Landmark Links April 22nd – The Rise of BARF


Lead Story…. We’ve been spending a lot of time lately talking about what’s going on in the high priced/high barrier to markets.  Of particular interest is San Francisco since it’s a market that Landmark is quite active in and it also has the most stringent land use restrictions (and the arguably worst affordability crisis) in the US.  Recently Tyler Cowan of Marginal Revolution posted a piece summarizing a new book that urbanist Joel Kotkin published and made the following head-scratching statement:

Lots of high-density, vertical building doesn’t really make cities cheaper.  In fact it sucks more talent in, and more business activity, and in the longer run makes cities more expensive.  Just look at Seoul and Singapore, which have built plenty but are nonetheless considered some of the most expensive cities to live in.  After all, isn’t that the increasing returns to scale story?

This in spite of overwhelming evidence that cities that add units are more affordable than those that don’t.  Let’s try a quick thought experiment: San Francisco currently has around 382,000 housing units.  Hypothetically, let’s assume that SF suddenly becomes Houston overnight and decide to build like crazy, sending that number up to 1.5 million units in a few years.  Raise your hand if you think this will have no impact on prices and rents.  Now take that same hand and slap yourself in the face until you realize that San Francisco is not magically immune to the laws of economics.  Kevin Erdmann penned a strong retort to this, pointing out that first off, it’s not accurate and, even if it were, building more density would still have a highly desirable outcome:

Even if it is true, it would be an even better reason to build, because it means that the value of density is practically limitless….On careful reading, I don’t think Tyler is saying this is a problem, per se.  He’s just saying building won’t lower costs.  But, even here, I think it would be quite a jump to argue that greatly expanded building in the Closed Access cities would not benefit the current residents who are being stressed by rising rents.  Even if expansion only led to more rising incomes and rising rents, the increased local market for non-tradable services would surely raise the incomes of current residents, too.  They would likely get some relief from rising incomes, even if rents didn’t relent.

We mentioned a few months ago that restrictive zoning as a driver of income inequality was an issue that would start getting more national attention once it started showing up in papers from economists employed by the Federal Government and across the political spectrum.  It is now indeed happening.  That brings us to BARF.  Last weekend the NY Times published a profile piece on a new political advocacy group called the Bay Area Renters Federation or BARF.  There are plenty of left leaning renter advocacy groups out there so what’s so special about BARF (aside from a great acronym) that garnered them a large profile in the weekend edition of the NY Times? Unlike most renters advocacy groups that focus on subsidized housing, BARF is very, very pro development.

Sonia Trauss is a self-described anarchist and the head of the SF Bay Area Renters’ Federation, an upstart political group that is pushing for more development. Its platform is simple: Members want San Francisco and its suburbs to build more of every kind of housing. More subsidized affordable housing, more market-rate rentals, more high-end condominiums.

Ms. Trauss supports all of it so long as it is built tall, and soon. “You have to support building, even when it’s a type of building you hate,” she said. “Is it ugly? Get over yourself. Is it low-income housing? Get over yourself. Is it luxury housing? Get over yourself. We really need everything right now.”

Her group consists of a 500-person mailing list and a few dozen hard-core members — most of them young professionals who work in the technology industry — who speak out at government meetings and protest against the protesters who fight new development. While only two years old, Ms. Trauss’s Renters’ Federation has blazed onto the political scene with youth and bombast and by employing guerrilla tactics that others are too polite to try. In January, for instance, she hired a lawyer to go around suing suburbs for not building enough.

As you can probably imagine the San Francisco old timers and aging hippies are not fond of BARF:

Ms. Trauss is the result: a new generation of activist whose pro-market bent is the opposite of the San Francisco stereotypes — the lefties, the aging hippies and tolerance all around.

Ms. Trauss’s cause, more or less, is to make life easier for real estate developers by rolling back zoning regulations and environmental rules. Her opponents are a generally older group of progressives who worry that an influx of corporate techies is turning a city that nurtured the Beat Generation into a gilded resort for the rich.

Those groups oppose almost every new development except those reserved for subsidized affordable housing. But for many young professionals who are too rich to qualify for affordable housing, but not rich enough to afford $5,000-a-month rents, this is the problem.

Adding to the strangeness is that the typical San Francisco progressive and the typical mid-20s-to-early-30s member of Ms. Trauss’s group are likely to have identical positions on every liberal touchstone, like same-sex marriage and climate change, and yet they have become bitter enemies on one very big issue: housing.

If the affordability/restrictive zoning issue is going to improve, there are going to need to be a grass roots movements like this to combat the entrenched NIMBYs.  IMO, we are likely to see more of these groups popping up in closed access cities as prices and rents continue to rise.  The California Legislative Analyst’s Office has taken notice and published a report in February stating that underdevelopment with the main cause of high prices in coastal cities.  However, there is only so much that state government can do (or frankly that we would want them to do).  The locals in these cities are going to have to start making as much noise supporting projects as the NIMBYs are opposing them so hats off to BARF for taking up the fight in San Francisco.


Upside Down: In Denmark and Sweden, negative interest rates have led to a real estate boom and have even resulted in negative interest rate mortgages in some instances.

Lifestyles of the Rich and Famous: While entry level sales struggle, high end realtors are providing helicopter real estate tours for wealthy clients and luxury developers are throwing in memberships in private jet charter programs for buyers of premium condo units.


Growing Pains:  Several years ago, online lending companies like Sofi, Lender Club and Prosper were the darlings of the banking world.  They rolled out a peer-to-peer model that was touted as faster and more reliable than heavily regulated plodding banks and sure to turn the conservative lending industry on it’s head.  Last week Fitch released a report highlighting concerns about the online lenders and their business models which was picked up by Fortune:

The problem, according to Fitch, is that online lenders are taking on riskier borrowers than they originally suggested they would. And they have perhaps been relying too much on credit scores, which the fintech lenders appear to be recognizing. “Pockets of recent credit underperformance beyond initial expectations have likely contributed to the ongoing refinement of underwriting models, including further de-emphasizing of the use of traditional FICO scores in certain instances,” Fitch said in its note. In other words, traditional banks may actually be able to assess borrowers with more accuracy, then the data-driven fintech lenders.

So they are taking on riskier borrowers than they initially said they would AND their underwriting models are proving to be weak.  They also have high loan delinquencies and, perhaps most importantly: this model hasn’t yet been tested through a full interest rate or credit cycle. Sounds great so far, huh?

Fitch made another very important point – the online lenders aren’t really lenders at all:

Online marketplace platforms aren’t actually lending, rather they typically match up potential borrowers with the source willing to fund the money—such as hedge funds, institutional investors, or even traditional banks. As a result, the “lack of alignment of interest due to separation of lenders and originators . . . present additional challenges,” according to Fitch.

This arms length relationship enables companies like Lending Club to earn oodles on fees for a while, and not actually have to be responsible if the loans go bad.

That can work for a while. The trouble is that if quality is bad, the actual lenders, that is the hedge funds and others that fund the loans are going to stop coming back for more. And that’s exactly what’s going on. “As institutional demand waned in recent months, marketplace lenders began to seek alternative funding sources to sustain loan originations,” Fitch says.

If that sounds familiar to you, it’s because it’s pretty much exactly what happened in mortgage lending before the bust when banks got stuck with a bunch of crappy paper after investors balked.  The online lending business is minuscule compared to  the mortgage market so I don’t expect much to come from this.  However, it bears mentioning.  As Mark Twain once said “History doesn’t repeat but it rhymes.”


Chart of the Day


Banned: The California State Senate voted earlier this week to ban Palcohol or powdered alcohol.  If the concept of consuming alcohol in powdered form sounds at all appealing to you, please stop reading this blog immediately and check into your nearest rehab because you have a problem.

What Happens in Vegas: Las Vegas hotels are about to start offering virtual reality porn in your room for $20.  No word on how the Vegas hookers are taking this news.

Smart Move: China has made the brilliant move of banning rich kids from appearing on reality TV shows that make them look like rich douche bags.  It’s a shame that the Kardashians don’t live there.

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Landmark Links April 22nd – The Rise of BARF

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