Landmark Links December 8th – Scare Tactics


Lead Story… Pretty much every major industry group in the US today has some sort of advocacy arm that puts out PR statements on it’s behalf.  These statements often run the spectrum from self-serving at best to disingenuous at worst.  The National Association of Realtors is no different and has built one of the most powerful lobbying/advocacy groups in Washington.  However, rather than simply falling under the category of PR flack statements, the NAR typically shrouds their pronouncements or reports with the perceived credibility of having been issued by an “economist.”  In reality though, this doesn’t make reports from the NAR any less self serving.  Their “economists” are on the payroll to push an agenda, not to offer up unbiased research.  Take for example the NAR’s report that the tax reform bill would causes housing prices in every state to drop if signed into law.  From Kelly Phillips Erb of Forbes (emphasis mine):

…Despite studies that have indicated that the mortgage interest deduction might not be good tax policy, it’s been good for the real estate market. Without it, the NAR anticipates that housing prices will fall by at least 10% across the board. The organization recently released a report breaking out on a state-by-state basis how the proposed tax reform efforts might hurt home values. Their findings? The NAR estimates that home values would fall in every state.


According to the NAR, homeowners in New Jersey, Connecticut, Illinois, New Hampshire, Maryland, Rhode Island, Virginia, Wisconsin, Georgia, Minnesota, New York, Ohio, Pennsylvania, and Texas (in order of sharpest decline with New Jersey most impacted) would see the sharpest dives. Estimated drops range from 10% on the low end to 21% at the high end.

The least impacted homeowners would be those in New Mexico, Arkansas, Louisiana, Mississippi, South Dakota, Tennessee, Hawaii, North Dakota, Wyoming, and West Virginia (highest to lowest, with West Virginia being least impacted). Estimated drops range from 5% on the low end to 10% at the high end.

To get to their findings, the NAR examined the numbers of homeowners who held mortgages and average home values in each state. They also took into account the average number of years that homeowners stayed in their homes, how many homes they owned and property tax values. In their methodology, the organization assumed that the property tax deduction and the mortgage interest deduction would be eliminated – either specifically (as with property taxes) or in practice (because of the increased standard deduction). You can read more in the report here.

Even casual readers of this blog should be well aware that I am no fan of the tax reform proposal.  I think it’s bad policy.  However, it’s not bad policy because it will cause housing prices to tumble but rather because it will further restrict inventory in the supply constrained markets where inventory is most needed.  I covered the reasons why back on my November 14th blog post entitled Disincentives:

The provisions that would most impact housing affordability in high cost markets are:

  1. Property tax deductions will be capped at $10,000
  2. The $500k capital gains exemption currently available to those who sell a house that they have lived in for 2 of the last 5 years will now only be available to those who have lived in their house for 5 of the last 8 years.
  3. The mortgage interest deduction will be lowered from interest deductability on a home loan of up to $1 million to interest deductability on a home loan of up to $500k

Generally speaking, prices fall when supply outpaces demand and rise when demand outpaces supply. You can observe this in markets across the US today.  Mortgage rates were higher in 2017 than they were in 2016, reducing affordability.  However, housing prices went up, not down because supply was also lower than it was in 2016 and there wasn’t a corresponding decrease in demand via lower household formation.  With the exception of the property tax deduction cap, the housing-related provisions in the tax bill will make people less likely to sell their homes which will likely make supply dip further.  In my opinion, this is more likely to lead to higher than lower prices over time.  Plus, as pointed out in a recent CNBC article, very few people itemize deductions anyway (emphasis mine):

For many taxpayers, the change would matter little. To claim the deduction, you must itemize deductions on your tax return, which only about a third of taxpayers do. Of that one-third, 74 percent take the mortgage interest deduction, according to the Urban-Brookings Tax Policy Center.

Per the NAR’s own report, home owners in New Jersey  – the high-tax state that the NAR says will fare the worst under the legislation – tax payers who itemize only take a $9,500 deduction on average when it comes to real estate taxes.  Again, according to the NAR’s report home owners in California – an incredibly expensive state for housing – only deduct $12,300 in mortgage interest.  That implies a mortgage balance of somewhere in the neighborhood of $300k assuming a 4% interest rate – nowhere close to being impacted by the proposed reduction to $500k.  Even those with between $500k and $1MM in mortgage debt would be grandfathered in under the worst case (House) scenario and could take their current deduction until they either sold or refinanced.  I just can’t see a scenario where any of these provisions leads to anything close to a nationwide crash in housing values of somewhere between 5% and 21% as the NAR study suggests.

So what is the NAR carping about?  I would suggest that this is really about one thing and one thing only: The amount of time that a home owner needs to live in a house before being eligible for the capital gains exemption is more than doubling and that is bad for realtors.  As things currently stand, a family can sell their house after living in it for two of the previous five years and pay no tax on the first $500k of profit.  There is no restriction on how many times a home owner can do this so long as they actually live in each house for two of the previous five years.  Inevitably, some of that $500k profit would find it’s way into the commission of a realtor since the home seller would typically then go out and buy a new – often more expensive house.  Now the Federal Government is saying that they want home owners to remain in their houses for five of the previous eight years before being eligible for the capital gains exemption.  This will absolutely lead to less supply and higher prices since it substantially delays one of the most compelling reasons to sell.  This isn’t great news for home owners who want to move up and it’s especially bad in markets where there isn’t enough inventory to begin with.  However, it is really bad for realtors whose incomes are 100% based on home sale transactions.  The problem is that it’s difficult to elicit much fear from the general public based on a study that concludes that housing prices are likely to go up if the bill passes due to a decrease in supply and that the result will be lower incomes for realtors.  So instead their PR team….I mean economists come up with a study that shows home prices tanking nation wide in an effort to frighten people into calling their Congressman and telling him to vote against the bill.  As stated at the beginning of this post it’s self serving at best and disingenuous at worst.  That’s not to say that some regions with particularly steep property taxes couldn’t experience a decline in values – they definitely could.  But a nation wide decline of between 5% and 21%?  Give me a break.

In conclusion, this is still a bad tax bill for housing – especially in areas undergoing a supply crisis.  However, it’s not bad because it’s likely to cause housing prices to plunge nationwide but rather because it’s highly likely to exacerbate the supply concerns and rising costs that are plaguing so many regions already – and yes, that means fewer transactions for realtors.


Cha Ching: The stock market rally has pushed American IRA and 401(k) balances to record levels. However, just half of all American households are feeling the windfall.

Trouble on the Horizon: Ray Dalio sees the elimination of the SALT deductions in the tax reform bill as increasing both tax migration and wealth polarity in the United States as “cost arbitrage” increases and pressure on high-earning individuals to re-locate builds.

See Ya: People are starting to move from California to Las Vegas in large numbers again because the rent is too damn high. See Also: More Coloradans moving out as population growth brings traffic headaches, higher home prices


Resilient: There has been a lot of talk about overvaluation in commercial real estate in recent months.  However, the Dodge Momentum Index, a monthly measure of nonresidential projects in the planning stage, is climbing once again.  This index typically leads construction spending in the non-residential space by a year and implies further growth in 2018.


High Barrier to Entry: Investors, downsizing baby boomers and millennials with parental assistance are helping to drive a surge in all-cash deals.

Slow to Recover: America no longer creates boom towns like has through much of its history and the metros that offer the highest pay now have some of the slowest population growth.  The culprit?  As usual, high cost of living resulting from restrictive land use.

Inflation: Framing lumber prices are up sharply year-over-year as rising costs continue to put pressure on builder margins.


Hero: This story about a man who went after a debt collection scam whose employees threatened his wife is the best thing that you will read today.  I promise.  Also, this needs to be made into a movie.

Looming: The real danger with bitcoin is what happens if it goes a long time without crashing.  See Also: The gravity-defying rise of bitcoin has been drawing in new money from people who appear to know nothing about the cryptocurrency other than the fact that its price has gone up a lot in a hurry.  And: There is nothing quite like a mania to make your hindsight bias kick in.

Hindsight is 20/20: I’d like to remind everyone of Laszlo Hanyecz who bought two pizzas for 10,000 bitcoins on May 22, 2010 back when the cryptocurrency had a value that was a small fraction of what it is today.  If he had held onto those bitcoins they would be worth $170MM as I write this.  I hope that the pizza was delicious (and did not have pineapple on it).

Busted: The SEC just shut down a comically illegal scam ICO called PlexCoin that was pulling in suckers by falsely advertising a 13-fold profit in less than a month without offering any specifics.

Chart of the Day

How do first time home buyers come up with a 20% down payment these days?  They don’t.  Instead, they largely rely on low down payment programs and mortgage insurance.

Source: Genworth Mortgage Insurance via The Daily Shot


Just in Time For Christmas: A new product called Twinkle Tush allows you to cover your cat’s ass with a jewel that hangs off it’s tail.  Its the perfect gift for the crazy cat woman in your life.

Life is Hard: Irish villagers are complaining that fumes from a nearby Viagra plant have both men and dogs walking around with erections.

Seems Reasonable: A Washington man high on meth and armed with an AK47 was arrested after neighbors called the police.  He claimed that President Trump had called him at home to warn him that lizard people had kidnapped his family.  In addition to the gun and drugs he was also allegedly  in possession of a plane ticket to Florida.  (h/t Darren Fancher)

Just Keep It: Someone stole a rather well-endowed $4,500 sex doll named ‘Dorothy’ from an adult store in Australia and is still at large.  This raises a critical question: would you really want the doll back after some thieving perve has it for a week?

Efficient Use of Resources: Ethereum’s blockchain is jamming up because of a new game that lets people buy and sell virtual cats.  And here I thought that the only things that people bought with crypto were drugs and guns.

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

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Landmark Links December 8th – Scare Tactics

Landmark Links December 5th – Plant Lives Matter


Lead Story… Every now and then I come an article that perfectly encapsulates the absurdity of today’s land use politics – especially in California – and their toxic influence on the housing affordability crisis.  Conor Dougherty of the New York Times wrote one such article last week (h/t Senet Bischoff).  The story was about an old abandoned home in Berkeley (aka NIMBY Mecca), on a large lot that was purchased by a developer a couple of years back.  The developer wanted to knock down the dilapidated old house and build three new ones on the site.  Such a re-development was 100% in compliance with existing zoning and would have been rubber stamped in any sane jurisdiction located within a state with rational land use practices.  Then again, this is Berkeley we are talking about so that obviously didn’t happen and the following – which frankly borders on NIMBY self-parody ensued (emphasis mine):

On paper, at least, there was nothing wrong with the proposal. The city’s zoning code designates the area as “R2-A,” or a mixed-density area with apartments as well as houses.

Berkeley’s planning staff recommended approval. But as neighbors wrote letters, called the city and showed up at meetings holding signs that said “Protect Our Community” and “Reject 1310 Haskell Permit!,” the project quickly became politicized.

One focal point was Kurt Caudle’s garden. Mr. Caudle is a brewpub manager who lives in a small house on the back side of Ms. Trew’s property (that lot has two homes, or one fewer than was proposed next door). Just outside his back door sits an oasis from the city: a quiet garden where he has a small Buddha statue and grows tomatoes, squash and greens in raised beds that he built.

In letters and at city meetings, Mr. Caudle complained that the homes would obstruct sunlight and imperil the garden “on which I and my neighbors depend for food.” Sophie Hahn, a member of the city’s Zoning Adjustments Board who now sits on the City Council, was sympathetic.

“When you completely shadow all of the open space,” Ms. Hahn said during a hearing, “you really impact the ability for anybody to possibly grow food in this community.”

To recap, the project was shot down after neighboring NIMBYs threw a hissy fit over the loss of a small vegetable garden.  However, it was litigated over the course of two years and eventually approved – likely at an incredibly high cost especially when you consider that there were only three units being built.  I’ll be the first to admit that this story is completely anecdotal and the vegetable garden objection is sort of funny (unless of course you are the developer, investor, or lender in which case it isn’t funny at all).  The fact that some Berkely hipster neighbor claimed that he and his neighbors forage for sustenance in a community garden rather than cruising down the road to Whole Foods when they need a zucchini is almost too much to bear.  However, this entertaining anecdote is emblematic of a much larger issue that I’ve talked about regularly on the blog: the lack of development is leaving people with few desirable places to go.  Today, I present you with Exhibit A: Stockton, CA where prices have nearly doubled over the past 5 years.  Yes, THAT StocktonFrom Marisa Kendall at the Mercury News (emphasis mine):

As home prices skyrocket across the state, there’s one California city where they’ve shot up more than anywhere else in the U.S. — nearly doubling in the past five years.

No, it’s not San Francisco, San Jose or Oakland. It’s not even in the Bay Area.
It’s Stockton, the Central Valley community twice dubbed America’s “most miserable” city by Forbes Magazine because of its high rates of housing foreclosures, unemployment and violent crime.

The jump in home prices in Stockton and neighboring Lodi — up about 92 percent over the past five years — is dramatic evidence of the ripple effects of the Bay Area’s tight housing market and the increasingly out-of-reach cost of living here. As people flee San Francisco and Silicon Valley in search of cheaper housing — heading to places like Stockton, Oakland and Sacramento — prices in those second-tier markets are rising.

“There’s flight away from areas where it’s expensive, to areas where it’s relatively cheap,” said Andrew Leventis, deputy chief economist at the Federal Housing Finance Agency, which first noted Stockton’s dramatic rise. “It would be just incredibly improbable if that wasn’t driving up prices in the west by some magnitude.”

The federal agency analyzed housing markets in the country’s 100 largest metropolitan areas. Oakland came in second, boasting an 86 percent jump in prices, according to the report released this week. Sacramento, also a major destination for Bay Area expatriates, is number six, seeing its home prices climb 74 percent.

The San Francisco/South Bay area is high on the list too, coming in at number four with a 77 percent increase — far above the national average of 35 percent.

 Lance McHan, a real estate agent in the Stockton area, said Silicon Valley transplants are eating up homes. About half of the 18 homes he sold this year went to buyers from the Bay Area — many of them making the long commute to their Bay Area jobs. That increased demand is changing the area.

Let’s make something clear upfront, especially for those of you who don’t live on the west coast:  No one – and I do mean NO ONE actually wants to live in Stockton (perhaps someone stuck their may claim otherwise but they know deep down that the previous statement is true).  For one thing, it’s in the heart of the Central Valley and at least a 1.5 hour long commute to major employment nodes in the Bay Area and Silicon Valley, as well as Sacramento.  It’s also brutally hot in the summer, completely flat, has major violent crime issues and massively underfunded government services.  I almost forgot: it was also basically ground zero for foreclosures in California during the bust.  Other than that though, its a wonderful, charming place.

So why are people moving there in large enough numbers to drive home values to double in 5 years? The best way to understand Stockton is that it acts as a pressure valve for desirable markets in the Bay Area and to a lesser extent Sacramento.  When the market corrects and things are affordable elsewhere, almost no one buys there.  However, when markets closer to employment, amenities or pretty much anything else desirable to live near get un-affordable, people move to Stockton as a place of last resort, often causing wild swings in home values.  As a result, one can actually make a ton of money there if they time the market right.  If not, good luck getting out whole.  Make no mistake: the spike in Stockton values is 100% tied to the insanity going on in places like Berkeley that I highlighted earlier in this post.  The boom in places like Stockton is very real and will likely continue until a lot more product gets built in more desirable areas or the next recession.  I know which one my money is on.


Just Doesn’t Buy What It Used To: This is just so incredibly depressing:

A cool $1 million has long been considered the gold standard of retirement savings. These days, it’s only a fraction of what you will really need.

For instance, a 67-year-old baby boomer retiring now with $1 million in the bank will generate $40,000 a year to live on adjusted for inflation and assuming a sustainable withdrawal rate of 4 percent, said Mark Avallone, president of Potomac Wealth Advisors and author of “Countdown to Financial Freedom.”

It’s worse for a 42-year-old Gen Xer, whose $1 million at retirement will only generate an inflation-adjusted $19,000 a year when all is said and done. And a 32-year-old millennial planning to retire at 67 with $1 million would live below the poverty line.

That’s what Avallone, a certified financial planner, calls “million-dollar poverty.”

Game Changer: Amazon is so good at keeping prices low that it’s changed how economists think about inflation.


Moo: Sand Hill Road in Menlo Park is ground zero for the top tier of venture capital companies and home to some of the most valuable real estate in the world.  However, some of the land surrounding it it is still being used as grazing land for cattle thanks to land use regulations.


The Next Big Thing: John Burns thinks that buy-to-let is becoming a “huge” investment opportunity in the US as single family rentals become more mainstream.


Score One for the Underdog: The Winklevii are best known as the identical trust fund twins who got a $65MM settlement from Mark Zuckerberg after they took him to court, alleging that he stole the idea of Facebook from them while all three were undergrads at Harvard.  During that dispute they also had the dubious honor of being called assholes by former US Treasury Secretary and then Harvard president Larry Summers.  Well, they just became the world’s first Bitcoin billionaires.  Remember that the next time someone tells you that the little guy never wins anymore.

Toxic Brew: Someday people will hopefully realize that mixing politics and investing is an incredibly bad idea.  Sadly, that day has not come.  Here’s the latest example of stupidity.

Welcome to the Big Leagues: CBOE and CME are in a heated battle to be the first to launch bitcoin futures trading.  See Also: Venezuela is trying to create it’s own cryptocurrency amid the bolivar’s free fall.

Chart of the Day

This chart is slightly misleading since it doesn’t take market cap into account – Bitcoin’s market cap at the beginning of the run was minuscule next to the four other asset classes, meaning that it’s far more likely to exhibit high volatility since it takes less capital to drive big moves.  Still, damn.

Source: The Daily Shot


Spirit Animal: I’ve always assumed that if Florida had a mascot that it would be an alligator living in a trailer bathtub.  However, this story about an opossum that broke into a liquor store, got wasted on bourbon and ended up in detox has me rethinking that assumption.

What Gave it Away? Man suspected of stealing $300,000 Ferrari arrested after asking for gas money.

Hard Weapon: Police arrested a man wanted on trespassing charges who tried to attack them with a large sex toy because, Florida.

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

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Landmark Links December 5th – Plant Lives Matter

Landmark Links December 1st – Pump You Up


Lead Story…. Over the past few months, I’ve written several times about how restaurants have come to be viewed as a savior of American retail.  I’ve also pointed out why I think this will end poorly as restaurants are getting overbuilt and facing labor and rental cost pressures in addition to pressures from delivery apps that impact their ability to sell their most profitable item: booze.  Today, I want to take a look at another tenant category that has historically been viewed as undesirable to have as a mall tenant but is now getting priority treatment: gyms.

Mall owners have never really liked gyms.  They were historically viewed as bringing in a lower end clientele that was unlikely to stay around and shop before or after workouts.  In addition, they typically require a lot more parking than other users which can hinder the ability to attract other tenants.  However that aversion to gym tenants was back when malls were still popular and not having issues with occupancy.  How times have changed.  Rachel Bachman of the Wall Street Journal took a look at how malls have gone from shunning to courting gyms (emphasis mine):

Mall owners long treated gyms like pool halls, unwanted tenants that attracted lower-rent visitors who were unlikely to shop. Now they’re giving health clubs some of their best real estate.

The reason is twofold. Retailers have closed hundreds of stores across the country amid increasing competition from online shopping, leaving mall owners to grapple with declining foot traffic and rising vacancies. At the same time, fitness centers have boomed and diversified, and a proliferation of smaller, boutique gyms that draw higher-end customers have created more attractive tenants that are easier to accommodate.

The result is that health clubs that were once pariahs at malls are helping transform them into hubs of living, working and playing.

To be sure, this isn’t your old school Gold’s Gym style fitness center.  Many of these gyms are new concepts that look quite different from that old school model.  More from the Wall Street Journal (emphasis mine):

Equinox, the New York-based luxury health club chain, will be an anchor tenant in a $125 million expansion of The Shops at Willow Bend, a 1.3-million-square-foot complex in the Dallas suburb of Plano, Texas.

The two-story, 35,000-square-foot Equinox, slated to open in late 2018 next to Neiman Marcus, will feature a roof deck for classes and events, says John Albright, vice president of development for Starwood Retail Partners, the mall’s developer and operator.

The proliferation of boutique fitness studios, which specialize in things like cycling or boot camp and often command $30 or more a class, has made fitness more attractive and easier to fit into retail centers. Nationwide, membership in fitness boutiques grew 74% from 2012 to 2015, compared with 5% for traditional commercial gyms, according to IHRSA.

“We’re like the nice-looking girl at the dance. Everybody wants to dance with us these days,” says Dan Adelstein, vice president of international development for Orangetheory Fitness.

The Boca Raton, Fla.-based chain has opened more than 700 U.S. locations since its 2009 founding. Orangetheory’s classes lead people through a circuit of treadmills, rowing machines and free weights. Classes typically run an hour, eliminating gym-floor wandering and keeping parking-lot traffic moving, Mr. Adelstein says.

In my opinion, the ultimate issue that will limit how much of a savior gyms are for malls is that so much of the attraction is at the high end.  High end malls have been performing relatively well, by and large and I highly doubt that you are going to see many Equinox, Orange Theory or Soul Cycle locations – all of which cater to an upscale client – going into malls in the struggling middle income communities where the major vacancy issues are most prevalent.  Some of this is also cyclical. It’s far easier for someone to justify shelling out $30 a class for a luxury workout when the economy is good.  It’s more difficult to see that sort of spending behavior in large scale when unemployment is high or a recession hits.  In addition, success begets competition and the growth in fitness boutique membership is likely to result in more competition for those valued $30 per class workout clients.  Much like restaurants, I absolutely see a role for gyms in re-purposing mall retail.  However, this impact is most likely to be felt in high end markets.


Solid: Here are five charts that show just how deceptively strong this long recovery has been.

Put it on Mute: Holiday sales forecast are complete trash.  Follow them at their own peril.

Confidence Game: Consumer confidence is in the middle of an epic boom.

Long Way Down: The natural rate of interest has been in decline since the beginning of the Great Recession, meaning that Federal Reserve policy has likely been a lot less accommodative in recent years than generally believed.


Reborn: Believe it or not, there used to be a Sears in swanky Santa Monica.  Not surprisingly, it went under and the vacant space is now being re-purposed for upscale offices and shops as well as restaurants by a holding company owned by none other than Eddie Lampert, the billionaire hedge fund manager who ran Sears into the ground in the first place.


Now for Some Good News: The FHFA has decided to increase conforming loan limits for the second straight year.

In the Money: It’s a really good time to own a less expensive house as scarcity at the low end due to a lack of new construction and investors buying up properties for use as rentals drives price appreciation at a rate that now significantly outpaces higher end homes.

The Tax Man Cometh: Why economists love property taxes but taxpayers generally hate them.


Bubble Watch: Bitcoin’s theoretical valuation makes the dot-com bubble look like a rational financial episode.  See Also: Important to remember – supply, not price is what ultimately pops bubbles and Bitcoin is theoretically limited in supply.  Here’s why that may not be entirely true.  And: At it’s core, Bitcoin is a new financial instrument that many of the people investing in it do not fully understand and:

“each (previous bubble) collapse has been fueled by a new, poorly understood financial contraption that introduces leverage into a system that is already unstable.” – Scott Nations

I suppose that the one interesting positive to this is that previous bubbles have been built on leverage but up until now, Bitcoin investment or speculation is being done without leverage.  However, the CME futures launch in two weeks could change this…..

A Sucker Born Every Minute: This startup raised millions to sell something called ‘brain hacking’ pills but their own study found that coffee works better.

Difficult Road: Amazon’s last mile delivery service is highly reliant on independent contractors with their own cars and looks an awful lot like Uber.

Chart of the Day

New home sales are still terrible when adjusted for population.


‘Tis the Season: A Minnesota woman was arrested for murdering her Thanksgiving guest during a dispute over a crack pipe.

Deep Cover: The world’s first “smart condom” which records and grades mens’ performance is now officially a thing.

Sign of the Apocalypse:MTV is bringing Jersey Shore back for some inexplicable reason.  Apparently 2018 is going to be off to a wonderful start.

Please Make it Stop: America’s flat earth movement seems to be growing.

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

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Landmark Links December 1st – Pump You Up

Landmark Links November 28th – Foundational Issue


Lead Story…. When I graduated college in 2001, I did not immediately enter the wonderful world of real estate finance.  I had worked as an intern for an investment bank in London while an undergrad and wanted to return full time upon graduation.  Being a naive college kid, I foolishly put all of my eggs in that basket rather than seeking multiple employment options.  Needless to say, it didn’t end well when the tech bubble burst, leading to layoffs across the banking world and leaving my presumptive employer little reason to deal with the headache of a work visa for a 22-year old political science major to enter a wheel program for a couple of years before inevitably returning to get his MBA.  My dreams of working for an investment bank overseas were done and instead, I ended up taking a less traveled path.  I had sailed competitively through college, was the captain of the varsity team at Tufts in a year when we won the national championship and had done quite a bit of youth coaching during the summer months.  As I was looking for job options, I found out that the yacht club in Newport where I had worked the previous summer was looking for a new program director.  By that point it was either live at home with my parents and take a temp job (NOT AN ATTRACTIVE OPTION) or move across the country to manage a program for well over a hundred kids with a staff of +/- 20 people and a substantial operating budget.

One thing that became immediately apparent to me was that there are certain factors that control whether or not a youth sailing program will be successful and they aren’t necessarily what you would think.  Initially, I was under the impression that a large budget, new equipment and top coaches were the sorts of factors that would push a program towards success.  These things are important for sure but they are nowhere near as important as another factor that is often overlooked: demographics.  Early on in my stint as program director it became clear that the best junior sailing eras at the club that I worked at all occurred when there was a critical mass of parents who were sailors themselves and understood how a successful program worked had kids at the same time.  When this critical mass occurred, the program was excellent.  When it didn’t, performance dipped substantially, regardless of who the coaches were or how much money was allocated to the program in the club’s operating budget.  The underlying demographics were  a foundational factor while the other variables like budget and coaches were secondary factors to success.  In other words, a program could overcome mediocre coaching and/or funding if there was a core group of parents that was knowledgeable, dedicated and worked together to make sure that their kids were going in the right direction.  I would like to think that I was largely responsible for the success that many of the kids that I coached experienced.  However, it was far more likely that I was simply fortunate to run the program during a time when the foundational demographic factors were extremely favorable.

So, what does this flashback to my previous sailing coach/director life after college have to do with real estate?  More that you would think.  I had a discussion last week with a Landmark client who had just returned from a home builder conference on the east coast.  This event was not the type where attendees pay high admission fees to listen to panels consisting whoever happened to barf up the most sponsorship dollars – regardless of qualification or expertise in the topic at hand – that have become all too common.  Instead, it was an invite-only affair attended by a who’s who of top builders, developers, lenders and investors – the sort of thing that you can’t buy you way in as a speaker regardless of how much you are willing to shell out.  When I inquired as to the general mood of the conference, I expected to hear a mostly downbeat response about the potential fallout from the Federal tax reform proposal, rising mortgage rates, stubbornly tough credit standards, low FHA limits, declining affordability, difficulty entitling land and various other potential and actual headwinds that I’ve written about here from time to time.  However, his response was exactly the opposite of what I expected.  Something along the lines of “you’d be amazed how optimistic people were.”  Mind you, I know several people who have attended this conference every year since at least 2011 and the attendees are far from Pollyannas (insert National Association of Realtors shill joke here), but yet they were quite upbeat at a time when there are plenty of reasons to be pessimistic.  The reason?  Positive demographics.

Attendees of the conference had a positive outlook because supply is still far below demand and it will be challenging to substantially increase supply as much as needed in this environment. This means that it will be hard for prices to fall dramatically, even in a recession scenario since large drops are usually associated with a glut of supply hitting the market.  They were bullish because the odds of having massive waves of mortgage defaults as in 2008 are extremely low due to a lack of risky mortgage products.  Most of all, they were bullish because they are seeing Millennials are finally move out of their parents’ basements, form households and have kids, and they are seeing it in real time.  Conversations like the one detailed above once again remind me of my all time favorite Calculated Risk chart:


The broader point here is that demographics are a foundational factor in real estate much as I found that they were in junior sailing 17 years ago.  It’s incredibly difficult to have a healthy market if demographics are moving in the wrong direction even if interest rates are low, making borrowing relatively cheap.  Our current reality is that rates are a bit higher than they were recently, prices have gone up substantially and tax policy could be less favorable towards home ownership going forward.  However, this is happening amidst the backdrop of a positive demographic backdrop that should lead to increased home buying demand until at least 2030.  So which factors will win out?  Who knows in the short term but I  know where I’m placing my bet in the long run.


Critical Metric: The yield curve between the 2 year and 10 year treasury may get all of the attention but the Economic Yield Curve or difference between the federal funds rate and economic growth is arguably just as important…..and it’s consistent with a positive outlook.  See Also: What is the yield curve really telling us?

Off the Mark: Wall Street’s pathetic 2017 market predictions from some of finance’s brightest minds are a reminder that accurate forecasting is as much about luck as it is skill.

The Future is Digital:  Sitting in front of a computer screen all day may not be great for your health but you better get used to it as the correlation between wages and digital literacy will continue to rise according to a new study from Brookings.


I’ve Been Saying This For a While: Why dying malls should be converted to much-needed housing.

Rising Tide: Whole Foods is basking in the glow of Amazon’s halo.


Softening: Faster apartment building was instrumental in pulling the US housing market out of it’s slump a decade ago.  Now it’s slowing down.

A Different Way to Pay: Bitcoin is making it’s way into real estate transactions.  See Also: How blockchain could change everything for real estate.

Reality Check: It takes a salary of over $216k to afford a median -priced home in San Jose.

This is a Bad Look: Facebook is letting housing advertisers exclude users by race.


All Aboard: Bitcoin is the first mania in the post-crisis era.  No telling how far this will run but history is not kind to Johnny-Come-Lately investors when get rich quick folks jump on board.

Scammed: College loan defaults likely won’t cause the economy to implode the way that subprime mortgage defaults did.  However, it might be an even bigger scam.

Huh?  Elon Musk’s touted ranges and charge times don’t compute with the current physics and economics of batteries.

Chart of the Day


Gotta Hear Both Sides: An Indiana teacher was arrested after her students walked in on her snorting a mixture of cocaine and heroin in a class room.

This Has Darwin Award Written All Over It: An Arizona man plans to launch himself into space in a home made rocket in order to prove once and for all that the earth is flat.

Burn it With Fire: The lost and found from Burning Man is one of the places on earth that I’d least like to go. (h/t Darren Fancher)

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

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Landmark Links November 28th – Foundational Issue

Landmark Links November 21st – Sacred Cow


Lead Story….  I’ve used the past few Landmark Links lead stories to talk about tax reform in general and it’s impact on the real estate market in particular.  Last Friday’s post focused on how proposed (now passed in the House) reforms favor commercial real estate investment over home ownership.  I ended that post by suggesting that Federal policy could put pressure on California’s most iconic and most controversial referendum-generated law: Prop 13.

Generally speaking, people respond well to incentives – especially when those incentives have economic consequences.  So do governments.  If you want more of something, make it more economically advantageous.  If you want less of something, do the opposite.  If the current Federal tax reform proposals pass, Washington is ultimate telling high tax states exactly what they want.  David Dayden wrote about this issue in an OpEd in the Los Angeles Times recently (emphasis mine):

The federal tax plan, introduced by House Republicans last week (Editor note: the plan passed the house last week), was carefully constructed to penalize Americans who live in Democratic-leaning states. It would repeal the state and local tax deduction, which 1 in 3 Californians use. And it would cut in half the deduction for mortgage interest, capping it at $500,000 for new loans. This change would hardly affect most of the country — less than 3% of all homeowners carry over half a million in mortgage debt — but it would bite places like New York and California hard because of their expensive real estate markets.

California’s endangered GOP lawmakers have been remarkably muted about the pending assault on their constituents. Only one, Darrell Issa of Vista, has come out against the tax bill. Meanwhile, East Coast moderates have negotiated a compromise that would simultaneously help their states and make California the biggest loser.

Under the compromise, Americans will be able to deduct property taxes of up to $10,000, but not income taxes. That’s rough if your state happens to have the nation’s highest income tax and one of the country’s lowest property tax rates. That is, if your state is California.

So, the bill would cap the mortgage deduction at a lower level that only really impacts blue coastal regions, take away the state income tax deduction which also primarily impacts blue coastal regions and put a cap on property tax write offs but still allow a relatively healthy deduction.  David Dayden outlined the logical response to these incentives in his LA Times OpEd (emphasis mine):

The natural response to this turn of events would be to re-balance the revenue mix. California Democrats could offer a bargain: Lower personal income tax rates combined with a property tax rate more in line with the rest of the country. Of course, that would require voters to first repeal Proposition 13, which since 1978 has severely limited property taxes.

The result could be highly progressive. If income tax cuts are on the first $50,000 of income, everyone would benefit, but the main winners would be the working poor and the middle class. Plus, tax increases on property do not directly affect renters, who are, in general, lower income-earners than homeowners. (Landlords surely could pass property tax increases on to renters, but if the changes to housing taxes work as expected to actually reduce prices, the effect would be muted.)

Because property taxes remain deductible, Californians likely would save money.And the new tax system would be more predictable, less reliant on volatile income and more on home values, which outside of the historic housing bubble of the 2000s are generally more stable.

Dayden’s conclusion is that this is essentially the most substantial threat that Prop 13 has faced since it’s passage in the 1970s.  Indeed, he does make a good point.  California’s finances are a volatile mess.  The state is overtaxed and far too dependent on the income and capital gains of wealthy residents to generate revenue.  This is the epitome of an unstable tax base.  Also, the property tax deduction remaining at $10,000 is significant.  It’s easy to forget if you live near the coast but the median home price in California in 2017 is still “only” $460,000.  At a 1% tax rate as stipulated under Prop 13, most home owners in the state fall well below the proposed $10,000 limit.  As such, Dayden pointed out that Prop 13 opponents would be able to run a campaign based on saving the average California money rather than simply rely on appealing to “fairness” or balancing the budget as they have done in the past.

While I think that Dayden’s conclusion is certainly possible, I suspect that we may eventually be headed for a different outcome since much of the political power in California still rests with the donor class that lives along the high-priced coast and many of those people consider Prop 13 to be sacrosanct.  Instead, I think that we could end up headed for a compromise – the split roll where residential property retains prop 13 protection but commercial property does not.

Perhaps the most interesting part of the tax reform proposal from a real estate perspective is that one class of real property will maintain the ability to fully deduct both the full amount of real estate tax paid and the full amount of loan interest – commercial property.  The concept of a split roll is not a new one  by any means.  In fact there has been discussion about it in some corners pretty much from the moment that Prop 13 passed.  However, commercial real estate owners have been able to effectively lobby to keep attempts to raise their taxes from being successful by utilizing a variation of the slippery slope argument: if you vote for our property taxes to increase, it will embolden the state to go after yours next.  However, I am of the belief that the Federal Tax Reform proposal could weaken that argument if it becomes law.  The loss of ability to deduct state taxes will hit Californians hard and could lead to a groundswell of pressure for the state to cut the state income tax which currently reaches a whopping 9.3% at only $53,980 of income for a single person.

Middle income Californians are likely to look at the reforms and ask why they are effectively paying a higher amount of taxes due to the loss of deductions while commercial property owners both maintain deductions and get far more favorable tax treatment on passive income from investments that are held in pass through entities.  Couple that with the fact that California is turning an ever-deeper shade of blue from a political standpoint and I don’t think that it’s a leap to suggest that commercial real estate  owners who are the beneficiaries of Federal tax policy will increasingly be viewed as more of a target for potential state revenue.  The Federal government appears to be telling states like California exactly what it think of their system of taxation and ironically it could result in an erosion of Prop 13, possibly the one Republican political accomplishment that has stood the test of time here.


Yellow Light: The ever-flattening yield curve is likely to give the Fed reason to pause in their rate increase trajectory.

Big Gains: When it comes to jobs, the economy has performed extremely well under Janet Yellen’s watch as Chair of the Federal Reserve.


And The Winner Is: The big economic winner in a pass through tax cut is commercial real estate and it isn’t even close.

Old School Becomes New: New fire proofing and re-enforcing technology could result in more towers being constructed of wood rather than concrete and steel.


Exodus: High housing costs have Bay Area residents streaming into Sacramento in search of a more affordable lifestyle, driving a downtown resurgence and causing home prices and apartment rents to soar.

Double Edged Sword: California’s restrictive housing policy is holding back it’s ambitious climate policy.

Livin’ on the Edge: Cape Coral, Florida is the fastest growing city in the United States.  It also probably shouldn’t exist and is a perfect microcosm of the Sunshine State (h/t Zach Maxam):

It really captured the essence of Florida, a precarious civilization engineered out of a watery wilderness, a bewildering dreamscape forged by greed, flimflam and absurdly grandiose visions that somehow stumbled into heavily populated realities.


The Rosen brothers realized they could sell Florida as another miracle elixir, “a rich man’s paradise, within the financial reach of everyone.” They started with some rugged mangrove swamp and palmetto scrub known as Redfish Point, which they rebranded as Cape Coral. Their dredges and draglines dug drainage ditches through the muck, then dumped the fill along the banks of the new “canals,” moving enough dirt to fill a swimming pool every minute. Then they built homes on top of the fill to create a maze of “waterfront properties” where neither waterfront nor property had ever existed, the instant alchemy of Florida real estate. Sure, the water the properties fronted was basically plumbing for a suburbanized floodplain, but it still sparkled in the sun. Sure, the creation of paradise required the annihilation of nature, but Gulf American’s ads touted this “improvement” of wetlands as the essence of America’s can-do spirit: “This virgin land has become a leading symbol of man’s accomplishments!”


Let Them Fight: The ongoing feud between Roger Goodell and Jerry Jones has the NFL on the verge of a civil war.  I sincerely hope that they both lose in humiliating fashion.

Virtual Tinfoil Hats: Doomsday preppers are now starting to switch from gold to bitcoin in preparation for the zombie apocalypse (or whateverthehell else they are flipping out about).  I hope that their bunkers have wifi or this will prove to be a huge mistake.

Pay Dirt: Investors holding default protection on Venezuelan debt got a $1 billion dollar pay day as the socialist workers paradise with the world’s largest known oil reserves missed recent bond payments.

What a Mess: How toxic politics, mis-spending and terrible decision making starved NYC’s subways.

Dogs Rule: How getting a dog could save your life, especially if you are single.

Chart of the Day

Housing starts adjusted for population are still weak

Source: The Daily Shot


Cocky: A Naval aviator got in trouble last week for utilizing his aeronautical and sky writing talent to make sky penises over Washington State. He was suspended but not before becoming a hero to every American male between the ages of 12 and 25, also me.

Hard Sell: In the “can’t make this shit up” category, disgraced televangelist Jim Bakker threatened grandchildren of his audience with the prospect of eternal damnation unless they call a 1-888 phone number and send him $60 (plus shipping) for a bucket of pancake mix.  There’s a video in that link just in case you think that I’m making this up.

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

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Landmark Links November 21st – Sacred Cow

Landmark Links November 17th – Winner Winner Chicken Dinner


Lead Story…. I’ve spent the last couple of weeks writing about how challenging it is to accomplish substantial, positive tax reform and also noting how the current proposal would have substantial negative effects on an already un-affordable housing market – especially in major west coast cities.

Today, I want to take a look at this issue from the prospective of another group: the commercial real estate industry. While those in the residential real estate industry are nearly universally unhappy with the reform proposal, their commercial real estate brethren are singing a far different tune.  For the past several months, there was more than a bit of concern in the commercial real estate world that several favorable tax provisions could get phased out or removed completely in a tax reform proposal.  These provisions include:

  1. The 1031 exchange which enables sellers of investment properties to defer capital gains taxes upon sale by investing the proceeds in certain types of properties.
  2. The ability to write off interest on debt secured by investment property.
  3. The preferential treatment for carried interest that is taxed as capital gains rather than ordinary income.

Those in the commercial real estate industry can breathe a sigh of relief – at least for now – as they appear to have dodged a proverbial bullet.  As it turns out, none of these provisions are under attack in the current iteration of either the House or Senate proposal – the only partial exception being that capital gains treatment would be confined to profits earned from assets held for three years or more as opposed to today’s 12 months.  In fact, there are some new proposals that would actually benefit owners of commercial real estate more than under today’s tax code.  Peter Grant of the Wall Street Journal addressed the impact of beneficial provisions within the tax reform proposal in an article this week.  From the WSJ (emphasis mine):

Owners of office buildings, malls, warehouses and other commercial property would benefit from lower taxes on their profits and would be able to avoid a 30% limit on deductions for interest expense that would be imposed on other businesses, based on two separate bills originating in the House and the Senate.

The Senate bill, unveiled last week, also would shorten the depreciation period for commercial property to 25 years from 39 years.


Both bills would make investing in real estate businesses more attractive, regardless of how the businesses are structured. Many private real-estate businesses are taxed under the so-called pass-through provisions of the tax law. In other words, there is no tax on corporate income. Rather, income is passed through to the personal tax returns of the property owner. Currently the top rate on pass-through income generally is the personal rate maximum of 39.6%.

Under the House bill, the pass-through rate for real-estate income would drop to 35.2%, but the rate would go down to roughly 25% if it is passive income—generally the kind earned from people who aren’t involved in running the business—which rent often is. Under the Senate bill, the maximum pass through for real estate would drop to 32.7%, according to Mr. Rosenthal.

The House bill would tax dividends paid by real-estate investment trusts at a reduced 25% rate, according to Nareit, the industry trade association. Under the Senate bill, REIT dividends would be taxed effectively at a maximum 31.8% rate, Nareit said.

So, why the favoritism for commercial or residential?  There is some speculation that it is at least in part intended to roll back punitive tax reform provisions enacted in the 1980s that had a negative impact on the industry.  More from Peter Grant at the Wall Street Journal (emphasis mine):

At the same time, the preferential treatment of commercial property helps rectify what many in the industry considered a major affront delivered by the Tax Reform Act of 1986. That law outraged many in the industry partly by limiting the use of so-called passive losses, like those coming from investments in real estate by doctors and dentists.

These proposals come at an interesting time for the real estate industry.  Commercial real estate in the US is almost universally acknowledged to be late in the cycle.  The tax reform proposal could prove to be a shot in the arm which could extend that cycle further.  Residential has experienced massive increases in value in some markets but is still relatively subdued on a nationwide basis, especially when it comes to starts and sales of new units.  I think it’s fair to say that there is nothing in the proposed tax proposals that will incentivize more much-needed residential construction.   The legislative pendulum has been solidly on the side of incentivizing home ownership over commercial real estate investment since at least 1986.  The tax reform proposals are a potential signal that the pendulum may be swinging the other way whether they pass or not.  All of which brings up a potential conundrum for California – Federal tax policy incentives could be aligning to force a change to the ultimate sacred cow of California politics – Prop 13.  I’ll address that next week.


Pity Party: Credit Suisse expressed sympathy for Millennials in their latest Global Wealth Report:

“They faced the rigors of the financial crisis… and have also been widely hammered by high and rising house prices, rising student debt and increasing inequality. Millennials are not only likely to experience greater challenges in building their wealth over time, but also greater wealth inequality than previous generations.”

Proceed with Caution: US household debt has reached another new record and some delinquency rates are beginning to riseSee Also: Credit card delinquencies are on the rise.


Hello, Fellow Kids: Mall developers are aggressively enticing online retailers with discounted rent and favorable lease terms in an effort to appeal to a younger crowd. However, tenants are proving to be rather picky about where they locate, favoring class A malls in close proximity to existing customers.  See Also: Brookfield’s $14.8 billion bid to buy the rest of GGP is fueling expectations that other operators of so-called class-A malls are becoming acquisition targets. And: The Brookfield GGP bid has mall short sellers feeling some pain for the first time in a while.

Discount Rack: PIMCO thinks that REITs are one of the few type of equities that are still undervalued.


Slim Pickens: I’ve written a bit about why west coast cities have more affordability issues than east coast cities recently.  Here’s another example: NYC has 388 condos currently for sale for less than $500k; Seattle has just 5.

Overwhelming: Pretty much everyone agrees that California has an affordability problem yet the people most engaged on the local level where approvals must be obtained are those that oppose new housing the strongest:

While a few groups don’t want to see more housing, 9 out of 10 adults believe housing affordability is a problem in their part of California, that includes 92 percent of African-Americans, 85 percent of Asians, 86 percent of Latinos, and 88 percent of whites. The Bay Area is bleeding the most where 93 percent say it’s a problem, 90 percent in Los Angeles, 88 percent in Orange/San Diego, 81 percent in the Inland Empire, 79 percent Central Valley.

We’re Number 1: Los Angeles-Long Beach-Glendale has unseated San Francisco-Redwood City-South San Francisco as the least affordable housing market in the US according to the latest NAHB-Wells Fargo Housing Opportunity Index.  Just 9.1% of the homes sold during the 3rd quarter in the region were affordable to families earning the area’s median income of $64,300.  The San Francisco region, which had held the top spot for 19 consecutive quarters fell to number 2.


Shocking Headline of 2017: ‘Market manipulation 101’: ‘Wolf of Wall Street’-style ‘pump and dump’ scams plague cryptocurrency markets. “I never saw that coming” – No One

Oh, Hell NO: The fanny pack is apparently making a comeback.  Can cargo pants aren’t far behind?

Bold Vision: Bill Gate just purchased a 24,800-acre parcel of land on the Phoenix area’s western edge with the intent to apparently build a “smart city”.

Chart of the Day

Declining Fortunes


Inspirational AF: An Alabama man who said he tripped and broke his hip while buying a watermelon at a Walmart store has won a $7.5 million verdict in his lawsuit against the retailer.  Looks like he’ll finally be able to afford that Roll Tide vanity plate for his pickup.

It’s Nice! Six Borat fan tourists were arrested for wearing mankinis in Kazakhstan because some people just don’t have a sense of humor.

Hamburglar: A rather large Maryland woman was arrested after a security video of her breaking in through a McDonalds drive through window and stealing a bunch of their disgusting food went viral.  Bonus points for butt crack and tramp stamp footage in the video.

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

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Landmark Links November 17th – Winner Winner Chicken Dinner

Landmark Links November 14th – Disincentives


Lead Story….. This is the final post of a three part series that I’m writing about “the middle class,” tax reform and why it is so difficult to achieve in today’s environment.

Primum non nocere is a Latin phrase that means “first, do no harm.”  It is often incorrectly attributed to the Hippocratic Oath which many medical school students take before they become doctors.  Unfortunately politicians, in addition to doctors, are not required to take such an oath before taking office.  If they did, perhaps some of our laws would be more beneficial to society as a whole.  Take for example the latest tax reform proposal and the impact that it would have on high cost housing markets.  Virtually every high priced housing market in the US (certainly on the west coast) has a problem – too little inventory is driving prices up to the moon.  Not enough new, desirable product is being constructed to entice move-up buyers to sell their house and upgrade.  As a result, spending on renovations is through the roof (it’s a great time to be a Home Depot stockholder!) and resale inventory is at historically low levels.  Given the above, and it’s impact on an affordability crisis and growing homeless population, one would think any new tax proposal should have incentives to increase inventory of both rental and for-sale housing – or at the very least not contain provisions that would explicitly create incentives to drive resale inventory even lower.  Sadly, one would be wrong.

Merrill Lynch came out with a timely research note a couple of weeks back about the concept of tax cuts “paying for themselves.”  It’s important commentary because it focuses on the notion of incentives and how they determine the effectiveness (or lack of effectiveness) in tax policy achieving it’s stated objectives.  From Merrill Lynch (emphasis mine):

“President Clinton worked with Republicans and cut the capital-gains tax rate from 28% to 20% in 1997. Capital-gains tax cuts are among the most likely to generate greater revenues because taking a capital gain is optional. If the tax on the gain is 20%, you are more likely to realize the gain and pay taxes than if the tax rate is 90%. If you don’t take the gain, there are no tax revenues. The booming stock market in the late 1990s generated a wealth of potential gains, and more were realized at lower tax rates. While it is common to hear pundits in the financial media say something to the effect that “no respectable economist believes that tax cuts can pay for themselves,” the late-1990s experience is a case study in why “respectable” economists are so often wrong. Indeed, that was the last time that the U.S. government ran a fiscal surplus and the bounty of capital-gains revenues was a major factor behind the budget surpluses of the late 1990s.”

When taking a look at the current bill as proposed, ask yourself: what type of behavior does it encourage and what do it discourage?  When it comes to housing policy, the answer should be obvious.  The tax bill as proposed by House Republicans would be an absolute catastrophe for housing, especially in high priced markets where it would undoubtedly hurt the so-called “middle class” that politicians of all stripes profess to want to help (side note – this post is only addressing market rate for sale housing – but things do not look positive or subsidized affordable development either).

The provisions that would most impact housing affordability in high cost markets are:

  1. Property tax deductions will be capped at $10,000
  2. The $500k capital gains exemption currently available to those who sell a house that they have lived in for 2 of the last 5 years will now only be available to those who have lived in their house for 5 of the last 8 years.
  3. The mortgage interest deduction will be lowered from interest deductability on a home loan of up to $1 million to interest deductability on a home loan of up to $500k

Point one above would make owning a home less affordable in high cost (ie California) or high tax (ie New Jersey) markets.  However, since there is no grandfather clause for existing owners, it is unlikely to have a material impact on the housing shortage, IMO.  I wish that I could say the same for the other two provisions.

The supply problem that we face today is brought on by two factors that are limiting mobility: 1) There aren’t very many units being built; and 2) People don’t move as frequently as they used to.  As recently as the mid-2000s, Americans moved every 6 years on average.  Today, that average has increased to nearly 10 years.  When people move, they tend to make other large purchases which act to stimulate the economy, while opening up entry-level units for others.  Having good housing mobility is generally good for the economy – not just realtors and home builders – which is part of the reason that it’s been incentive in the tax code.  However, extending the capital gains exemption time-frame and reducing the mortgage deduction as noted in points 2 and 3 above would reduce, not increase mobility.

First, let’s look at the capital gains exemption.  The new provision of requiring people to live in their house for 5 of the last 8 years before being eligible explicitly incentivizes home owners not to move as frequently.  However, as stated above, mobility has been falling for the past decade.  This provision will simply give would-be movers a reason to hold on for a few more years in order to take advantage of the tax break rather than selling today.

Second, let’s look at the consequences of lowering the mortgage interest deduction.  It may be hard to believe for those who live in other parts of the country, but it’s nearly impossible to find a home that’s more than a studio for $500k in many high priced coastal regions.  The immediate impact is simply that this provision would negatively impact the affordability of a house in a high priced area and make renting more attractive on a dollar-for-dollar basis.  However, that’s not the aspect of this provision that I think will lead to reduced inventory.  The mortgage write off reduction comes with a grandfather clause that keeps the deduction at a $1MM cap for those who already own a home.  Homeowners who are grandfathered in will be able to keep the cap until they either sell and buy a new home or refinance their existing home.  It’s already expensive enough in many markets to sell a home and trade up.  Typically that move comes with a increased basis, higher mortgage payment and a new higher tax bill (especially with Prop 13).  This is yet another reason to do nothing and stay put.  Laura Kusisto, Christina Rexrode and Chris Kirkham addressed the likely fallout recently in the Wall Street Journal (emphasis mine):

Economists said the changes come at a sensitive time for the housing industry.

Single-family home prices rose on an annual basis in 92% of 177 U.S. metropolitan areas in the third quarter, according to a Thursday report from the NAR. That was the largest share of metros notching price gains in more than two years.

But the gains were driven by a shortage of homes for sale. At the end of the third quarter, there were 1.9 million homes on the market, 6.4% fewer than the same period last year. The average supply during the third quarter was 4.2 months, down from 4.6 months a year earlier. Economists say six months is typical of a balanced market.

“We have affordability issues as it is. If you make it more difficult for people to put money toward the house, or take away the economic benefits of them owning a house, it really, really could be a major problem,” said Rick Sharga, executive vice president of Ten-X, an online marketplace for real estate.

Mr. Howard of the NAHB said the tax overhaul could cause a housing recession because of a potential drop in home values. States with high housing costs, including California, where more than a third of homes are valued above $500,000, would be particularly hard hit, he said.

“Republicans have always claimed that they don’t want to pick winners and losers in the economy,” he said. “They are clearly picking large corporations over small businesses, and they are clearly picking wealthy Americans over the middle class.”

To be sure, the $500,000 cap on the mortgage interest deduction would apply only to loans made after Nov. 2, which protects existing homeowners. But experts said that is likely to exacerbate the current stagnation in the housing market.

Homeowners in high-cost cities like New York, Boston, Los Angeles, San Francisco and parts of Miami are less likely to trade up to larger, more expensive homes if they know that means losing the protection on the mortgage interest deduction, which in turn makes it difficult for younger buyers to enter the market.

“In those expensive markets that already have an inventory crunch it’s probably going to make the situation worse,” said Ralph McLaughlin, chief economist at Trulia. He said this is likely to drive up prices.

I tend to think that the initial response, should this be signed into law may be a relatively small decline in prices.  However, I would also guess that the intermediate to long term consequences are less inventory, lower affordability and ultimately higher housing costs.  To be 100% clear, we do indeed over-incentivize home ownership in many ways under the current tax code.  In fact, I would propose that if we were starting the tax code from scratch there are elements of the new proposal that make more sense than what is currently in place.  However, politicians have to deal with conditions in the real world, not an idealized version.  As such, making these sort of sweeping tax reforms at a time when we are already facing an unprecedented housing affordability crisis is just bad policy.  And, damn I wish that I owned stock in Home Depot right now.


Push and Pull: The US unemployment rate fell to 4.1% in October, marking a new cycle low.  Inflation has been tame though which has kept the Fed from being too aggressive in hiking rates and leading to speculation about the reliability of the Phillips Curve (the relationship between unemployment and inflation).  However, look for more aggressive rate hikes if unemployment falls much below 4%.

Area of Concern: Overnight index swaps suggest the economy will be weak enough a year from now to warrant rate cuts.

Playing Catch Up: Wage growth is subdued in the US due to deceleration at the top end masking acceleration at the bottom end of the scale.


Office Space: The personal computer was supposed to kill the office and liberate us from hellish commutes to the city. But the average American commute has only increased since then.  Could virtual reality reverse this trend?

Breaking Up is Hard to Do: The bat-shit crazy and incredibly expensive Harry and Linda Maclowe divorce proceedings are a reminder that there ain’t no divorce like a billionaire developer divorce.


Out on Their Own: New data shows that the trend of Millennials leaving their parents basements to buy homes of their own shows no sign of abating.

Dragged Down: Job growth is continuing to slow in the most expensive residential markets in the US.  Turns out it’s hard to work where you can’t afford to live.  Who knew?


Oops: $300 million in cryptocurrency was accidentally lost forever thanks to a bug.  Fear not though, this is a stable asset class that will prove to be a tremendous store of value in the long run.

Race to the Bottom: Researchers at the Cleveland Fed think that peer-to-peer loans have deteriorated to the point that they are starting to resemble subprime loans during the mortgage crisis.

Where in the World? Jet-set debt collectors join a lucrative game – hunting the super rich who owe millions.

All the Cool Kids: The retail worker of the future will be cool, charismatic and better paid as successful retailers emphasize in-store experience.

Chart of the Day

How Many Hours Americans Need to Work to Pay Their Mortgage

Source: Visual Capitalist


Hot Boxed: A Kansas City man facing federal gun and drug charges ended a police interview by ripping massive farts. I have no clue whether he’s innocent or guilty but this epic:

According to the Kansas City Star newspaper, a detective’s report said Mr Sykes “leaned to one side of his chair and released a loud fart” when asked for his address by police while being interviewed in September.

“Mr Sykes continued to be flatulent and I ended the interview,” the detective wrote after recovering.

Night Out on the Town: A group of naked people rampaged through Missouri town, breaking into buildings, barking and showering in soda water because, drugs.

Gotta Hear Both Sides: An Oklahoma man who taped adult magazines to his body for protection was arrested for trying to stab an ex-neighbor. (h/t Ty Reed)

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Landmark Links November 14th – Disincentives