remodel rather than sell, every little bit counts in a market that is this tight.  A growing number of mom-and-pop landlords holding on to starter homes when they move up probably isn’t helping.  Chalk this up as another perverse side effect of all-time-low interest rates.


Black Box: The biggest problem with productivity is that it’s so damn difficult to measure.

Low Standards: Auto loans are going bad despite strong employment, a sign that lending standards are too loose.

Efficiency: Americans are paying $38 to collect $1 of student debt.  Great deal for debt collection agencies.  Not so much for students or the American tax payer.


Against the Grain: Bank of the Ozarks has expanded construction lending – albeit at low advance rates – while other lenders continue to pull back.  So far, it’s paying off.  (h/t Tom Farrell)

Up In Smoke: Adelanto wants to be the Silicon Valley of medical marijuana. (h/t Tom Farrell)


Land of Opportunity: Large Chinese developers are emerging as big bidders for US home builders.

Tall Tales: Nobel Laureate Robert Shiller lays out a convincing case of the power of narrative in explaining how he believes that tales of flipper riches led to the housing bubble.


Short Memory: Bond buyers are flocking back to online lenders’ debt after getting badly burned just a few short quarters ago.

Told Ya So: A new study finds that dogs really can talk to humans so please stop looking at me like I’m crazy when Pepper and I are having a deep discussion.

Depressing: A growing body of research is pointing to Instagram being the most harmful social network for your mental health.  For those of you who haven’t figured this out: pretty much everyone on Instagram is full of shit.  If their lives were really that wonderful, they wouldn’t be glued to a smart phone trying to convince you.

Chart of the Day



SMH: Five people in Sacramento have been hospitalized after eating gas station nacho cheese.  It should go without saying but this is why you should NEVER eat gas station nacho cheese or any other food product prepared in a gas station.

Dinner Time: Authorities broke up a massive 7,000 bird cockfighting operation in Val Verde, CA last week.  Colonel Sanders was not available for comment.

No I Will Not Make Out With You: A Florida man is in critical condition after he was bitten on the tongue by a rattle snake while trying to kiss it.  This is a real quote from his friend:

“Ron was just acting silly, you know?” he said. “I guess he said he could kiss the devil and get away with it, but evidently he didn’t.”

No word from the clearly-traumatized snake who apparently slithered away after swapping spit (and venom).

It’s Lit: A man walked into a Denny’s in Hayward and tried to light several patrons on fire because, Denny’s.

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

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Landmark Links May 23rd – Amateurs

Landmark Links May 19th – Peniaphobia


Lead Story….  Economic health is highly intertwined with demographic trends.  As people age they enter different saving and spending cycles that are fairly historically well established.  Generally speaking, people tend to save money during their peak employment years and spend that money in retirement.  The consumption of retirees boosts the economy which, leading to more jobs and higher wages for workers.  The general lack of retirement savings from the Baby Boomer generation has been a well-publicized problem for quite some time.  The Boomers were the first generation to switch en masse from defined benefit to defined contribution plans – shifting the burden of providing retirement income from employer to employee – at least in the private sector.  The result has been woefully underfunded retirement accounts.  However, there is another, far less talked-about conundrum that Ben Steverman of Bloomberg pointed out recently and it could be hindering the economy: rich baby boomer retirees – those that can afford to retire comfortably – are hoarding cash rather than spending as previous generations have.  From Bloomberg (emphasis mine):

There’s a time in everyone’s life to save. There’s also a time when you’re supposed to spend. That time is commonly known as retirement.

Millions of Americans aren’t doing that, however, which has put the U.S. in a perverse situation. Younger generations aren’t saving enough as their income slips further behind previous generations. Older Americans meanwhile sit atop unprecedented piles of assets built through stock market and real estate booms.

Yet these retirees, or at least the affluent ones, aren’t spending it. It turns out they’re afraid of the unknown.

A new study finds many U.S. retirees keep saving even after they’ve retired. The average American over the age of 60 cuts spending 2.5 percent per year, or about 20 percent over a 10-year period, according to an analysis of University of Michigan survey data by financial planning software company United Income. As a result, millions of Americans are living too frugally, said Matt Fellowes, United Income’s CEO 1 . On average and adjusting for inflation, retirees are entering their 80s richer than they were in their 60s and 70s.

Unsurprisingly, given the data, Americans are dying with more money than they used to, adding to the increasing inequality that flows from inherited wealth. United Income analyzed the estates of people who died between 2000 to 2002, and compared them with those who died between 2010 to 2012. Although the later group had just lived through a financial crisis and worldwide recession, their estate values were 130 percent higher.

“We have to get people comfortable with enjoying their retirement and spending their money,” Fellowes said.

Other studies have found affluent older Americans hoarding money. Last year, a study in the Journal of Financial Planning found that the wealthiest fifth of U.S. retirees were spending 53 percent less than they could have. Meanwhile, the poorest 40 percent generally spend more than they safely should; the median retiree spent about 8 percent less than the safe amount.

In many ways, this is part of the lasting fallout from the Great Recession and it’s a classic reaction from those that have undergone financial trauma.  Perversely, it’s also a symptom of people living longer.  If wealthy retirees have experienced a traumatic financial event and and believe that they are going to live well into their 90s, they are more likely to hoard cash, regardless of what the experts say about how much they should spend.  The data might indicate otherwise but data is of little comfort when the consequence of being wrong is running out of money and ending up destitute.  This is where peniaphobia or the fear of poverty takes over for rational financial decision making.  Being a profligate spender isn’t good either but the problem is that retirees have over-corrected and are saving more money that they can ever spend if they lived to 200.  On a personal note, my grandmother is of this mindset.  She is in her early 90s and has more than enough money saved up to be comfortable but refuses to spend any of it despite the rest of the family trying to convince her to enjoy it while she’s still here.

The impact on the economy is profoundly negative since so much wealth has accumulated with today’s wealthy boomers and the generation before them.  The result is that less money gets spent on consumption, leading to less robust economic growth and lower wages.  This leads to younger people making less money than their parents did and carrying higher debt loads – a classic recipe for both economic stagnation and growing wealth and income inequality.  Ben Steverman sums this up nicely in his Bloomberg article (emphasis mine):

The situation for wealthier older Americans couldn’t be more different than that facing younger generations. A study released by the National Bureau of Economic Research last month found the typical American man who entered the workforce in 1983 earned up to 19 percent less over his lifetime compared with one who started working in 1967. (Women’s incomes rose over that period, but that’s because earlier generations of women earned very little money.) Based on more recent data for younger people who are still in the workforce, the authors wrote, “the stagnation of median lifetime income seems likely to continue.”

What can get rich elderly Americans spending more? One way is to reassure them they’re not going to run out of cash. Tools such as annuities and bond-ladders can turn a retirement account into a regular stream of income, mimicking a paycheck. Insurance products could also protect retirees against huge, late-in-life expenses from medical care—a dominant fear. Browning likes longevity insurance, an annuity that kicks in only if you live to 80 or 85. Other options are reverse mortgages or long-term care insurance.

Maybe the problem requires more creative solutions. Financial planners need to help retirees realize they have a “cognitive bias” that makes them too gloomy about the future, said United Income’s Fellowes. Survey data often show older Americans are less optimistic about financial matters then younger people. Fellowes analyzed the data further and found this optimism gap has been widening over the last four decades.

Even as retirees live longer, healthier lives, they’ve become more pessimistic about the economy, the stock market, and their own financial situation.

After a lifetime of saving, it requires some psychological gymnastics to start spending your nest egg. Browning’s suggestion is that financial planners urge their thriftiest clients to make big purchases–like a second home or a fancy car–before they retire, out of their pot of savings. The idea, he said, is “training people to spend.”

Unfortunately, I’m a bit more pessimistic about this problem than Fellowes and Browning in the passage above.  Wealthy retirees are just a few years removed from the Great Recession.  It is terrifying to watch your life savings put at risk due to a crisis that could have brought down the banking system.  Unfortunately, slow economic growth is the collateral damage and I’m just not sure how you “train” a lifelong saver to become a spender again after they have experienced a recent financial trauma.  IMO, there is only one cure for this sort of problem – the passage of time.


Don’t Call it a Comeback: It took a decade but household debt, led by surging student loans has now surpassed it’s prior peak from 2008.  Of particular interest is that student debt, which cannot be discharged through bankruptcy, now makes up 11% of total household debt, up from 5% in 2008.  See Also: Student debt is eating your household budget.  Contra: This is much ado about nothing and debt service as a percentage of household income are still at 40-year lows.

Magic Printing Press: How Japan’s Abenomics proved that printing money can actually work (sometimes).

Yellow Light: Is the bond market signaling a change in course for the Federal Reserve as flat economic data leads to lower long rates?


The Mothership: Apple’s new corporate campus looks absolutely insane.

Rising from the Ashes: Retail may be suffering but e-Commerce, coupled with upzoning of land to residential use is fueling an industrial real estate boom in the NY area.


Site Unseen: Rich young Chinese are buying overseas properties on their smartphones. This seems like an incredibly prudent idea that will end in great wealth for all involved.

The Survivors: Why fewer home builders mean happier home builders.

Avalanche!  The ongoing housing affordability crisis in CA has led to a whopping 130 housing-related bills currently being proposed in Sacramento.  Unfortunately, they range from incremental improvement to doing more harm than good.


Winning: Amazon’s vertical integration,  innovative culture and focus on last-mile delivery solutions make it highly unlikely that it will face a substantial challenge anytime soon. See Also: Amazon is hiring people to break into the multi-billion dollar pharmacy market.  I wouldn’t want to be a CVS shareholder right now.

Tipping Point: New restaurant industry research found that independent restaurants and small chains are outperforming big chains mostly because people have (finally) come to the conclusion that big chains generally suck at food.

Sad But True: From selfies to personal branding to the rise of influencers, nearly every Millennial social media trend can be traced back to one person: Paris Hilton.  Let.  That.  Sink.  In.  See Also: Businesses from restaurants to fashion are building “selfie booths” so that unwitting Millennials can help them get free advertising.

Chart of the Day

What a difference a decade makes.

Source: The Irrelevant Investor


Just Shoot Me: A new clothing company on Kickstarter is trying to make rompers for men into a thing.  It’s called fashion, you wouldn’t understand. (h/t Chris Gomez-Ortigoza).  As awful as this is, it made for some great memes.

Scout Leader of the Year: A Girl Scout leader from Kentucky was recently indicted for stealing $15,000 worth of Girl Scout Cookies.

Seems Reasonable: An Austin, Texas man became a hero to bros everywhere when he sued a woman to reimburse the cost of a movie ticket after she refused to put her cell phone away during a movie date.  The lawsuit is for $17.31.

TMI: A giant TV flat screen in DC’s Union Station caused a stir earlier this week when it began streaming porn videos.  Station officials claimed it was hacked, also that they subscribe to Playboy because they like to read the articles.

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

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Landmark Links May 19th – Peniaphobia

Landmark Links May 16th – Catch Up


Lead Story…  Over the past few years, I’ve often turned to the following chart from Calculated Risk as a guidepost for the US economy in general and the housing market in particular:


Possibly the most under-discussed aspect of the housing crash is that it happened during a period of economic headwinds from a contraction of the prime household formation age group of 30-39.  When that demographic grows, it creates a tailwind of demand in the housing market that can help provide a cushion against draw downs caused by economic contraction.  As the chart shows, this group started growing in 2014, after having shrunk since the late 90s and will continue to grow until around 2030.  IMO, it should be the best case for optimism among housing market participants which has been strong of late.

The reason that I am such a fan of this simple but important chart is that it’s not a prediction.  The relevant population in the data set has already been born.  Short of a plague, the trajectory of the chart will remain intact.  That’s one reason why I’m generally optimistic about the next recession not being as brutal on housing as the last one, even as I take a more cautious view of the economy.

The rise of the prime household formation population is now showing signs of bolstering the entry level housing market as Laura Kusisto and Chris Kirkham noted in the Wall Street Journal last week (emphasis mine):

In a shift, new households are overwhelmingly choosing to buy rather than rent. Some 854,000 new-owner households were formed during the first three months of the year, more than double the 365,000 new-renter households formed during the period, according to Census Bureau data. It was the first time in a decade there were more new buyers than renters, according to an analysis by home-tracker Trulia.

Home builders are beginning to shift their focus away from luxury homes and toward homes at lower price points to cater to this burgeoning millennial clientele. Demographers generally define millennials as people born between roughly 1980 and 2000.

In the first quarter of this year, 31% of the speculative homes built by major builders were smaller than 2,250 square feet, indicating they were in the starter-home range, according to housing-research firm Zelman & Associates. That is up from 27% a year ago and 24% in the first quarter of 2015.

“There’s an increasing confidence level in that part of the market,” said Gregg Nelson, co-founder of California home builder Trumark Cos. “The recovery is finally starting to take hold in a broader way.”

The shift reflects a reversal of a pattern that has driven the five-year housing-market expansion.

Up until now the luxury market has soared, while the more affordable end of the market has struggled. Tough lending standards, slow wage growth, growing student-debt obligations and a newfound fear of homeownership have combined to crimp demand among millennials in particular.

Now, the return of first-time buyers is allaying fears that millennials might eschew home ownership permanently. But it also provides an infusion of new demand while housing supply is tight and home price growth is significantly outstripping wage gains.

Home prices in February increased by 5.8% over the same month a year earlier, according to the most recent S&P CoreLogic Case-Shiller U.S. National Home Price Index.

The return of first-time buyers is accelerating. In all they have accounted for 42% of buyers this year, up from 38% in 2015 and 31% at the lowest point during the recent housing cycle in 2011, according to Fannie Mae, which defines first-time buyers as anyone who hasn’t owned a home in the past three years.

This story fits nicely with the demographic chart above.  It might be happening a bit later than initially predicted but it is happening.  The challenge is going to be accommodating the increase in newly formed households when housing starts remain low and people are moving far less frequently than they used to.


No Slack: The two biggest challenges to the economy achieving 3% GDP growth are slow growth in the prime working age population and weak labor productivity growth.  See Also: Traditional industry needs more technological innovation, not less in order to unlock growth.  And: Shoes are going to be 3-D printed in mass production soon.

Misleading: Don’t be fooled by shitty department story results.  Consumer spending is doing just fine.  See Also: Profits from store-branded credit cards are masking just how bad traditional retailers are doing.

Crystal Ball: Ray Dalio, Chairman and CIO of the world’s largest hedge fund sees smooth sailing for the next couple of years, chaos in the future.


Juggernaut: How George Gleason grew Bank of the Ozarks from a tiny bank in Arkansas with a funny name and $28 million in assets to an $18 billion bank and delivered a 4,312% return (22% compounded annual return) to shareholders in the process.


They’re Baaaaack: Wells Fargo is preparing to issue private-label mortgage bonds for the first time since the housing crisis.

Surprise, Surprise: Gov. Brown is pessimistic on any major deal to address California’s housing affordability crisis actually getting done.

Hindsight: A new study finds that using homes as ATMs was more to blame for the housing crisis than flippers or subprime loans.


Great Expectations: Amazon is now worth twice as much as Walmart despite only generating 27% of the revenue that Walmart does.

Boring: Elon Musk has revealed video footage of the heavy machinery digging his first tunnel under LA as well as the electric sleds that he plans to use to transport cars.  If this works, commuting in America’s worst traffic city is going to become quite a bit easier.

Chart of the Day


Do Not Disturb: I’m sure that there are worse places to get busted getting busy than a McDonald’s dining room.  I just wouldn’t be able to tell you what they are.

Gotta Hear Both Sides: An Oregon man carried a bloody human head into a grocery store and stabbed an employee on Sunday afternoon.

Wasn’t This the Beginning of a 90s Movie? Ukraine banned Steven Seagal as a threat to national security.


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

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Landmark Links May 16th – Catch Up

Landmark Links May 12th – Round We Go


Lead Story… Human beings are incredibly adept at explaining things by creating narratives to justify why something increases or decreases in value.  During the housing boom, we rationalized away booming housing prices by pointing out the positive feedback loop created by increased housing production and expenditure.  Houses were going up in price so people bought more houses and tapped into their increased equity to consume more via HELOC, which in turn boosted the greater economy.  Back in the internet bubble of the late 90s, we explained away absurd valuations and skyrocketing stock prices for unprofitable companies by rationalizing that “this time was different” and that companies could sustain high valuations so long as they continued to grow – profitability (or even revenue, for that matter) be damned.  We even came up with new BS metrics. Suddenly clicks mattered more than PE ratios. In the teeth of the Great Recession, we were often told by pundits that home values would never recover because the bubble had burst and demand would stay low forever since home ownership was almost always a bad investment.  In hindsight each of these economic narratives which justified excess of one form or another were proven wrong.

The problem is that the chosen narrative du jour is often just a description of the symptoms of economic growth or contraction as opposed to the cause.  Daniel Gross of Strategy+Business explained this phenomenon in as straightforward and clear a manner as I’ve seen in a piece about procyclicality lengthening business cycles, titled Economic Cycles Cut Both Ways (emphasis mine):

During uptrends, generally speaking, financial success begets more success. People earn wages and borrow money, which allows them to buy cars and homes. Because jobs are plentiful, they’re able to stay current on their debt, which boosts the profits and confidence of lenders — who then extend more credit, which allows more people to spend and invest. The longer the cycle, the greater the tolerance for risk. When everybody succeeds, everybody else succeeds. Between June 2004 and February 2007, for example, there were no bank failures in the United States, the longest such streak in history.

By many accounts, we may be in the middle of the longest economic expansion in recorded history, as Goldman Sachs noted earlier this week.  Yes, it’s been a bit of a slog and uneven to say the least.  However, the above passage accurately reflects the current state of the economy in general and the housing market in particular, IMO.  But there is a dark side. The above-noted feedback loop works on the downside as well, as Gross notes in the post (emphasis mine):

But procyclicality, as we learned in the mortgage and financial crisis, also moves in the other direction. And it can do so very quickly. When one party fails to keep up with an obligation — on a mortgage, lease, payment for services — it can push others to fail to keep up much larger obligations. And when there is a lot of leverage built into the system, the margin for error is smaller. For want of $5,000 in mortgage payments, somebody might lose their house, causing a bank to take a $300,000 loss on the mortgage, which leads instantly to larger losses in securities backed by those mortgages, which leads quickly to big losses for financial institutions that had borrowed money to invest in those securities, which leaves those financial institutions unable or unwilling to extend a mortgage to a homebuyer.

George Soros refers to this as reflexivity and has become a billionaire many times over by applying it to financial markets both on the way up and on the way down.  Gross goes on to point out that recent negative trends in auto loans and credit card defaults could be pointing to the beginning of a downward swing in the economy.  Housing has been going up in value in core markets for quite a while despite relatively low sale and start volume. The housing market (at least in terms of price) has tracked economic growth at the high end of the income spectrum, which has been where most of the gains have been in terms of wages and net worth.  

The narrative has become that housing prices will continue to rise due to the supply-demand imbalance in desirable markets.  The question that bears asking is what happens when this imbalance inevitably changes, either on the supply side (more units being built) or the demand side (a recession that impacts finances, out-migration from expensive markets, increased selling from Baby Boomers in expensive markets, etc)? I don’t know when this will happen or if it will be soon, but it will happen at some point. No cycle lasts forever no matter how strong the narrative justification behind it is.  This one won’t be an exception.


Myth Busters: You know the story about how people are fleeing California in droves?  It doesn’t exactly hold up to close scrutiny.

What Happens Next?  Central banks have been yuge buyers of government bonds for years.  What happens when they become sellers?

Scammers Delight: Auto loan fraud is soaring in parallel to the housing bubble.

Buddy System: JPMorgan tells banks to partner up as a U.S. deposit drain looms.


Scarcity: The biggest challenge facing industrial property investors is finding assets to buy.

It’s a Long Way Down: Sears was once the giant of American retail.  Now it’s likely headed for the scrap heap in a collapse like none other.  See Also: Sears billionaire CEO is apparently planning on running for president.  He’s blaming the “irresponsible media” for his company sucking.


About Time: Fannie and Freddie are going to start proving financing for buyers of manufactured homes in an effort to help low income owners.  Hopefully it will help get rid of shady programs like this.  See Also: In Silicon Valley, even mobile homes are getting too pricey for longtime residents.

Starting Strong: 2017 is looking like a big year for starter home sales in general and Millennial buyers in particular.  See Also: Un-related adults are now pairing up to buy homes in desirable markets.


Priced to Perfection: How oil companies are using algorithms to constantly update the prices that gas stations charge.

Chart of the Day

Chicken or the egg: are young people postponing marriage because they are living at home or are they living at home because they are postponing marriage? Source:

Living at home 1

Living at home 2


Gross: The internet’s most cringe-inducing subculture is pimple-popping videos.

Bad Medicine: Consider this a public service announcement – sticking a live eel up your butt to relieve constipation is a really, really bad idea.

Secret Weapon: Venezuelans’ new weapon against riot police are ‘poopootov cocktails.’

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

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Landmark Links May 12th – Round We Go

Landmark Links May 9th – Stick to Your Knitting

no idea

Lead Story… I was reading the Wall Street Journal this weekend and came across a story that reminded me of some of the best advice that I ever received: work hard enough at something to become an expert and then stick with what you know.  The WSJ story was written by Rob Copeland and Peter Rudegeair and was entitled: How a Hedge-Fund Ace Chased Silicon Valley Riches—and Embarrassed Himself.  It was about how superstar hedge fund manager Nick Adams of Wellington Management Company who made his career investing in bank stocks decided to start pouring money into tech startups and is losing his ass as a result.  The Wellington story is a classic and cringe-worthy tale of investment style drift that seems to rear it’s ugly head more frequently in the mature stages of a bull market.

This is nothing new and it’s something that we’ve become well attuned to in the real estate world when developer clients start chasing deals that aren’t in their core competency in the quest for yield.  Suddenly, a builder who excels at developing infill housing in LA is trying to take down a 1,000 unit master plan in the Coachella Valley or build a class-A apartment project in a different state.  The reason this typically ends in tears is threefold:

  1. Success in one sector of real estate or investment does not beget success in another sector – in fact it may even be a detriment since it makes overconfidence more likely.
  2. The devil is in the details and a lack of experience executing a complex business plan means that you simply don’t know what you don’t know.
  3. Newbies and out-of-market folks always pay the “dumb tax.” If it were such a good deal, why aren’t the locals or experts in that niche not doing it?

Sure, there are a few style drift success stories.  Everybody wants to be the next John Paulson, the hedge fund manager who became a billionaire when he abandoned his merger arb strategy to place a massive short bet against the US housing market. However, for every Paulson, there are dozens upon dozens of examples where style drift has disastrous results.

When it comes to real estate development, the most blatant example that I can recall happened during the North Dakota fracking boom.  From about 2009-2014, soaring oil prices led to a booming economy in the frozen tundra of North Dakota while much of the rest of the nation was struggling to emerge from the lasting impact of the Great Recession.  The unemployment rate was non-existent, pay was soaring and people were moving to formerly desolate, rural areas in droves.  The problem was that much of North Dakota simply didn’t have the infrastructure to accommodate the newcomers.  There was essentially no reason to live there other than newly-found fracking riches and the place was woefully short of everything from housing to restaurants.  There were more than a few out of town developers who were still licking their wounds from the housing crash and decided that they were going to go develop in North Dakota to cash in on the boom.  They were enticed both by high yields (I recall seeing multi-family cap rates around 12% when many markets in California were trading in the 5%’s) and the comforting mantra that oil would keep going up in price because it was so necessary to power the global economy (note the echoes of the housing boom justifications in that rationalization).  So long as oil was stable, demand was off the charts and rents were soaring.  To some, it seemed like a no-lose situation.  We saw some of these and passed every time when we pushed the developer to explain why the locals who were now flush with oil money wouldn’t do the developments on their own.  No one ever answered this question in a satisfactory manner.

We now know that the North Dakota story ended in tears once oil supply – ironically driven by fracking technology – surged and prices plunged.  This sent real estate rents and values into a tailspin as rig counts shrunk, roughnecks who had been making 6-figures left and vacancy soared.  It turns out that no one actually wanted to live in a frozen tundra with an inhospitable climate and no amenities once the oil money stopped flowing.  Guess who got left holding the bag: out of town developers with no prior experience in the area.   Some of them are now sitting on underwater properties where rent is often 40% lower than pro-forma.  This is the aforementioned “dumb tax” and the projected 12% yield on cost doesn’t look so good now.

Fast forward to the present day.  Times like this when yields are thin and returns are light after a period of increasing values are when we start to see the most style drift. Developers are quite often searching for better yields then those available in their area of expertise as a way to make theoretically greater returns (albeit often at greater risk).  However, as both the Wellington and North Dakota stories show, the grass is not always greener elsewhere.  If you can’t explain what your edge is and how a project fits in with your business plan then your deal is probably not a deal that should get done.


Warning Signs: The odds of a recession are rising as the yield curve continues to flatten out.  (h/t Doug Jorritsma)

Pop: The bubble has quietly burst for over-valued tech unicorns that most of you have probably never heard of.

Going to Leave a Mark: The Congressional Budget office is projecting that the Fed will keep hiking interest rates until they level out at a 3% Fed Funds Rate in 2020 (it’s 0.75% today).  (h/t Doug Jorritsma)

Not Much Slack: We are getting awfully close to full employment.


Fighting Back: Walmart is trying to compete with Amazon in the eCommerce space through it’s purchase of


Fixer Upper: It’s a really good time to be in the home remodeling business as profits rise.

While Rome Burns: Golden State politicians are doing nothing or worse as the state’s housing crisis continues to grow.


F&$k Yeah! A new study found that swearing makes you stronger, which is my excuse from now on.

Sister Act: Meet The Sisters Of The Valley: California’s cannabis-growing, medicine-making outlaw nuns.

Chart of the Day

Housing has never been so expensive and that’s not a good thing for the economy.


FAIL: Meet the Pennsylvania man who lit a pile of leaves in his back yard to scare off some possums.  He burned his house down.

Eat Up: A new study found that eating boogers is good for your teeth and overall health.  Looks like Spaulding Smails was ahead of his time.  Also, my 2-year old is going to be so psyched about this.  (h/t Steve Sims)

Whip it Out: A man has requested to show his schlong in court as part of the defense in a murder trial, because Florida.

Exposed: A porn actress was bitten on the foot while filming a promotional scene in a shark tank.  Sharks are such prudes.  This is one of those things that could only happen in the great state of Florida.

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

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Landmark Links May 9th – Stick to Your Knitting

Landmark Links May 5th – Sticker Shock


Lead Story… Mortgage delinquencies and foreclosures have declined dramatically since the end of the Great Recession.  Per Calculated Risk, the combined percentage of home mortgages that are delinquent or in foreclosure has dropped to 4.5%, after peaking at over  10% back in 2010.  However, there is one mortgage artifact of the housing bubble that is still with us, at least for a few more quarters: HELOC recasting.

First a little bit of background on how HELOCs work:  Per, a HELOC is home equity line of credit. It is a loan, using your home as collateral, that lets you borrow up to a certain amount, rather than a set dollar amount.  It allows for flexible borrowing of one’s home equity at a low, floating rate.  HELOCs are recorded as a 2nd Deed of Trust.  They have a borrowing period of 10 years after which, additional borrowing is no longer allowed and they recast or begin to amortize, typically over a 15-year period.  During the bubble underwriting on these things was bat shit crazy (that’s a technical term) and sometimes allowed for advance rates of  100% of appraised value (I still can’t understand how someone thought this was a good idea).  HELOC origination volume was off the charts during the bubble and everyone involved from borrower to bank seemed to assume that the loans would never actually make it to the recast period. Everyone assumed that the borrower would either refinance or sell the home to pay off the HELOC – the home mortgage example of the banking truism that “a rolling loan gathers no loss.”  That assumption was accurate for a while but then the music stopped and HELOC lenders were the first ones to find themselves “out of the money” as values plunged.

Related image

The ability to refinance went away almost completely and HELOC origination slowed to a trickle.  The two things that HELOC borrowers had on their side were:

  1. Time – the crash started 2007-2008 and the bulk of HELOC originations occurred from 2004 to 2007 (those from 2005-2007 were originated at the most inflated valuations) so it would take years for the recasts to hit the most underwater borrowers.
  2. Low Cost – Ironically, HELOC borrowers benefited from having a floating rate as the Fed cut rates to 0% and then held them there, making payments more manageable as the economy remained mired in a sluggish recovery.

The problem is that the HELOC market never came back enough to absorb the loans that are recasting and there has been a tidal wave of such recasts beginning in 2014.  Many markets saw values increase substantially enough so that refinancing a first mortgage would pay off the recasting HELOC (hello coastal California!!) but many other more economically depressed areas of the country have not.  There has been a steady drumbeat of doom and gloom for several years about how HELOC recasts could trigger a banking crisis.  I was reminded of this while reading through Black Knight Financial Services’ Mortgage Monitor Report for March (emphasis mine):

“In 2017, 19 percent of active HELOCs are facing reset,” said Graboske. “This is the largest share of active HELOCs facing reset of any single year on record, although the approximate 1.5 million borrowers slated to see their HELOC payments increase this year is about 100,000 fewer borrowers than in 2016. With the lines beginning to reset this year and early into 2018, we’re seeing the last of the pre-crisis-era HELOCs that the industry has been focusing on since early 2014. After deceleration in early 2018, we will have a lull of several years in reset activity. On average, borrowers facing resets this year are looking at a ‘payment shock’ of about $250 per month over their current HELOC payments – more than doubling their current payments, in fact. Historically, those increases have impacted HELOC performance significantly; delinquency rates of 2006 vintage HELOCs – which reset last year – jumped by 74 percent. That was marginally lower than the 2004 and 2005 vintages, which saw delinquency rates rise by 90 and 88 percent, respectively. Payment shocks remain high for lines resetting in 2018 but then drop along with the overall volume of resets in 2019.

First off, that 19% of active HELOCs are resetting this year is a mind boggling statistic as are the increases in default rates in big recast years.  For those of you living in areas where prices have recovered, you are probably asking yourself why a HELOC borrower wouldn’t just refinance his or her loan.  The answer is that many who can already have. Others will wait until the last minute and some will try to extend the recast with their lender.  However, a significant portion will be stuck with a substantially higher payment than what they currently have.  More from Black Knight (emphasis mine):

 “One thing that’s working in the 2007 vintage HELOCs’ favor has been the equity and interest rate environment of the last year. Rising home prices and low interest rates throughout 2016 have allowed borrowers to be much more proactive than in years past in terms of paying off or refinancing their lines to avoid increased monthly payments. For those still facing resets, however, equity continues to be a struggle. One-third of borrowers whose HELOCs will reset in 2017 have less than 20 percent equity in their home, making refinancing problematic. One in five have less than 10 percent, and one in 10 are actually underwater. Even that reflects improvement in home prices, though; last year 45 percent of borrowers facing reset had less than 20 percent equity and nearly 20 percent were underwater.”

I suppose that the silver lining here is that employment data has been good and wages are finally increasing, especially at the lower end of the employment market.  That being said, it sucks to have your long-awaited raise go 100% towards an increase in payment on a mortgage that you took out 10 years ago.  At this point in time, it’s nowhere near a big enough problem to engender a government backed solution a la HARP, nor, frankly should it.  We’ve already been through two years of the recast tidal wave and it hasn’t triggered the aforementioned looming banking crisis.  However, the recast tidal wave is just another drag on the low end of the market that still hasn’t recovered and just can’t seem to catch a break.


Leaving the Door Open: Tax withholding is surging, indicating that wages are on the rise and solidifying the likelihood of a Federal Reserve rate hike in June.

Solid: Weekly unemployment claims continue to remain at an historically low levels.  But See: Retail continues to shed jobs.

Lights Out: Left with no hope of repaying its creditors, Puerto Rico (finally) declared bankruptcy.


Best Coast: Yet another reason that West Coast = best coast – our offices are more dog friendly.  (h/t Tad Springer)


Easing Up: Fannie Mae is trying to make it easier for potential borrowers with student debt to get a home loan.

Staying Put: The popularity of aging in place remodeling continues to see it’s popularity grow.  Related: US housing wealth is growing for the oldest and wealthiest Americans, at the expense of everybody else.

Rise of the Machines: MIT researchers have created a robot that can 3-D print a basic house in a matter of hours.

Get Out: Millennials are leaving their mom’s basement at a faster pace than they have over the past few years.


Constant Evolution: When experts are wrong, it’s often because they are experts on an earlier version of the world.

Worldwide Bleeder: Despite firing 100 people last week and bleeding cable subscribers by the millions, ESPN is not doomed.  However, it’s business is going to look very different going forward.

Shrinkage: Subway’s store count is contracting for the first time, mainly because their food is trash.

Chart of the Day 

Are new houses going to start getting smaller?


Your Prayers Have Been Answered: KFC has released a steamy romance novella for Mothers Day featuring Colonel Sanders.  Nothing goes together like awful fried chicken and romance novels.  Side note: KFC’s most profitable day of the year is Mothers DaySide Note 2: The previous sentence is the most depressing thing I’ve ever written. (h/t Nicole Deermount)

He Who Smelt It: Former Chicago Cubs player David Ross got a nose-full when his Dancing With The Stars partner Lindsay Arnold farted in his face during practice.  For the record, this is probably the only thing that could get me to watch that garbage show.  (h/t Nicole Deermount)

Below Minimum Wage: An Arizona woman discovered a note from a Chinese prisoner in a purse that she purchased because, Walmart.  (h/t Ingrid Vallon)

Meanwhile, In Florida: This is an incredibly interesting way to hide a pipe filled with marijuana resin when you get pulled over.

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

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Landmark Links May 5th – Sticker Shock