Landmark Links April 28th – It’s Lit

fire-funny

Lead Story…. Over the past couple of weeks or so, there have been a ton reports and stories about the real estate market heating up.  It turns out that a lack of supply, an improving economy and rising mortgage rates bringing in people off the sidelines have led to what could be one of the best seller’s markets ever.  FOMO or fear of missing out rules the day for the moment at least.  As CNBC’s Diana Olick pointed out earlier this week (emphasis mine):

More homes came on the market in March, but fierce demand made quick work of them. At the end of the month, the supply of homes for sale nationally was down 6.6 percent compared with a year ago, according to the National Association of Realtors. Unsold inventory is a slim 3.8-month supply. A balanced market between buyers and sellers has a five-to-six-month supply.

Properties sold in March were on the market for an average 34 days, down from 45 in February and 47 in March 2016.

In order to compete, buyers are coming in with cash and dropping contingencies. That is because in such a hot market, homes are appraising well below the sale price. That makes it even harder for first-time, mortgage-dependent buyers to succeed.

………………………………

As a result, home prices continue to hit new peaks each month. Prices nationally are up 5.7 percent in February year over year, according to Black Knight Financial Services. Washington, Oregon and Colorado are seeing the biggest price gains, as buyers flee high prices in California.

Real estate brokerage Redfin used its search engine to look specifically at which markets had the most people searching for homes outside their city. San Francisco, Los Angeles and New York took the top three spots.

“Fast-growing coastal cities may be generating the high-paying jobs, but they haven’t created enough budget-friendly housing to keep pace,” said Nela Richardson, Redfin’s chief economist. “The price of real estate and desire for home ownership is compelling many to uproot and seek housing in more affordable communities.”

Sure enough, there are signs of the market heating almost everywhere, from oversubscribed so-called Homebuying Classes in Seattle to utter bidding insanity in Los Angeles.   Also consider that pretty much everyone in the US believes that the value of their home is going to rise this year and you start getting crazy decisions like people putting more cash into a purchase because the house that they want to buy won’t appraise.

We’ve seen variations of this before in the current cycle – low inventory and a bump in demand leads to all sorts of craziness in desirable markets.  However, there is one key aspect of that’s different this time – the action is spilling over into secondary markets.  I spoke with a land broker friend earlier this week who works exclusively in the Inland Empire market.  He told me that absorptions in new communities are currently the strongest that they have been in years and that public builders are once again looking for lots.  In fact builders who were saying that they didn’t need inventory just two short months ago are now increasing un-countered offers on lots as their inventory burns down quicker than anticipated.  That sort of aggressive bidding hasn’t happened in a long time outside of the most core markets.

In a healthy market, secondary regions like the Inland Empire should act as release valves for Los Angeles, Orange County and San Diego when they start heating up.  Traditionally buyers look to these markets for affordability but that hasn’t been happening in this cycle  The current uptick in strength in the Inland Empire is a real-life example of the Redfin quote from the CNBC article above.  Ironically, it turns out that rising interest rates may be spurring buying activity – at least temporarily – as buyers rush in before they go higher.  It almost appears as if seemingly perpetually low rates kept people on the sidelines because it led to buyer complacency in the market.  It may seem counter-intuitive that higher rates can lead to higher home prices but it is also often the case.

This spring real estate frenzy is coming at a somewhat tenuous time.  Despite outstanding mortgage debt shrinking for much of the past decade, consumer debt excluding mortgages is now at an unprecedented 20% thanks largely to massive growth in student and auto loans.  The growth in these categories is beginning to show up in credit card charge offs and auto loan defaults.  There is also the question of how long home price appreciation can substantially outpace income gains which was noted in a Wall Street Journal story by Laura Kusisto (emphasis mine):

A dearth of new construction and strong demand from buyers are pushing up prices twice as fast as the rate of income growth, the latest data show, a level economists said is unsustainable.
The S&P CoreLogic Case-Shiller U.S. National Home Price Index released Tuesday showed that in February home prices rose 5.8% from the same month a year earlier. That put prices nearly 40% above their level at the bottom of the housing crash in February 2012.
At the same time, incomes rose 3% in February from the same month a year earlier, and are up 12% since February 2012, according to the Labor Department.

In conclusion, the market is on the upswing but concerns remain.  Among those concerns are diminishing affordability due to rising mortgage rates and prices.  There is also the question of just how much of America’s household credit capacity has been eaten up by growth in student and auto loans and whether or not there is much excess capacity to go towards servicing increasing mortgage debt going forward.  Oh yeah, I almost forgot about the minor twist of a proposed tax overhaul that would have a profound impact on the tax treatment of housing.  In other words, buckle up – it’s going to be a bumpy ride.

Economy

Go or No Go: The three questions that will decide if Trump’s tax plan works.

Cashing Out: The future looks bleak for cashiers in America.  However, the experience of bank tellers after the universal adoption of the ATM offers a ray of hope.

Long Horizon: The era of low inflation could be with us substantially longer than expected.

Commercial

Relief: Rents continue to slide in the formerly white-hot Bay Area apartment market as new buildings continue to come to market.

Residential

Hero:  Billionaire and Microsoft co-founder Paul Allen just pledged $30MM towards development of permanent housing for homeless people in Seattle.

Profiles

The Struggle: Funding of tech firms has plummeted since the 2014-2015 boom, forcing many in Silicon Valley to fight for survival.

Flash Back: A look back at the Barron’s article that popped the tech bubble by raising the burn rate question.

On the Move: Why Amazon’s use of self-driving technology would be a game changer.

Chart of the Day

World’s largest companies by revenue (in billions)

The World's Largest 50 Companies by Revenue (2016)

Source: The Visual Capitalist

WTF

Down and Dirty: People with more money than fashion sense can now buy jeans with fake dirt on them for $425 at Nordstrom (h/t Darren Fancher).

Transparency: In other clothing news, British retailer Topshop is now selling clear plastic jeans for $100 a pop.  It’s called fashion.  You clearly wouldn’t understand.

Perfect Cover: Police say that 10 pounds of pot was wrongly sent to a Pennsylvania pastor.

Meanwhile, Florida: When the first eight words of an article title are A neighborhood covered in poop is at war…….” you just know it’s going to be about Florida.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links April 28th – It’s Lit

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