Landmark Links September 22nd – Myth Busters


Lead Story…. There are few forces on earth more powerful than that of mean reversion. I’ve written about common media narratives regarding Millennial preferences quite a bit since I started this blog.  Since the beginning of this cycle, the US media has latched on to a juicy narrative that was too good go pass up – that Millennials were unlike any other prior American generation and would forego things like home ownership and car ownership “forever” in favor of renting, mass transit and ride sharing.  I’m really not sure where this view originated.  Chances are that it was someone or a group of people with an ax to grind against suburban sprawl who saw that Millennials were increasingly foregoing home and car ownership.  Rather than investigating the underlying causes, they simply attributed these life decisions to reasons that fit their pre-existing biases.  Media outlets took the bait and the Millennial-as-perpetual-urban-renter theme became accepted as fact.  For several years, John Burns Real Estate Consulting (and others) have pointed out the fallacy of this thinking – there is a critical difference between what someone would like to do and what they are actually doing.

In the years following the Great Recession, Millennials did indeed rent in the city and forego purchasing cars in droves.  However, as this generation has aged, it’s behavior is reverting to the mean just as it did with previous generations.  Two stories came out this week that helped clarify the difference between what young people are doing with regards to home ownership and what they would like to be doing.  The first was from Daniel Taub at Bloomberg who referenced a joint study by the National Association of Realtors and non-profit American Student Assistance that found that heavy student debt loads delay home purchases by 7 years on average (emphasis mine):

The typical student debt load for millennials in the U.S. is $41,200, surpassing their median annual income of $38,800. One impact of that burden: first-time home purchases are being delayed by seven years.

That’s according to survey results released Monday by the National Association of Realtors and the nonprofit group American Student Assistance. Only a fifth of millennial respondents own a home, with 83 percent of non-owners citing student debt as the reason they aren’t buying. Among those who do own, 28 percent said they’d sell their current home and purchase a better one, if not for student loans.

It’s difficult to buy a home when debt service on student loans eats up so much of your income and potential down payment savings.  This is a problem that previous generations didn’t have to deal with at nearly the same scale.  However, young people are still buying homes (and SUV’s for that matter) once they form families and start having kids.  They are just going through these rights of passage later than previous generations did.  Another story from NPR’s Emily Sullivan and Sonari Glinton pointed out that older Millennials are buying suburban homes and SUVs, just as previous generations did and completely counter to the Millennial-as-perpetual-renter narrative (emphasis mine):

But now, as millennials get older — and richer — more of them are buying SUVs to drive to their suburban homes.

The National Association of Realtors’ 2017 Home Buyer and Seller Generational Trends study found that millennials were the largest group of homebuyers for the fourth consecutive year.

Zillow’s chief economist, Svenja Gudell, says that for millennials, growing older is beginning to mean buying a house in the suburbs.

The Great Recession acted as a pause button for many choices that Gudell says millennials were already going to be slow to make.

“We’re seeing that the age at which women have kids has also gone up. And so instead of having children in their late 20s, you might start having kids when you’re in your early 30s at this point,” she says.

Generationally speaking, the stereotype of millennials as urbanites falls flat when it comes to home ownership. The Zillow 2016 Consumer Housing Trends Report found that 47 percent of millennial homeowners live in the suburbs, with 33 percent settling in an urban setting and 20 percent opting for a rural area.


Michelle Krebs, an executive analyst at Autotrader, says college debt kept millennials out of the car market, but now that’s changing.

In 2011, millennials were just 20 percent of the market. They’re about 30 percent now, and Krebs says that they’ll be 40 percent of the market before the next decade if current trends continue.

Erich Merkle, an economist with Ford, says that as millennials cross the threshold into family life, they’re buying large SUVs.

“We expect them to carry on as they age with three-row SUVs and likely go larger simply because they need the space to accommodate children that are now teenagers or preteenagers,” he said.

Ford expects all SUV sales to grow from 40 percent to more than 45 percent of the total U.S. new vehicle market within the next five to seven years.

Millennials just might be mainstream after all.

Young people increasingly moving to the suburbs and purchasing SUVs both fit nicely with the demographic trend that my favorite chart from Calculated Risk illustrates:


As Millenials age, they are acting exactly as previous generations acted – just a few years behind due to student debt and the unfortunate reality of coming of age during the Great Recession.  Look for this mean reversion to continue as the 30-39 year old age group grows dramatically over the next decade or so.  Deferring home and car purchases due to personal financial limitations may not be as sexy to write about as a sea change in attitudes amongst an entire generation towards two bedrocks of American society. However, it is a far simpler explanation and, per the actual data, also has the advantage of being the correct one.


Tale of Two Demographics: New data shows that retirees are on the move but young people are increasingly staying put.

Warning Signs: The next financial crisis is far more likely to be brought on by untested and largely unregulated Silicon Valley fintech startups than by Wall Street.

It’s Been a While: The incremental bump in US incomes that we have been experiencing of late does not erase the 50 years of stagnating wage pain that preceded it.


Leveraging Up: Interest from bond investors is prompting publicly listed mall owners to issue debt at record levels this year even as equity investors rush for the exits.

Winter Wonderland: Landlords are tying to turn under performing open-air shopping centers into winter hangouts complete with skating rinks, fire pits and programmed entertainment in an effort to drive foot traffic in colder months.

Short Commute: Not driving to work is the new high end job perk and the more that you make, the less likely you are to take public transport.


Whatever It Takes: A new startup called Loftium will give you up to $50,000 to put a down payment on a house but only if you agree to continuously list an extra bedroom on Airbnb for 1-3 years and share income with them during that time.

Tightening: Bank financing for residential acquisition, development, and construction suggests that banks are getting more selective.


Virtual Roller Coaster: Bitcoin’s wild ride shows the truth – it’s value depends on it becoming digital gold or being used by criminals – and that value is most likely zero. See Also: Bitcoin has become all about the payday, not its potential.  But See: What Jamie Dimon gets wrong about Bitcoin and Tulips.

Disappearing Act: The fascinating post-baseball story of former Giants super star pitcher Tim Lincecum, as reclusive an athlete as you will ever find

Chart of the Day

Some housing stats from The Daily Shot

Existing home sales dipped again, missing economists’ forecasts. Affordability is becoming more of an issue.

Source: Piper Jaffray

Most housing analysts blame these slowing sales on shrinking inventories. Home listings are seasonal, and for this time of the year, the availability of houses for sale is the lowest since the 90s.

Source: The Daily Shot


Truth Serum: A new survey of British plant eaters has found that one in three vegetarians eat meat every time they’re drunk on a night out because not eating meat sucks.

Over Confident: A shaman was killed while swimming in a crocodile invested lake in Indonesia.  He jumped in there in an effort to prove his  supernatural control over crocodiles after a villager had been killed the previous day.  The whole ordeal was caught on video.  It’s easy to say in retrospect but this was probably a bad idea.

Good Samaritans and Better Headlines: Topless car wash raises cash for deputies wounded in gun battle at Rastafarian pot farm

Gotta Hear Both Sides: A Colorado Springs woman is wanted for questioning by local police after having been spotted pooping on a family’s lawn multiple times.  The manager from the local Chipotle was unavailable for comment.  (h/t Dave Landes)

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

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Landmark Links September 22nd – Myth Busters

Landmark Links September 15th – Toxic Brew

Meals on Wheels

Lead Story…. One universal truth about the financial industry is that it inhabits an ever-changing spectrum of fear and greed.  Real estate finance is certainly no different.  When greed is rampant, lenders bend over backwards to get money out the door so long as a perspective borrower can fog a mirror.  When fear rules the day, the process of obtaining financing is more akin to a full proctology exam.  People generally like to think that we learn from past mistakes.  However, when it comes to finance, memories are short and lessons generally only stick for a short period of time.  After that, they become lost in the dustbin of history or rationalized away by some variation of the ever-popular “it’s different this time” meme.  So, imagine my lack of surprise when reading a story this week about an Australian real estate financing scheme virtually certain to end in tears for all involved.  From Frank Chung at (emphasis mine):

THE Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

To clarify what is happening here: if an investor in Australia owns a rental property and wants to buy another, lenders are letting him or her cross collateralize the original property and use the equity from that initial property as a virtual down payment, negating the need for the investor to actually invest any additional cash.  When done in scale, this introduces a massive amount of risk into the system since it drives leverage ratios through the roof.

The first thing that you are probably thinking is how the hell is this going on when the housing bubble happened so recently?  Well, here’s a bit of perspective: that was the case in the US but not in Australia.  A fairly recent crisis is far less of an impediment to bad behavior when it happens in a different country thousands of miles away.  As the chart below shows, Australia had a brief market correction around 2008 but it’s housing market has been headed to the moon ever since, largely buoyed by massive inflows of capital from international buyers:

Image result for australia versus us housing

When I initially read the article quoted above, my first thought was whether or not rents are high enough there to cover expenses when properties are essentially 100% financed.  Short answer: they are not.  More from Frank Chung (emphasis mine):

The report describes the system as a “classic mortgage Ponzi finance model”, with newly purchased properties often generating net rental income losses, adversely impacting upon cash flows.

Profitability is therefore predicated upon ever-rising housing prices,” the report says. “When house prices have fallen in a local market, many borrowers were unable to service the principal on their mortgages when the interest only period expires or are unable to roll over the interest-only period.”

LF Economics argues that while international money markets have until now provided “remarkably affordable funding” enabling Australian banks to issue “large and risky loans”, there is a growing risk the wholesale lending community will walk away from the Australian banking system.

“[Many] international wholesale lenders … may find out the hard way that they have invested into nothing more than a $1.7 trillion ‘piss in a fancy bottle scam’,” the report says.

The report largely sheets the blame home to Australia’s financial regulators, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission. “ASIC and APRA have failed to protect borrowers from predatory and illegal lending practices,” it says.

This is a “business plan” that is 100% reliant on substantial appreciation to be successful.  From the article, it appears as if many of these loans have a built in interest only period and aren’t even covering debt service during this I/O period.  Once the loan adjusts and begins to amortize, the borrower needs to refinance or sell.  Otherwise he or she will have to continue to feed the project (or have the loan negatively amortize) every month in order to cover the loss.  Such a business plan is successful if and only if the property appreciation is greater than the amount of cash or negative amortization needed to cover the negative cash flow.  Perhaps the worst part is that the market doesn’t even need to fall in order for a borrower to get wiped out (remember all of the properties are cross collateralized under this scheme).  Instead, the market simply needs to move sideways and, due to the negative cash flow and borrower’s inability to refinance in a flat market, the borrower will eventually default.

Notice that the regulators are already being blamed for not reigning in the banks and allowing predatory lenders to prey on borrowers.  Let’s be honest: these borrowers know exactly what they are doing.  They are trying to amass a portfolio of investment properties with minimal investment and as much debt as possible with a complicit lender taking on equity risk in order to get more dollars out the proverbial door.  This isn’t some middle class worker who was sold on the dream of home  ownership by a smooth-talking mortgage banker and got in over his head.  The lenders here are being blinded by greed and the borrowers are as well.  Both are 100% culpable for the mess that they are going to cause. I feel a bit like I’ve gone back in a time machine writing this post since it reminds me so much of the shenanigans in the US mortgage market back in 2005 and 2006 when negative amortization pick-a-payment loans were all the rage.  Our current system in the US is far from perfect and is still too restrictive thanks to the ongoing housing bubble hangover but thank God that US mortgage lenders aren’t doing what Australian lenders are.


Strategy Shift: In a tight labor market, companies are looking to set up in cities with large numbers of underemployed people who would leap at a new opportunity.

Contrarian: An unconventional Bank of International Settlements paper makes the argument that global demographics- which have played a role in driving global deflation – will change course and cause inflation to increase in the coming years.

Grinding Higher: US Median income has now hit a new high. but still isn’t much greater in real terms than it was in 1999.


Assessing the Damage: In the wake of hurricane Irma 25% of homes in the Florida Keys were destroyed and thousands more were damaged.  Meanwhile, millions of people in the Southwest were still without power as of early this week.

Can’t Stop. Won’t Stop: Houston’s housing market seems undaunted by Harvey as buyers and builders are keeping deals on track.


Trail of Disruption: Since being released 10 years ago, here are all of the things that the iPhone has helped to destroy.

Tightening the Noose: China is planning to ban the trading of bitcoins and other cryptocurrencies traded on exchanges after banning ICOs last week.  The country accounts for nearly a quarter of bitcoin trades and cryptocurrency was largely seen as a means to move cash offshore in light of capital controls from Beijing.

Subtle: When asked about Bitcoin at a recent conference, JP Morgan Chase CEO Jaime Dimon was quoted as saying “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.”  Sometimes I wish that these corporate types would stop with the overly PC answers and let us know what they really think.  Contra: Dimon has trashed Bitcoin in the past and it’s nearly always been a buying opportunity.

Chart of the Day

Important Difference: Global income inequality hasn’t grown since the financial crisis

However, wealth inequality has.

Source: The Daily Shot


Strange Visual: Denny’s announced a new mascot this week that looks like a turd with eyes.  Actually, it look exactly like Mr. Hankey from South Park.

Keeper: A runaway bride in Great Britain was arrested after skipping town with 13,000 pounds of her fiance’s bachelor party fund.

Exposed: A married couple was busted for public indecency when they posted videos of themselves getting busy in public places online.  See Also: Nude model jailed for topless Egyptian temple shoot vows to keep stripping at holy sites.

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

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Landmark Links September 15th – Toxic Brew

Landmark Links September 19th – The Missing Link


Lead Story….  Basic economics and simple logic both dictate that if you want to make something more affordable, you do so by lowering it’s cost.  Then again, as anyone who has lived in California knows, the powers that be in this state have almost no aptitude when it comes to either simple logic or basic economics.  Consider the issue of affordable housing:  the fundamental problem is that we have a growing population and don’t build nearly enough units to keep housing costs in check.  However, rather than addressing the problem head on, lawmakers continue to push schemes to subsidize the construction of an extremely limited number of affordable units that are funded by imposing taxes and/or fees on pretty much everything else.  Take the City of Los Angeles and it’s proposed linkage fee on new construction that is nearing approval and would drive up already high construction costs substantially.  Land Use Attorney Andrew Starrels of Holland & Knight LLP did an interview with Globe Street (h/t Steve Sims) last week to explain how this latest scheme would work (emphasis mine):

The City of Los Angeles is considering imposing a significant new fee on most construction projects. These are called “linkage fees” because they attempt to connect new development to the severe need for affordable housing in the city by providing a sustainable funding source. The fees apply to virtually all new commercial and residential construction, and will be collected when a building permit is issued and deposited into the City’s Affordable Housing Trust Fund. As originally proposed, the fees would amount to $12 per square foot of new residential construction and $5 per square foot of commercial development. This will represent a significant assessment on nearly all forms of development in the hopes of creating more housing affordability. The measure is sponsored by affordable housing advocates and political leaders, including the Los Angeles Housing and Community Investment Department and nonprofit and for-profit developers of affordable housing. Los Angeles has one of the most dire shortages of affordable housing in the U.S., as very limited supply and rising land costs have combined to create a doubly burdensome situation for poor and working class families. Wage growth and the cost of living have simply not kept pace with the rising cost of real estate, especially in high-value coastal areas, even as the economy recovers.

First off take note of who is pushing this: “for-profit and non-profit developers of affordable housing” along with the usual advocate and bureaucratic folks.  At it’s core, these developers are trying to get others to fund their projects.  It’s good business for them at the expense of anyone who wants to build market-rate residential or commercial in Los Angeles.  Second, and increase of $5/sf for commercial development and $12/sf for residential development is insane given already-skyrocketing construction costs.  The sad part is that the revenue from the proposed linkage fee will likely provide little more than a drop in the bucket towards the amount of affordable housing actually needed.

Let’s face the facts: It’s really expensive to build affordable housing in California.  But don’t just take my word for it: A 2016 legislative analyst’s report estimated that building enough affordable homes for the roughly 1.7 million low-income household in CA that currently spend half or more of their salaries on housing would cost as much to finance each year as the state’s spending on Medi-Cal.  This is not a problem that is going to be solved via piecemeal subsidies.  Period.  Should this pass, it will result in a relatively small number of low income units built at best.

To understand the scale of the problem, the waiting list for Section 8 vouchers in LA is 40,000 people long – that’s an 11 year waiting list.  In an example of how slowly affordable housing units actually get built, just 329 income-restricted units were built between 2008 and 2014 as part of LA’s density bonus program that rewarded developers with additional units for making a portion of a project affordable – barely even beginning to scratch the surface of what is needed. The way that California’s cities deal with housing is roughly akin to a drunkard who has a cocktail in the morning to help ease his hangover.  Sure, he may feel better for a short while but it will ultimately make the problem worse. All the while, what he really needs is to face the problem head on and get sober – which is a lot harder to do but a far better outcome in the long run.

So, what will happen if the linkage fee passes?  A small number of affordable units will get built and will provide shelter for a number of people in need.  That’s good.  However, in doing so, construction costs will go up substantially, discouraging much-needed construction needed to keep costs under control for the middle class.  California’s housing paradigm will remain unchanged: a very limited number of lucky low income people will get subsidized housing, the middle class will continue to get priced out and only the rich will be able to afford well-located housing.  Sad.


Keeping Options Open: More Americans are delaying marriage past their 20s than ever before.

Bye Felicia: Vikram Pandit, former CEO of Citigroup thinks that 30% of bank jobs could be lost to technology in the next 5 years.

Out In Front: San Francisco edged out Washington DC to become the nations highest income large metro area. Median household income in the San Francisco metro area in 2016 was $96,667, versus $95,843 in the Washington region. However, per Zillow the median home value in San Francisco is $1.23mm versus just $547k in DC. Hmmmmm. I wonder why.


Kingmaker: Why Amazon’s 2nd headquarters doesn’t necessarily need to be in a large city and how it could create the next Austin.

Production Line: NY and California continue to dominate when it comes to new office deliveries.

This is a Bad Idea: Two ex Google employees want to eliminate neighborhood mom and pop bodegas by putting smart phone operated boxes with non-perishable items in buildings. The idea was received poorly to say the least.


Cramped: Seattle is building a whole lot of 1 bedroom apartments and not much of anything else.

E for Effort: California lawmakers passed several bills in an attempt to deal with the housing affordability crisis. Some are a step in the right direction but come with strings attached like prevailing wage provisions so I don’t expect much of an impact. Hope I’m wrong….


Blood in the Water: Silicon Valley has largely flown under the radar of Federal Government regulators while oil companies and Wall Street banks have not.  That is changing quickly as big tech firms find themselves more in the cross hairs of Washington than ever before.

Predictable: Bitcoin took a dive after China banned exchanges.

Building Out: This interactive map of planned development of the LA subway and light rail system between now and the 2028 Olympic Games is fascinating.

Chart of the Day

Popular delusion

Investors still think that the current private equity multiples will get them their usual returns (such as what they got with the 2010-12 vintages). Amazing.

Source: The Lead Left via The Daily Shot


Hear No Evil: A sign language interpreter used gibberish and warned of bears, monsters and pizza during Hurricane Irma because, Florida.

Your Tax Dollars at Work: A former county administrative assistant from Arkansas admitted to fraudulent use of a credit card to make $200k in purchases including a tuxedo for her pug.

VICTORY: A Berlin court upheld a man’s right to fart in public this week.  Fortunately the judge was not long winded in his decision.

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

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Landmark Links September 19th – The Missing Link

Landmark Links September 12th – Send Help


Lead Story…. The United States construction industry has been coping with a massive labor shortage pretty much since the economy emerged from the depths of the Great Recession.  Job openings and steadily increasing compensation have not been enough to tempt young workers to enter an industry that generally pays relatively well (especially for those without a college education) but also involves manual labor.  Housing starts have increased some this year (although they are still low by historical standards), leaving the industry in an tight situation by the end of the summer.  Then, over the past couple of weeks, Hurricane Harvey devastated Houston and Hurricane Irma flattened part of Florida both of which which will exacerbate the problem substantially.  The level of sheer devastation from these storms if unfathomable.  Tens of thousands (possibly more by the time you read this) will have damaged or lost homes or worse.  I tend to joke about Florida a lot in the WTF section of this blog but I am truly keeping my favorite crazy state in my thoughts and prayers as they (and the greater Houston area) go through this.

Now the cleanup begins and the consequences of having to rebuild one of America’s largest cites and a portion of one of it’s largest and most populous states are going to be profound.  This would be a monumental effort even in a “normal” construction labor market since a massive amount of workers and resources need to be re-directed from the normal  construction economy.  Laura Kusisto and Doublas Belkin of the Wall Street Journal pointed out just how tight the market for construction labor currently is (emphasis mine):

Before Harvey, construction workers across the U.S. were already in tight supply and material costs were rising. Houston is likely to face such a severe crunch that it could affect the national economy by pushing up material costs and driving down the U.S. unemployment rate for construction workers further, according to Robert Dietz, chief economist at the National Association of Home Builders. There were 225,000 unfilled construction jobs in June, near the recent high of 238,000 recorded in July 2016, according to a National Association of Home Builders analysis of Labor Department data. In all, 10,000 to 20,000 workers could be needed to rebuild the homes damaged by Harvey alone, or 10% to 20% of the total number of residential construction workers in the Houston metropolitan area, according to the National Association of Home Builders.

Let’s dig into those numbers a bit further.  The team at John Burns Real Estate Consulting took a look back at rebuilding after hurricane Katrina hit New Orleans in order to get an idea of what to expect after Harvey (this was written before Irma made landfall in Florida, so in all likelihood, it only gets worse).  Here were their major takeaways (emphasis mine):

  1. Repair and remodeling spending will surge 9% nationally, taking labor and material resources away from new home construction. Our VP Todd Tomalak expects total 2017 disaster repair spending to reach $23 billion, which is more than double that of 2016. Those without flood insurance will tend to DIY.

  2. New home construction costs will rise for several years.

    • Government regulation and oversight will likely increase, making home construction more expensive. After three major floods in less than three years, most Houstonians no longer believe flooding is a once-in-a-lifetime event.
    • Labor costs will rise. 8 of the 14 builders we spoke with last week expect new home permits to decline for the balance of the year, primarily due to short supply of labor. All builders expected labor prices to continue increasing. Construction worker compensation rose 14% in Mississippi after Hurricane Katrina. Our clients in Dallas expect to lose workers to Houston as well.
    • Land prices likely to remain stable. The shortage of land in good locations will likely continue to keep land prices high.
  3. Real estate discounts will disappear. Prior to the hurricane, many new home sellers and apartment landlords were offering incentives to buyers and renters due to a slowly growing economy and an overbuilding of expensive apartments. Apartment Data Services, the Texas leader in apartment statistics and research, estimates approximately 10% of Houston-area apartments flooded from Hurricane Harvey, and believe most of the 70,000 vacant units will become occupied quickly. With housing vacancy certain to decline, we expect the incentives to disappear..

  4. Construction volumes will be higher than forecasted in 2018 and later. It took about five years after Hurricane Katrina to rebuild the housing stock in Harrison and Hancock counties.

The logical conclusion is that it’s likely about to become more expensive to build or remodel a home as the labor market continues to tighten up in the coming months.  I have two main takeaways from this:

  1. How mobile is the construction labor pool in 2017?  In other words, will workers in California, Colorado, Arizona, Virginia, etc be inclined to go to Houston or south Florida for a few months of work in order to make higher wages that become available when a crisis hits?  The Wall Street Journal had some anecdotal evidence that they will.  If the answer is yes, this will have a ripple effect on pricing on a much more nationwide basis.  If it is no, then the impact will be an acute cost increase in the regions surrounding Houston and South Florida but relatively minimal impact elsewhere.  I’m still not 100% sure on this but am leaning towards the idea that the construction labor pool is currently more mobile than commonly thought – especially when that mobility entails leaving a high cost of living region like coastal California when better wages become available in a lower cost of living region like Houston or South Florida.  Only time will tell.
  2. In the past, a construction labor shortage would have been at least somewhat offset by immigrant labor (legal and otherwise) as jobs open up and wages rise.  That is highly unlikely to happen this time around given today’s political climate and the result will be higher housing costs.  I’m not writing this to make a political argument but merely to point out a fact: less potential workers lead to shortages and a higher cost of living when demand increases.  IMO, this is something that is not acknowledged frequently enough by either side of the immigration debate.

We have been fortunate in recent years that the Atlantic hurricane season has been relatively tame.  Not so in 2017 and it’s still relatively early.  Keep all of those impacted by these brutal storms in your thoughts and prayers.  Houston and south Florida will rebuild but the resulting higher construction costs will likely be felt long after the sky has cleared.


False Premise? Why the notion that higher interest rates were “normal” while current ones are “unnaturally” low is false.

The Big Shift: Economic productivity is finally rising as companies begin to hire more workers in the goods producing and professional & businesses sector and less in lower productivity sectors like retail, leisure and hospitality.

Unreliable: If central banks can’t explain why inflation is so low, then why is there any faith in their forecasts?


Pick Me, Pick Me! Cities across the US are falling over themselves to be the site of Amazon’s second corporate headquarters.

Disruption: The reason that WeWork is valued so highly is that they have the potential to change the way that office buildings operate by utilizing better data.

Soaked: There is nearly $30 billion in CMBS exposure in areas affected by Hurricane Harvey.


Standout: Home ownership is hovering near a 50 year low but increasing Hispanic home ownership since the depths of the housing crisis is one of the few bright spots.

Reminder: Lower than anticipated GDP is very much a residential investment problem and is helping to keep interest rates low.

The Forbidden City: Many of Los Angeles’s most popular and iconic buildings would not be allowed to be built today.


Schadenfreude: The Juicero failed at least in part because it’s founder and CEO is a bat shit crazy, self righteous vegan (h/t Steve Sims):

Some employees say Evans’s passion for wellness was overwhelming. The founder mostly ate raw and vegan foods, and would sometimes scold non-vegan employees who ate yogurt or drank milk at team meetings, according to three former employees. He occasionally referred to dairy products as “cow pus,” they say. For a time, he also refused to allow employees to expense work meals at non-vegan restaurants, the ex-employees say.

Too Easy: Online hookup apps have taken a bite out of the bottom lines of brothels in Australia.

Hmmmmm: Three Equifax managers sold a substantial amount of stock in the company right before last week’s cyber attack which compromised the data of 143 million people was revealed.

Chart of the Day

Hello, Industrial Revolution

World GDP per capita over time

Source: Visual Capitalist 


Buy GOLD: A cybersecurity scientist has issued a bizarre warning that sex robots could one day rise up and kill their owners if hackers can get inside their heads.

Panties in a Bunch: Hurricane Irma wreaked destruction across the Caribbean and some models are sending their thoughts and prayers via racy bikini pics on Instagram, leading to claims of tone-deafness.  Let me go on the record to say that I am not offended by this.

Clowning Around: Clowns are gearing up to protest Stephen King’s movie ‘It’ over something that they call negative clown stereotypes.  Just my opinion but clowns are terrifying and deserve to be stereotyped.

FAIL: A French soccer team misspelled their own name on all of their player jerseys for the 2017-2018 season.  Spellcheck FAIL.

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

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Landmark Links September 12th – Send Help

Landmark Links September 8th – Discount Rack


Lead Story… Late in 2016, the Federal Reserve had a dollar problem on it’s hands.  The Fed had embarked on the beginning of a tightening cycle by boosting short term rates while other major economies were actually easing rates.  When a central bank raises rates, it’s currency tends to appreciate, all else being equal.  So every time that the Fed indicated that it would raise rates via a statement or meeting minutes, the dollar would shoot up in value, raising concerns about currency over-valuation versus trading partners and slowing growth.  As a result, the Fed was forced to push it’s rate increases back several times in 2016 and hike less than initially intended.  The US economy (and by extension the dollar) was the prettiest girl at a dance populated mainly by 2s and 3s as economies in the rest of the developed world battled deflation and economic contraction.

The dollar appreciation had a profound impact on real estate markets (and commodities, for that matter) especially where foreign investors were concerned.  As noted here back in May of 2016, dollar appreciation created a conundrum for foreign buyers who had put non-refundable deposits on to-be-built condos in Miami when the dollar increased in value during the construction period.  The problem was that the buyer would need to come up with more money than anticipated to close since their native currency depreciated versus the dollar.  As a result, many chose to flip their contracts, creating a glut of condo inventory that Miami has not recovered from.  The silver lining was that dollar appreciation led to a potentially large profit (in native currency terms at least) if and when a sale took place even if the value of the unit hadn’t gone up in price.  Miami’s foreign condo buyers essentially became Forex currency traders by default.  By the middle of last year the dollar had strengthened to such an extent that it substantially impacted foreign buying power and inventory surged substantially as offshore buyers disappeared.

Oh what a difference a year makes when it comes to the Greenback.  The dollar topped out in January of 2017 and has continued to fall ever since.  In fact, it’s now on it’s longest monthly losing streak in 14 years and has fallen nearly 10% year to date.  Eshe Nelson at Quartz covered this last week (emphasis mine):

American employers added 156,000 jobs in August (pdf), missing economists’ forecasts for a 180,000 gain in payrolls. Meanwhile, the unemployment rate ticked up to 4.4%, from a 16-year low of 4.3%, and annual wage growth remained stubbornly sluggish at 2.5%. Traders reacted swiftly to the disappointment, and sent the dollar index down 0.5%, just minutes after the report was published.

For 2017, the average monthly payrolls increase is 176,000, about the same as 2016. While this is still a healthy pace of jobs gains, the stagnant labor force participation rate and wage growth will have policymakers at the Federal Reserve wondering if the US economy is prepared for more interest rate increases.

Most officials expected in June (pdf) that they would raise rates at least one more time by the end of the year, but weak inflation convinced many investors that they probably wouldn’t. This is keeping the dollar suppressed. Geopolitical concerns over tensions with North Korea and the looming need to increase the US debt ceiling aren’t helping the dollar either. But as the dollar languishes, other currencies are soaring. Most notably, the euro:

The dollar has lost 11% of its value against the European shared currency in the past six months. While, Europe is experiencing a growth spurt in its economy, the benefits have almost become too good. The euro climbed above $1.20 for the first time since January 2015 this week and is reportedly worrying European Central Bank policymakers who are trying to rollback stimulus measures. Now, they are now concerned the eurozone will face a fresh bout of low inflation because of the strength of the currency. ECB officials meet next week to announce their latest policy decision.

So, what does this mean for US real estate?  It means that foreign currency buys 10% more in the US than it did a year ago.  That could lead to a resurgence of foreign interest in areas like NY, Miami and even San Francisco (to a lesser extent) where they have had trouble with high condo inventory of late.  It could also have a positive impact on US markets that are attractive to Canadians like the Coachella Valley.  Canadian buyers largely kept the Valley afloat coming out of the downturn but buying slowed down and many ended up selling when oil tanked, taking the Canadian dollar and economy with it.  The Coachella Valley has struggled in a way that most of the rest of the California housing market has not as it tried to cope with the exodus of Canadians who had propped the market up.  The Greenback losing value against the Loonie could be just what the doctor ordered for a region that has seen housing activity stuck in neutral at best.

There are plenty of downsides to a falling dollar.  It’s makes it more expensive to travel, imports go up in price and commodities tend to go up as well.  However, a cheaper dollar means that dollar-denominated assets are more attractive to foreigners.  That could provide a tailwind to some over-supplied housing markets that depend on foreign buyers…..and add even more fuel to the already-raging fire in markets that are already experiencing a massive supply shortage and soaring home prices.


Puzzling: Low inflation data continues to defy Federal Reserve expectations.

Dropping Standards: Job satisfaction is way up, mainly because workers have increasingly lowered their expectations.

False Alarm? Fear not the robot apocalypse.  Automation commonly creates more, and better-paying, jobs than it destroys. A case in point: U.S. retailing and the eCommerce boom.


Sticker Shock: Institutional investors identified elevated valuations as their primary concern when it comes to commercial real estate in the US.


Sea Change: Great piece from Rick Palacios, Jr. of JBREC about how self-driving cars are going to change housing.

Race to the Bottom: The fascinating backstory of how solar panels went from an expensive luxury to cheap enough for mass adoption.


Frothy: Yale economist Robert Shiller wrote the book on bubbles (and collected a Nobel Prize along the way) and he says that “the best example right now is bitcoin.” See Also: Why cryptocurrencies are like Beanie Babies.

Too Little Too Late? Kroger, the largest supermarket by store count and sales, is attempting to fight off Amazon by slashing prices, investing in technology and adding online ordering options.  Shouldn’t they have been doing this years ago?

Smoke and Mirrors?  According to Moody’s, Amazon is actually the weakest of the big US retailers, not one of the strongest.

Just Stop Already: People who fake service dogs are monsters.

Polly Want a Xanax: Parrots are probably the world’s worst pets yet they remain relatively popular.

Chart of the Day

The labor shortage in residential construction continues.


Suns Out, ___ Out: A couple was arrested for having sex on a crowded beach in broad daylight because, Florida.  Also because Four Loko. (h/t Steve Sims)

That Stinks: Woman ends Tinder date stuck in window trying to grab her own poop.

Hell No: People at the Burning Man Festival drank breast milk lattes mainly because people at Burning Man are freak shows.

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

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Landmark Links September 8th – Discount Rack

Landmark Links September 5th – Bubblicious


Lead Story… It’s been said that calling a financial bubble in real time is next to impossible.  Sure, certain people talk about bubbles nonstop but how many times do their pronouncements ever actually come true?  More often than not bubble-calling makes a prognosticator look like the proverbial broken clock that manages to get the time right consistently twice a day.  However, every now and then a financial bubble appears that isn’t so difficult to miss.  In fact, there is a bubble in today’s market currently being inflated at a rather impressive rate: ICOs or Initial Coin Offerings.  So, what is an Initial Coin Offering?  Simon Black at Zerohedge explains (emphasis mine):

If you haven’t heard of ICOs, it stands for Initial Coin Offering. It’s a combination of venture capital and cryptofinance.

Traditionally, startup companies have raised the money they’ve needed from angel investors and VC funds.

These days, companies are raising money by selling digital ‘tokens’ to investors, most of whom typically pay in Bitcoin, Ether, or some other cryptocurrency.

Tokens often represent shares in the startup company, just in the same way that Apple stock represents shares in Apple.

And, just like shares of Apple, investors can buy and sell their tokens in the market.

There are countless startup companies now issuing tokens. And, just like the price of the cryptocurrencies themselves, many ICOs have soared in price.

If this sounds like little more than a way to skirt the Initial Public Offering or IPO process and all of the regulatory red tape and reporting that go along with it, that’s because it is.  Despite the SEC recently warning companies that issue ICO’s that they fall under their regulatory umbrella, this is still very much the wild west of capital raising.  Some of the returns that these “investments” are generating are beyond absurd.  More from Simon Black (emphasis mine):

There’s a token issued by Stratis, for example, that is up 101,168% since its ICO last summer. The NXT token is up 672,989%.

Those are not type-o’s.

There’s another token that’s actually called “Fuck” which is up 370% in the last 24 hours.

The returns are absurd… especially considering the assets are priced in Ether or Bitcoin, which have also soared to all-time highs.

So on top of a 1,000% return in Bitcoin, ICO investors have also made a 100,000% return in the token.

Not sure about you, but I really wish that I had bought into the “Fuck” token offering a few days ago despite not having a clue what type of company it is backed by let alone it’s business prospects.  This begs the question: do you really believe that the businesses behind these tokens are growing at a rate that justifies that type of obscene appreciation?  Plus, this type of return breeds the “easy money” mentality that arouses animal spirits, pulls unsophisticated investors off the sidelines and leads to debacles like the housing bubble or the late 1990s tech bubble.  Need another red flag?  Paris Hilton and Floyd Mayweather have been promoting some of these things.  Seems really legit.  Black drew one more analogy in his post to show just how crazy things have gotten:

To put these numbers in context, Peter Thiel invested $500,000 in Facebook back in 2004 as the company’s first big investor. In 2012 he sold most of it for $1 billion.

That’s a return of 200,000% in eight years… pretty tame by ICO standards.

There is a legitimate argument over whether or not individual crypto currencies like Bitcoin and Ethereum are overvalued or not.  However, I don’t think that there is much of a debate that some of these ICO’s are incredibly overvalued and will end in tears for investors.  That’s not saying that there won’t be any success stories or that the group won’t continue to shoot towards the moon for a while as growing coverage in mainstream publications pull in more marks looking to get rich quick.  At the same time, there are storm clouds on the horizon.  For example China, where a ton of ICO capital comes from (this makes sense if you’ve followed large Chinese capital flows frequently overpaying for assets in a desperate scramble to get cash offshore at any cost), declared the practice illegal.

Mark Twain is reputed to have said that ““History doesn’t repeat itself but it often rhymes.”  In this case, the ICO boom sure appears to rhyme with tulips, tech stocks and mid-aughts housing.  Then again, maybe I’m just bitter that it isn’t nearly so easy to raise capital for real estate projects.


What A Drag: Superstar companies can be a drag on growth when a lack of competition enables them to gouge consumers, underpay workers and invest too little.

Levered Up: America’s public companies are foregoing equity in favor of debt to buy back shares and make acquisitions.  I wonder how this will turn out.


Whipsaw: Houston was dealing with a glut of apartment units before Hurricane Harvey hit.  Not any more.


RIP: Richard Florida thinks that the urban revival of the past decade or two is coming to an end.

Painful: The housing hangover is showing few signs of lifting as prices continue to increase and the supply / demand imbalance persists.

Higher Ground: Hurricane Harvey could reshape how and where Americans build homes as flood plane, insurance and building code issues come into focus.


Consider Yourselves Warned: The IRS is looking at social media accounts to determine who they should be auditing.

This Was Inevitable: The maker of the Juicero, the incredibly expensive yet largely useless wifi juicer which managed to raise a whopping $120MM from gullible VCs is shutting down. (h/t Darren Fancher)

Juiced: Hedge funds are rushing into cryptocurrencies in an effort to boost their weak returns.

Buzz Kill: One of the consequences of widespread pot legalization is lower prices.

Charts of the Day

Reduced debt service burden due to low interest rates resulted in less non-discretionary spending as a percentage of households’ income

Source: The Daily Shot


Can You Spot the Irony: A man ran past security into the giant burning effigy at the Burning Man Festival in the Nevada desert.  He died and should now be the frontrunner  for a Darwin Award.  (h/t) Darren Fancher.  Side note: I’d sooner be stranded on a deserted island with the guy who did this than attend Burning Man.  Also, drugs are bad.

One Way or Another: A North Carolina man who jumped into the water to evade police ended up having to be rescued when he was subsequently chased by a shark.

Gotta Hear Both Sides: Homeless man claiming to be a vampire rips pigeon’s head off, drinks blood in New York’s Bryant Park.

Gotta Hear Both Sides Part II: A South Korean woman was arrested for cutting off her husband’s penis while he slept, then flushing it down the toilet because he allegedly played too much golf.

Going Postal: Seventeen postal workers in Atlanta have been charged with taking bribes to move cocaine.

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

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Landmark Links September 5th – Bubblicious

Landmark Links September 1st – Dual Purpose


Lead Story…. In Tuesday’s post I discussed how more re-purposing of obsolete suburban office and retail properties is needed but is politically challenging, often due to issues with reduction of municipal tax revenues that occur when a project goes from commercial to residential.  A long-time client who has been successful in the re-purposing or land coverage space replied with an astute observation that I want to address today:

awesome job. but i have to ask … what lenders will play ball on such re-purposing ideas? or said differently, what lenders are allowed to play ball? innovative RE ideas are impossible to get funded right now through primary channels. secondary channels get prohibitively expensive or are just as scared as the big banks.

This comment is 100% correct.  Assuming that you can negotiate the political pitfalls that often come with re-purposing to residential, it is still quite difficult to finance such a project from a debt perspective, meaning that returns often have to work on an equity-only basis.  It’s one thing to find such opportunities in a distressed market but completely another when things are stable.  Today I want to take a look at why this is so and what can be done to help find more attractive debt.

First off, there are broadly two types of lenders that provide bridge loans against assets that aren’t stabilized:

  1. Credit or cash flow – lends against a project based on the credit of a borrower and/or tenant.  Requires stabilized net operating income or NOI of a certain level to cover debt service on a certain multiple.  This can be either recourse or non-recourse debt.  Credit or cash flow lenders are typically relatively inexpensive.
  2. Basis – lends against a project based on the value of the underlying collateral alone with less regard for cash flow coverage.  Basis lenders are typically more expensive.

There is a place for both of these lenders in the market.  For example, basis lenders can often close far faster than credit lenders, have more underwriting flexibility and are easier to qualify for.  However, that flexibility and ease of use often means that they are making loans on projects that are perceived to be higher risk and they get compensated accordingly.  The higher interest rate can push into the low double digits which is often an issue of contention for equity partners who charge roughly the same or less for their preferred return.  As such, most borrowers prefer to go with a credit/cash flow lender if able.  So, what makes a project attractive to a credit / cash flow lender?  Let’s look at two hypothetical examples:

  1. Borrower 1 is purchasing a 50% leased office building with substantial deferred maintenance.  Borrower 1’s business plan is to re-position the building, lease it up at today’s market rents and sell as a fully leased asset in 3 years.
  2. Borrower 2 is purchasing the same 50% leased office building.  However, Borrower 2’s business plan is to re-entitle the site for a multi-family development.  The entitlement process is projected to take 24 months, during which the underlying lease expires.  Borrower 2 does not plan on leasing the vacant space or performing deferred maintenance during that time period.

Borrower 1’s scenario is a “down the middle” loan for a credit / cash flow lender.  Borrower 1’s business plan is to improve cash flow through leasing and re-positioning, which puts the lender in a stronger position from both a cash flow and valuation standpoint then they are in initially.  The loan for this business plan would likely be non-recourse with a coupon somewhere in the 5% – 7.5% range depending on the leverage with a 1 point origination fee.

Borrower 2’s scenario would not be attractive for a credit / cash flow lender since the success of the business plan is based upon re-entitling to a higher and better use while cash flow dries up.  If the re-entitlement were not successful, the property would either have to be entirely re-leased which would require a capital call since such loans typically do not have reserves or sold as a vacant building.  Either of these scenarios make such a business plan unattractive to credit / cash flow lenders.  As a result, if debt is needed for this business plan, it would likely come from a basis lender and would carry a coupon in the 9%-12% range depending on leverage with a 2% origination fee – substantially more expensive than the debt on the first scenario and much more likely to give an equity partner a serious case of heartburn.

So, what is a borrower to do if they want to finance a land coverage project with lower cost non-recourse debt?  My best answer is a hybrid business plan.  In other words, develop a business plan to re-lease the building while going through the entitlement process at the same time.  A loan to finance such a plan will typically hold back TI’s and leasing commissions to allow for re-tenanting while equity would be used to process the entitlements.  Does this drive the cost of the project up and tend to drag project duration out?  Absolutely.  However, the ability to obtain cheaper debt (often at a substantially higher advance rate) should help to offset the higher basis and it gives the borrower optionality when it comes time to sell.  This hybrid plan also has the advantage of a higher degree of downside protection.  If the entitlement effort fails, you have a fully leased asset to sell or hold rather than a vacant building to sell or re-tenant.

Assuming that they can get a credit / cash flow lender to put a loan on a project with an entitlement business plan is one of the most comment client mistakes that we see.  Even with the hybrid business plan, the key is still to buy at the right price.  An asset that trades at an above-market value due to re-entitlement potential is going to be difficult, especially in a mature and stable market.  However, if an asset is priced at an attractive level for it’s current use (after TI/LC and deferred maintenance investments are made), this is a business plan that can make sense for a re-purposing project.


Confidence Game: US consumer confidence is now at it’s second highest level since 2000.

Falling Behind: Here are five charts that illustrate just how much worse off millennials are than their parents.


Winter is Coming: Investors are starting to raise funds to purchase distressed properties as the retail and suburban office sectors continue to deteriorate.  But See: Online shopping is still driving massive demand in the class A warehouse space.

Reversion: Investors are converting condo towers to rentals in order to cash in on better tax treatment and soaring rents.


Piggy Bank: People are tapping their homes for cash again but HELOC originations continue to be outpaced by paydowns of old lines.


Red Flag: This NY Times article about a former Target manager making $12MM shorting the VIX makes me concerned about the stock market.

Zero Sum Game: Why Amazon doesn’t need to make any money off of groceries, putting pressure on competitors.  See Also: Why Amazon is such a threat to the grocery industry.

Snowflakes: Some smartphone-carrying millennials and Gen Zers are so used to texting upon arrival that the sound of a ringing doorbell freaks them out.

Hype Machine: Some tech guru’s think that the value of a bitcoin is headed to $500k.  However, the math isn’t quite so friendly when it comes to calculating valuation.  See Also: This:

Chart of the Day

Context matters: The current CA “housing boom” just barely surpassed the state’s worst housing slumps going back to the 1950s:

Despite the fact that people are still moving here in large numbers:

All of which results in incredibly valuable dirt:



Gotta Hear Both Sides:  A Montana woman called 911 to report a bad taste in her mouth from low quality meth.

When You Gotta Go…: Police arrested a 65-year old Ohio man  for urinating in a beer cooler at a local convenience store and his mug shot looks exactly like a man who would urinate in a beer cooler at a local convenience store.

Hole in One: A young South Carolina couple was arrested for indecent exposure after they were caught having sex in the middle of a golf course fairway in broad daylight.  The arrest was picked up by America’s finest website, and resulted in this amazing blurb:

Two other witnesses–who were on the tee box at hole 8–said that they observed “what they thought was a deer laying down in the fairway.” However, “Upon closer inspection, they realized it was two people having ‘doggy-style’ intercourse.”

Looks like someone finally found a way to make golf interesting.

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

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Landmark Links September 1st – Dual Purpose