Landmark Links May 2nd – Imperfect Solution

Duct Tape Car Fix - 21

Lead Story… It’s one thing to spot a change in the direction of a market before it occurs.  It’s completely another to devise a way to profit from that change. We are now about a decade removed from the housing crash and ensuing Great Recession.  Some of the largest fortunes in history were made betting against the housing market when a handful of risk-takers not only saw the impending mortgage disaster coming but concluded that purchasing credit default insurance against subprime mortgage bonds was the way to make a fortune.

Fast forward to 2017: the mortgage market is far tighter than it was in back in the housing bubble.  Most subprime lending was snuffed out by a combination of regulation and the scars of economic catastrophe brought on by exploding mortgages and other sketchy financial products.  Housing prices have recovered but sale and start volumes haven’t come close as an ever-growing population continues to grapple with housing supply that is growing too slowly to stabilize price. Today’s tight credit underwriting and limited supply make it less likely that we are in an echo housing bubble, despite the rising prices.  Buyers are far more stable financially than they were 10 years ago and there simply isn’t enough supply to cascade markets drastically lower as happened during the crash.

While housing seems to be on solid, if expensive ground, retail most definitely is not.  The trend towards online shopping has been eating into retailers profits for years now and seems to be hitting critical mass, resulting in a raft of vacant shopping malls / big box centers,  and bankruptcies, especially at the lower end.  As such, it was no surprise that the Wall Street Journal’s Serena Ng profiled a hedge fund manager who has been leading the charge in attempting to profit from the demise of American retail.  His vehicle of choice?  Betting against a Commercial Mortgage Backed Securities Index using credit derivatives (emphasis mine).

As a youth Eric Yip spent weekends working in a small shop at the bustling Burlington Center Mall, where his parents sold housewares and rock band T-shirts. That has given Mr. Yip the insight to make one of the most talked-about trades on Wall Street: a “short” wagering that many malls across America are doomed.

These days, Burlington Center is a silent place. Of around 100 stores, only about a dozen remain open. Macy’s and J.C. Penney are gone, leaving Sears as the last anchor tenant. Vacant properties surround a dry fountain whose centerpiece, a life-size bronze elephant, used to spout water onto its back.

The mall’s ghostly presence has spurred a financial wager that Mr. Yip, now a New York hedge-fund manager, is pitching to investors many times his size. Starting in late 2015, he began visiting shopping centers across the U.S. to take their vital signs. Concluding that dozens faced a fate akin to Burlington Center’s, as internet shopping becomes more dominant, he placed a bearish bet on an obscure index linked to the performance of bonds that are backed by commercial mortgages.

So far, so good. A slice of the index, which Wall Street calls the “CMBX 6,” has tumbled 6.3% since the start of this year, according to IHS Markit . The decline is good news for anyone shorting the index, or betting on it to fall, as he is.
Mr. Yip’s hedge fund, Alder Hill Management LP, gained 8% in the first quarter of 2017, said people familiar with its performance, fueled in part by the bearish bets on two index slices.

Mr. Yip has been pitching his idea to other investors. Earlier this year, he circulated a 58-page report that mapped out a dire outlook for regional shopping centers and said more than two dozen whose debt was reflected in the index were likely to default. He presented his thesis to a group of investment firms at a lunch in Midtown Manhattan.
The daring trade, potential payoff and Mr. Yip’s aggressive marketing have drawn comparisons to the way a few canny traders and hedge funds bet against an index tied to subprime mortgage bonds during the housing bubble a decade ago. That wager proved lucrative when housing went into a deep swoon and thousands of homeowners defaulted.

Mr. Yip said investors could make huge profits if, for instance, Sears Holdings Corp. were to file for bankruptcy, which his report called “likely just a matter of timing.” The closure of a sea of Sears stores could lead some other retailers to break their mall leases, he said, ultimately leaving struggling malls for dead.

Sears Holdings says it isn’t in peril. Howard Riefs, a spokesman, said the company has sold assets and taken other steps to “improve [its] operational performance and financial flexibility.” Sears closed 150 of its approximately 1,430 Sears and Kmart storesso far this year.

Corvex Management LP, Aurelius Capital Partners LP and Gratia Capital LLC have all made negative bets on the index similar to Mr. Yip’s, according to people familiar with the funds. The volume of outstanding bets on the index has swelled by more than $2 billion since Mr. Yip began shopping his trade around.

While many people are bearish on the future of malls, there’s little consensus about how an investor might successfully bet against them.

Any downturn in commercial real-estate debt is thought unlikely to be as brutal as the housing meltdown, partly because most of the bonds are backed not just by malls but by a wide variety of properties, including hotels and office buildings.

The index Mr. Yip is betting against has a higher concentration of shopping centers than similar financial instruments, but still only around 40 of the roughly 1,500 loans underpinning the index’s performance are mall debt. Debt of weaker malls makes up less than 15% of the index, according to Bank of America Merrill Lynch.

Many of the mall-based loans would have to default, and their properties be liquidated, before investors with bearish bets could collect a windfall. Skeptics say mall owners have tools at their disposal to improve their properties before they spiral into default.
“The CMBX is a very blunt tool” for betting against malls, said Alan Todd, head of commercial mortgage research at Bank of America Merrill Lynch. While retailers are downsizing at a faster clip, not every mall will be similarly affected, and the time between store closures and ultimate mall failures can vary significantly, he added.

Part of the beauty of the “Big Short” bet against housing was that it was asymmetrical in nature.  The funds that took out out credit default swaps against mortgage backed securities were able to choose the the specific mortgage bonds that they bought insurance against.  In some cases, they were even able to influence the collateral that went into those bonds.  It was a classic example of one side (hedge fund shorts) knowing far more about a trade than the other (institutional longs).  In addition, the bonds were made up of similar assets: sub-prime mortgages.  This allowed the shorts to benefit from high concentration with little to no diversification in the underlying securities.  Those buying credit protection on CMBX (the CMBS index) don’t have a decided edge like Big Short hedge funds did for several reasons:

  1. They are betting against a diversified pool of assets – as noted above, only about 15% of the index is made up of debt from weak malls.  That’s not an insignificant number but it’s a far cry from betting against a security 100% backed by mortgages to subprime borrowers.
  2. They betting against an index rather than an individual security – The shorts aren’t able to pick out a weak bond and bet against it like they did in the Big Short.  As Alan Todd from BofAML said: this is a “very blunt tool.”  They are using a shotgun, the mortgage shorts from 10 years ago were using sniper rifles.
  3. They don’t have knowledge asymmetry – unlike the Big Short, there doesn’t appear to be any knowledge asymmetry between shorts and longs betting on or against the index.  Back in 2005, the prevailing view of the public was that housing had entered a new paradigm and would not go down in value.  Today, pretty much everyone has known that retail is a train wreck and has been for a while.  The prevailing view is that mall retail’s new paradigm is a downward spiral brought on by online shopping.  Betting against housing in the mid-aughts was a bold contrarian play.  Betting against retail in 2015-2017 hardly seems contrarian.

There is no doubt in my mind that malls are a dumpster fire and there is more pain to come from Sears, JCPenny, Macy’s etc as well as the smaller stores that rely on them for traffic.  Betting against the CMBX index may be a way for hedge funds to make some money as the market for retail continues to deteriorate.  However, due to the issues outlined above I wouldn’t expect anything close to Big-Short-like returns.  Even if Mr. Yip and his cohorts are correct on the investment thesis, their vehicle of choice is not going to be anywhere near as effective as credit default swaps against subprime mortgage bonds were.


Meh: US growth in the first quarter of 2017 was sub-par.

Warning Signs: Risk assets are booming around the world but today’s “risk-off” market is sowing the seeds of future instability.

Rise of the Machines: Here’s a summary of the entry-level jobs most likely to be stolen by robots in the near future.


Sign of the Times: A new renter survey found that tenants now consider high speed internet and wifi more important amenities than in-room laundry facilities.


How the Other Half Lives: A new luxury condo project Century City offers Botox bars and robot butlers because, LA.

On the Rise: The number of new homeowners just outstripped that of new renters for the first time in a decade.

Leveling Off: The home ownership rate has stopped falling and has stabilized for the time being.


Scheinfreund: A rapper and a sketchy promoter used a bunch of famous Instagram models to entice Rich Kids of Instagram to buy tickets as expensive as $250k to attend an exclusive music festival on a tropical island.  All hell broke loose when the accommodations and food looked like a refugee camp and all of the music acts cancelled. The ensuing chaos and social media melee made for by far the most entertaining thing I’ve read this year.

Holding On: The crucial decision that Elon Musk made when he was asset rich and cash poor was not to sell off a large portion of his stake in Tesla.

Honey, I’m Going Out Tonight: A new study found that men need to go out and drink with friends twice a week to stay healthy.  Stay tuned for the next study which measures the divorce rate of people who followed the advice of the initial study.

Chart of the Day


Gotta Eat: A hooker solicited a cop for sex in exchange for Chicken McNuggets, because Florida.

Get Off This Plane Right Meow: A woman with allergies was recently thrown off of a plane when she asked to move her seat away from a comfort cat, because United.

Bom Chicka Bow Wow: A new study found that 1 in 10 American air travelers reports having sex of some kind in an airport.  This seems really high to me.

Uncovered: Declassified documents outline how the CIA tried to spy on the Russians by surgically implanting a microphone into a cat.  It’s safe to say that Project Acoustic Kitty’ was a bust:

The research was dubbed ‘Project Acoustic Kitty’ and cost $13 million (£10 million) over its five-year development in the 1960s.  The cat’s tail was used as an antenna with a wire travelling all the way up its spine to a microphone in the animal’s ear.  The equipment’s battery pack was sewn into the cat’s chest.   Victor Marchetti, a former CIA officer, told The Telegraph that year of the gruesome creation.
He said: ‘They slit the cat open, put batteries in him, wired him up’.  ‘They made a monstrosity. They tested him and tested him.  ‘They found he would walk off the job when he got hungry, so they put another wire in to override that,‘ he added.  The final 1967 report on the project concluded it was non-practical, signalling the end of the research.


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

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Landmark Links May 2nd – Imperfect Solution

Landmark Links April 28th – It’s Lit


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.


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.


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


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


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


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.

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Landmark Links April 28th – It’s Lit

Landmark Links April 25th – Myth Busters

Myth Busters

Lead Story… What a week.  Back in the office today after a fun weekend in Cabo.  I’m a bit limited on time but thought that these two myth-busting articles about the real cost of a college education and Millennial job hopping were fascinating:

Myth Busters Part 1: Yes, sticker prices are high but the actual cost of college isn’t nearly as steep as commonly thought once scholarship and grant money is taken into account.

Myth Busters Part 2: Millennials don’t job hop at anywhere near the rate commonly believed. In fact they look an awful lot like previous generations in this area.  Here’s why it would be a whole lot better if they did.


Shale Fail: OPEC used to be able to influence the cost of oil through supply cuts. Now those days are gone thanks to American shale producers.

Perspective: Generally speaking, the global living conditions keep improving, despite a nearly constant negative media narrative.  These 5 charts show how.


Gone to Pot: Could state-chartered public banks provide the lifeline that marijuana companies need to access regulated lending and depository markets?  See Also: There are some interesting parallels between investing in marijuana today and investing in alcohol before the repeal of prohibition.


Not What We Needed: The Trump administration just announced yuge tariffs on Canadian lumber because apparently construction costs aren’t soaring quickly enough. 

Don’t Believe the Hype: Mortgage credit availability is still terrible by historical standards.

Rise of the Machines: Robots and modular factories are going to play a major role in filling the construction labor shortage.

Nine Oh Wine: Chinese investors are making bets on Temecula wineries and communities around them.


Black Box: Increasingly complex algorithms that govern online retail prices  and are causing wide price swings for goods.

Playing With Fire: Uber managed to run afoul of Apple by continuing to track former users even after they had deleted the app.  These are the people we are trusting with autonomous car data….

BS: Silicon Valley-based juicer start up that cost hundreds of dollars says you can now get a refund after it was exposed as complete bullshit.  (h/t Darren Fancher)

Chart of the Day


You Know the Drill: A man stole $250k and a Viagra prescription from the safe of a strip club appropriately called “Wacko’s” because, Florida.

Yo Quiero Taco Bell: A Pennsylvania man was arrested for drunk driving after he crashed into a light pole in Pittsburgh.  To make matters worse, the man’s Chihuahua was found intoxicated as well after it lapped up vodka that had spilled from a bottle that was on his lap at the time of the crash.  The criminal complaint notes that the “aggravated” man kept yelling “monkey dicks” and “similar nonsense phrases” while en route to jail.

Extra Fiber: An American frozen food company recently recalled their hash browns because they had bits of golf ball material in them.  (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 April 25th – Myth Busters

Landmark Links April 18th – Buy Low

Trading Places

Lead Story….. Quick programming note: I won’t be posting on Friday as I’m heading out of town for a wedding.  In fact, I’m going to be the wedding officiant when my sister-in-law and future brother-in-law tie the knot.  It’s the first time I’ve ever officiated wedding and, needless to say, I’ve been busy getting ready.  I wasn’t going to post this week (there will not be a post on Friday) but then I came across this Business Insider article by Frank Chaparro summarizing an interview where Wall Street legend Howard Marks of Oaktree described the phone conversation with Michael Milken that changed his life.  It’s one of the best things I’ve read and I wanted to post it in it’s entirety (highlights are mine):

Howard Marks isn’t afraid of risky assets, so long as the price is right.

Marks’ investment firm, Oaktree, is considered one of the leading investors in distressed debt, essentially riskier debt.

He founded the firm in 1995, and since then the firm’s assets under management have increased from $5 billion to about $101 billion. And Marks is estimated to have a personal net worth of close to $1.97 billion, according to Forbes.

He counts Warren Buffett as a friend and a fan. “When I see memos from Howard Marks in my mail, they’re the first thing I open and read,” Buffett once said.

And in an interview with Julie Segel at Institutional Investor , Marks explained the phone call that changed his life.

He was asked by his boss to meet up with an investor out in California named Mike Milken. Milken, whom many consider the father of high-yield bonds, explained that investing in safe assets isn’t as smart as it appears, because they can only go down.

“If you buy AAA or AA bonds they only have direction. If you buy single B bonds, and they survive, all the surprise will be on the upside,” he said.

“[You] could issue high yield bonds, they called them junk in those days, if the promised yield was high enough. And that makes perfect sense,” he added.

It’s all about price, according to Marks, not what you invest in:

There’s not such thing as a good investment idea, until you’ve discussed price.

Investing well is not a matter of buying good things, it’s about buying things well. And people have to understand the difference. And if you don’t understand the difference you are in big trouble.

This interview hit home for me.  In recent months I’ve had several discussions with prospective clients where I’ve been asked about the viability of a new business plan.  My answer has always been the same: it depends on what price you are paying.  Howard Marks is a billionaire and one of the most successful investors in the world because he understands the difference between buying good things and buying things well.  We’d all do well to heed his advice in the last four sentences of the interview.


Black Box: Financial insiders are becoming increasingly worried about the spread of securities-based loans which allow wealthy investors to borrow against their securities portfolios at variable rates without selling positions.  The loans loans don’t show up on bank balance sheets and there is almost no regulatory oversight.

Worst of Both Worlds: Believe it or not, economic concentration is flat even as inequality rises, primarily because lower income people are fleeing high cost cities.  Like so many things these days, it all comes back to a lack of affordable housing.

Over It: CalPERS is sick and tired of paying high private equity fees.


Dead Space: American built way too many malls and it’s a major drag on the economy. See Also: Is American retail at a historic tipping point?  And: If you think online shopping is disruptive to retail, just wait until driver-less vehicles become mainstream.


Check Up: JBREC’s highly entertaining Housing Bubble Check-In finds only a small handful of potential bubble signs.

Same Direction: Young Americans aren’t moving like they used to.  See Also: Why current housing trends will help to keep interest rates suppressed.

Hitting the Road: Leaving coastal California is a no-brainier for some as housing costs continue to rise.  See Also: LA’s housing costs mark it harder for companies to keep workers here.


Underdog: The unlikely story of how Mark Davis outfoxed the most powerful man in Nevada, Sheldon Adelson, and brought the Raiders to Las Vegas.

How the Other Half Lives: Residents in the inland regions of California increasingly have less in common with their coastal brethren….and little say in governing at the state level.

Iceberg!  What happened after the Titanic sunk in pictures.

Surge Pricing: Japan has a major potato chip shortage thanks to a bad crop and bags are now going for as much as $12 a pop.

Stuck Up:  Why American Express is losing the credit card snob war to Chase.

Chart of the Day

I think that I spot a trend here….



Fake it ‘Till You Make It: A man was arrested for impersonating a police officer when he pulled over a real cop because, Florida.

Headline of the Year:  It’s only April but the headline of the year title has already been claimed.  Nothing is beating this: Amid Allegations of Unpaid Taxes, Neo-Nazism, and Sex Offender, Denver Furry Convention Canceled.

Stamina: The world’s oldest porn star is 82 years old and credits his longevity to eating raw eggs every day.

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

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Landmark Links April 18th – Buy Low

Landmark Links April 14th – Shakedown Street


Lead Story… Important disclaimer: Landmark was involved on the capital raise for a project that I’m going to write about today.  However, neither I, nor my partners as individuals, nor Landmark have an ongoing economic interest in said project.  I want to be fully transparent up front even if certain other people involved in today’s Lead Story are trying to mask their actual motives.

The Grateful Dead released the song Shakedown Street (and the album by the same name) in the late 1970s at a time when US cities in general and the Bay Area in particular were mired in a period of urban decay.  The lyrics refer to a run down urban center and fans have long speculated that they (and the album cover which I’ve posted above) were intended to depict the area outside of the band’s recording studio in a rough area of San Rafael.  Strictly from a real estate standpoint, the song is a relic of a bygone era as urban areas along the coasts have been booming for years, especially the Bay Area.  Also, the median home value in San Rafael is now over $960k per Zillow.

Today, urban decay along the coasts has been reduced to little more than a bad memory.  However, the shakedown artists have arguably gotten worse.  Back when the song was written, they may have been drug dealers, street hustlers, gangs, or even crooked cops.  The difference is that today’s more refined shakedown artists are professional extortionists who hold up projects for no reason other than to extort developers under the provisions of CEQA or the California Environmental Quality Act.

CEQA is one of those statutes that may have been well intending, but created a loophole for professional extortionists and greenmailers looking for quick payoffs.  CEQA was enacted to institute a statewide policy of environmental protection back in 1970.  Per Wikipedia’s abstract of the statute:

CEQA does not directly regulate land uses, but instead requires state and local agencies within California to follow a protocol of analysis and public disclosure of environmental impacts of proposed projects and, in a departure from NEPA, adopt all feasible measures to mitigate those impacts. CEQA makes environmental protection a mandatory part of every California state and local (public) agency’s decision making process.

The goals of environmental protection and mediation are worthy for sure.  The problem is that the law opened up a loophole for NIMBYs, extortionist attorneys and other special interests such as labor unions and competitors to challenge any project that they don’t like under the cover of environmentalism.  A study by law firm Holland and Knight in 2015 came to this depressing conclusion about abuse of the statute (emphasis mine):

The report’s authors say their findings debunk the common wisdom that CEQA litigation is advanced primarily by environmentalists, or even that it serves primarily environmental purposes. In fact, the opposite may be true.

Some of the discoveries supporting this conclusion may be surprising:

  • Among infrastructure projects, transit—not highways or roads—is most frequently challenged.
  • Renewable energy projects are the most often challenged utility/industrial projects.
  • And in the private sector, higher-density housing is most contested. Infill projects in general appear to attract challenges far more often than “greenfield” development, or sprawl.

Report co-author Jennifer Hernandez summarizes the takeaway in The Planning Report:

“CEQA litigation is not a battle between ‘business’ and ‘enviros’ … [It] is primarily the domain of Not In My Backyard (NIMBY) opponents and special interests such as competitors and labor unions seeking non-environmental outcomes.”

If CEQA is generally regarded as the province of environmentalism, then calls for CEQA reform are sometimes seen as threatening progressive goals. But Hernandez argues that moderate reforms aimed at transparency and consistency would advance sustainability and equity in the state by curbing abuse of the well-intentioned statute.

We are currently in the midst of a massive housing affordability crisis and CEQA challenges are driving up cost and reducing supply where it is desperately needed most: urban areas.  In addition, study after study has shown that density is GOOD not bad for the environment.  This makes it incredibly difficult to believe that CEQA challenges against urban infill projects have any sort of actual environmental objectives in mind when they are filed.

For some CEQA suits, the motivation is easy to decipher: labor unions typically challenge projects under CEQA that aren’t using union labor, competitors want to limit competition and NIMBY’s just don’t want anything built anywhere near their property.  However, today I want to focus on perhaps the most insidious CEQA challenger: the greenmail extortionist.  Here’s how the scheme works:  A supposed “activist” sets up a shell organization with a name that sounds environmentalist in nature and teams up with a law firm.  They then seek out projects with developers whom they believe to have deep pockets and then challenge those projects under CEQA grounds.  The CEQA suits are typically groundless and the extortionist usually loses if/when they go to trial.  However, going to trial costs a developer money and, perhaps more importantly time.  But going to trial isn’t the goal here – rather the objective is to get a payoff from the developer to make their legal problem go away and let them continue with their project.  Unfortunately, this is typically far less expensive for a developer than months or more of costly litigation so they frequently don’t go all of the way to trial.  Instead, they pay off the extortionist who then uses the funds to capitalize their shell organization to go after their next target and achieve an even larger payday.  The aim of a skilled CEQA greenmailer is to try to get paid a lucrative amount to go away but not so much that the developer opts to defend the lawsuit.

Developer and capital partner clients of ours have run into this problem before and I recently learned that one was facing a challenge on a project in Long Beach that had been written up in the Long Beach Business Journal under the foreboding title Developers Beware: Activists May Sue (Emphasis mine).

With more than 50 projects underway, approved or under review, the City of Long Beach is going gangbusters with regard to development. Housing, retail, restaurants, industrial – developers are building it all. With so much activity, it is natural to see pushback from residents and local organizations.

Long Beach resident Warren Blesofsky and his group – Long Beach Citizens for Fair Development – have been exceedingly vocal about city practices when it comes to development. The group has vocalized its opposition for about 40 development proposals, according to Blesofsky, and has taken legal action on three.

“We’re pursuing a strategy of appeals and litigation citywide to change the way the city does business with regards to development. We really feel that the city government in Long Beach is by and for developers,” Blesofsky said. “The loss of the environmental, cultural, historic and fiscal resources in Long Beach is generally for the benefit of a few people and not for the many residents of Long Beach.”

The first formal appeal and lawsuit made by Blesofsky was against the second phase of the Shoreline Gateway project at 777 E. Ocean Blvd., adjacent to phase one, now called The Current. According to Ryan Altoon, executive vice president of Anderson Pacific LLC, the developer of the project, the suit was settled out of court. The settlement included a confidentiality agreement, so neither Anderson Pacific nor Blesofsky can disclose the terms of the settlement.

Currently, Blesofsky and his legal representation, Jamie Hall of Beverly Hills-based Channel Law Group LLP, are negotiating settlement terms for appeals at 100 E. Ocean Blvd. and 3655 N. Norwalk Blvd.

Hall has been involved in several other development lawsuits in Long Beach, including one against The Current and three on behalf of Debora Dobias and the group Long Beach Transportation and Parking Solutions (TAPS).

“I want to make sure that people understand that when people bring these lawsuits, it’s not because they just want to be gadflies and they hate developers and they want no buildings,” Hall said. “They’re not absolute NIMBYs. It’s about the details. It’s about whether or not there is adequate mitigation.”

The TAPS lawsuits were against downtown proposals by Ensemble Investment LLC, Raintree-Evergreen LLC and Broadway Block LLC. These lawsuits were settled together in November of last year and resulted in parking studies to be conducted in the Alamitos Beach and downtown areas.

Blesofsky said his appeal at 100 E. Ocean Blvd., the former site of the historic Jergins Trust Building, focuses on taxpayer abuse issues. He claims the site was sold under value, while other offers were millions of dollars higher. Blesofsky also claims the current zoning is for high-density housing but that, in a case of spot zoning, the city approved the land sale to a developer proposing a luxury hotel.

Blesofsky and Hall said negotiations are proceeding with developer American Life Inc., but that they could not share any details.

Clearly, Blesofsky and his attorney have an agenda in going after projects.  But is this actually doing anything good for the city or the environment?  Or is it just lining the pockets of an “activist” and his attorney when the developers settle?  Now we get to the part about the project that Landmark worked on located on Norwalk Blvd (emphasis mine):

The Norwalk Boulevard property has been home to the El Dorado Park Community Church for the last 55 years. Developer Preface has proposed a 40-home gated community to complement the adjacent El Dorado Park Estates neighborhood.

“I look at that building as a beautiful, historic building. I see a town hall. I see a community meeting space,” Blesofsky said. “Those are all uses that are allowed under the current zoning, and that’s why I object to the zoning change for high-density, single-family, million-dollar houses.”

Blesofsky said the proposed zoning change to residential is another case of spot zoning by city staff to appease developers, despite the site being surrounded by residential neighborhoods. He said the zoning change is meant to allow developers to minimize lot sizes to maximize the number of homes on the land, which doesn’t provide the best quality of life for residents.

Project data, however, tells a different story. Current zoning allows for up to 42 homes with 7.2 units per acre and 6,000 square feet of gross land per home. The Preface project only consists of 40 homes with 6.9 units per acre and 6,316 square feet of gross land area per home – less units per acre and more square footage per lot, including an average of 7% more open space per lot.

Additionally, Blesofsky claimed the zoning change would allow for smaller setbacks on the properties, including rear, side yard and garage. However, the only change to setbacks according to the site plan is a two-foot increase to the rear setbacks from the property lines.

Read that last passage carefully.  At this point in the story it becomes apparent that Blesofsky is often just making things up when he goes after a developer.  The building is far significant from an architectural prospective, nor is it a historical structure.  From my recollection, it was built in stages beginning in the 1970s and was not designed by a notable architect.  His comments about zoning and setbacks, as highlighted above are just flat out wrong.  Kudos to Brandon Richardson, the author of the piece for astutely pointing this out.  The article continues (again, emphasis mine):

Blesofsky’s appeal to the housing development also claims inadequacies in the environmental impact report, most notably the section in which alternative projects are identified. He contends the report is lacking an alternative that includes a housing element.

Alternatives listed in the document include abandoning the project and allowing the current structures to remain and function as a church, daycare and associated parking lots or converting existing facilities to a private elementary school or special event venue.

Alternatives that were rejected for various reasons of feasibility and scope included moving the chapel structure to preserve it and converting the chapel itself into housing.

“We are extremely disappointed litigation related to the City’s Environmental Impact Report has been filed by Warren Blesofsky,” a Preface spokesperson said in an e-mail to the Business Journal. “Despite the obvious and overwhelming community support for this project, as well as the thousands of hours of collaborative efforts between the development team and city staff, one individual – who chose not to participate in the planning process and does not live anywhere near the property – is attempting to undermine the project. With apologies to our friends in the El Dorado neighborhood, we will continue to work with all stakeholders in the city and community to move the project forward while we try to reach a resolution with Warren Blesofsky.”

Current negotiations between Blesofsky and Preface are focusing on the historical importance of the church and ways to mitigate the impact of losing the structure. Aside from the architectural importance, Blesofsky said the church’s past as a drive-in church, where residents could listen to a sermon in their cars while parked on the property, marks a time in American history that should not be destroyed without consideration. He explained that this is uniquely American and part of the country’s cultural landscape.

Blesofsky and Hall admitted that under California Environmental Quality Act (CEQA) guidelines, the best they can hope to achieve is mitigation beyond the proposed photographs of the church.

“One thing that we are trying to work on with developers, rather than just having some video taken with no context, is to actually do a documentary about the history of this church,” Hall said. “The best way to preserve it is to do something like that and have it available for public view in perpetuity.”

So they are basically, admitting that they don’t have a leg to stand on even under a generous interpretation of CEQA.  Usually, when this sort of CEQA challenge is raised, local NIMBYs tend to jump on board and oppose the project.  However, that doesn’t appear to be happening here (again, emphasis mine):

Bari Harris, an El Dorado Park Estates resident and local realtor, said she thinks the church is an eyesore and hopes the project moves forward quickly, despite Blesofsky’s appeals.

“I think it’s a shame that they are challenging the project and are holding it up,” Harris said. “With the housing shortage that we have, I just think it’s such a shame that they are holding up 40 more homes that we could have for people.”

The city was presented with a petition signed by between 40 and 50 residents in support of the development project, according to Harris. Additionally, residents and even congregation members of the church that recently vacated the premises submitted numerous letters of support into public record.

Despite community support, Blesofsky maintains that the process and proceedings are not acceptable and said more mitigation is needed on the Norwalk project and reform needs to be made to the development process at the city council level.

Hall said that each project he has worked on has resulted in better projects. He explained that these lawsuits are a direct result of elected officials’ tendency to violate CEQA guidelines by approving inadequate environmental reviews or bypassing them altogether, their poor treatment of developers and not listening to residents.

“I don’t earn my living doing this. I have my own business. In fact, I’ve lost money doing these appeals. It’s more just a matter of conscience to me,” Blesofsky explained. “I’m not anti-development, I’m pro-development. I think Long Beach does need more housing, and I believe in private property. I also believe in playing by the rules.”

Blesofsky said he is the owner of Linden River Capital LLC, in Long Beach. His company’s website states: “We are a real estate investment firm that specializes in the acquisition, management and sale of distressed properties and mortgage loans.”

Long Beach Citizens for Fair Development is in its infancy, with few core members, according to Blesofsky. He said he wished he did not have to resort to litigation, but claimed that the city does not take public comment to heart and instead focuses solely on staff reports. Because of this, he said the group has plans to continue taking action against development projects until changes are made to city procedures with regard to development approval.

“We want development weighted toward local developers and community development projects. I’d like to use the fiscal resources of the city for the highest good,” Blesofsky said. “If the city wants to give the citizens a real voice when it comes to development, then we won’t need to litigate anymore.”

To recap this mess:

  1. There doesn’t appear to be any environmental issue here whatsoever yet it is being challenged under CEQA.
  2. There is nothing historically significant about the former church building and local community members think it’s an eyesore.
  3. The challenge is based on zoning and setback assumptions that are simply untrue.
  4. The community as well as congregants of the former church are on the public record supporting the project.  There doesn’t appear to be much opposition here besides Mr. Blesofsky who apparently doesn’t even live in the impacted neighborhood.

Blesofsky might claim that he’s pro development and doesn’t make money on this sort of thing.  If you believe that, I have some ocean front property in Arizona that I’d like to sell you.  The system is being gamed big time and the sad part is that this is far from a one-off issue.   It happens all of the time.  In fact, it’s a dirty little secret that developers often have contingency line items in their budgets to settle CEQA lawsuits should one be filed.  Guess who pays for that?  Whoever ultimately buys or leases the project.

Something has to be done to prevent frivolous lawsuits that have become a hallmark of the California Environmental Quality Act.  CEQA may be a valuable protector of the state’s resources but it’s wide ranging-provisions that allow people without standing to file lawsuits against development at will, often against public interest are contributing to the affordability crisis.  Reform needs to happen but it’s a 3rd rail in Sacramento that almost no one in power is willing to touch due to the powerful legal and environmentalist lobbies.  Unfortunately, no one wins in this game of greenmail except of course for the CEQA extortionists and their attorneys and it doesn’t appear as if that is about to change any time soon.  Shakedowns are still alive and well in California.


Unpredictable: A guide to how markets responded to geopolitical crises in the past.  Spoiler: it’s nearly impossible to predict how markets will react to a geopolitical crisis.

Caveat Emptor: The $7 trillion dollar hazard beneath the M&A boom is potential future goodwill writedowns.

Unpaid Bills: Credit card charge-offs are on the rise as more American consumers struggle to pay their bills.  Loss and delinquency rates are still relatively low but this is an indicator of consumer strength worth watching.


Changing of the Guard: Last week was another brutal week for US retailers who are closing stores at a faster pace than ever before.  But See: The boom in online retailer fulfillment centers are providing a boost to local job markets.

Slim Pickins: It’s getting more challenging to find debt for multi-family construction projects as banks retrench thanks largely to new regulations, leaving more expensive debt funds to pick up the slack.


Staying Put: The latest Freddie Mac renter survey finds that apartment dwellers are largely optimistic about their financial position and don’t plan on moving, even if their rent increases.

Soaring: Seattle renters need a bigger raise than any other city in the US in order to maintain projected take-home pay next year.  See Also: How Amazon is eating Seattle and driving growth.  But See: Yes, Seattle real estate prices and rents are surging but it isn’t in danger of becoming the next San Francisco.


FAIL: This week’s United Airlines PR debacle prompted a hysterical Bloomberg article detailing  the worst corporate gaffes in history.

What a Difference a (Rainy) Winter Makes: Pictures of California before and after the winter deluge of 2016-2017 are incredible.

Ouch: How a Chinese dairy billionaire got over-leveraged and lost his fortune in 90 minutes.

Rise of the Machines: Terrible fast food restaurant Burger King has a new add that is specifically designed to hijack home voice activated speakers in an incredibly annoying way, opening the door for more advertisers to take advantage of virtual assistants like Siri and Alexa.  Perhaps if Burger King put an equal amount of effort into making food that isn’t utter crap, they wouldn’t need to rely on such lame gimmicks.

I’m Totally Getting This: Summer is just around the corner and a company called Forty Ounce Wines is now selling 40s of Rosé.   It’s perfect for people who can’t decide whether they want to party in the Hamptons or go to one of those stereotypical college parties that the PC Police bust white frat boys for throwing.

Chart of the Day

More house on less lot

 Median Square Footage Land

Source: Corelogic


Hyper Inflation is Bad: The Zimbabwean Government recently passed a law to compel the nation’s banks to accept livestock as collateral for cash loans to informal businesses.  This tells you pretty much everything that you need to know about the economy there. (h/t Steve Sims)

Hardening Problem: A husband filled his soon-to-be-ex-wife’s car with cement after she changed her last name for a supermarket promotion because, Russia.  Fortunately, it was caught on video.

Bucket List Trip: There is a shit museum in Italy.  I’m not making this up.  There is actually a museum in Italy devoted to shit (h/t Cyndi Deermount)

Hardcore Evidence: A condom-clogged drainage pipe tipped off Austin, Texas, police to a prostitution ring that was operating under the guise of a massage parlor.

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

Visit us at

Landmark Links April 14th – Shakedown Street

Landmark Links April 11th – Flipping Out

Flip off

Lead Story… Circus magnate PT Barnum is often credited as the source of the infamous quote that “there is a sucker born every minute” despite the fact that there is no actual evidence that he ever uttered those words.  In fact the aphorism is more likely attributable to Joseph “Paper Collar Joe” Bessimer an infamous con-man.  If Paper Collar Joe were still around today he would probably find himself at home in the shady real estate “guru” industry.

During the housing bubble in the US, all sorts of scammers, charlatans, posers and hucksters made money by selling variations of the get-rich-quick in real estate dream to gullible marks.  Many of them vanished without a trace (other than maybe a bankruptcy filing here or there) when the market imploded 10 years ago.  Based on today’s lead story, some may have hopped the northern border to Canada.  I was short on time this weekend and wasn’t going to post a lead story, then I found this gem from MacLean’s re-capping something called The Real Estate Expo in Toronto.  I checked the date to see if it was dated April 1st, hoping that this was just an April Fools joke but was disappointed to see that it is indeed real.  From Meagan Campbell of Maclean’s (emphasis mine):

If real estate were a religion, Elijah Joseph would be a believer. He is 24-years-old, and he has devoted his future to erecting properties trimmed with 24-carat gold. “I’m looking to build a great big empire,” he says. “There is no doubt. I have a plan. I have a course of action, and right now, I’m kind of looking for a mentor.”

In mid-March, Joseph attended the Toronto Real Estate Wealth Expo, a jungle of real estate gurus and their 15,000 disciples who paid up to $500 per ticket, only to be told to invest in what is actually one of the worst buyer’s markets in Canada. While life coach Tony Robbins and singer Pitbull fired up the crowd into impulsive mode, a line-up of personalities preached that, despite record-high Toronto house prices, now is actually an ideal time to buy. The presenters all had personal stakes in the market, but attendees ignored the conflict of interest, and the event, disguised as a conference and concert, became a full-day sermon on buying real estate as the greatest good.

“Fear will kill you. Fear will drown you,” said Daryl King, who is selling properties upwards of $8.8 million throughout the Greater Toronto Area and Ontario. “Just jump in!” chanted Inez Kurdrik, a downtown realtor. On the same panel, Brad Lamb, nicknamed “the condo king,” who has built eight high-rises in Toronto, declared, “Toronto has become one of the last safe havens in the world.”

In reality, a consensus is emerging that Toronto is a in fact a buyer’s hell. The average house price in the Greater Toronto Area sold for $916,000 last month, up more than 30 per cent from the year before.

The Expo strategically tours cities in need of buyers. Sponsored by real estate agencies, developers and banks, the event will visit Miami, a seller’s market in which housing prices rose 10 per cent last year, and Chicago, which was almost an equally strong seller’s market last year when the Expo was planned.

“This event is a blood-sucking event,” said Clark Lord, a musician and artist who bought tickets solely to see Tony Robbins. “They’re telling everyone [that they can] be a millionaire when we can’t even pay for food.” Lord’s friend, Ivan Rendalic, a lawyer, only went because Lord bought him a ticket. “All this is is a stimulus package,” says Rendalic. “They’re getting high on the hype. They’re refusing the logic. Once people hit a small barrier, they’re f**ked.”

The event itself was misleading. “Gold ticket seating” meant a foldable chair at the nosebleed-back, and while attendees like Joseph paid $250 for “VIP” passes, expecting they would get to meet Robbins, such access was reserved for people who paid $500 for “Ultimate VIP” passes. Robbins showed up an hour and a half late, at which point he fist-pumped around the room while telling people to search within their hearts—a bizarre hybrid of busker and Buddha. “Our hearts start beating before our brains start working,” he said, though his embryology lesson was incorrect. Robbins wasn’t the only presenter who needed fact-checking; at the Expo in 2009, a headliner was Donald Trump.

“This is the very hugest, the very hugest of all,” said Raymond Aaron, a personal finance guru, who was supposed to present on “automatic prosperity” but instead spent his stage time selling his two-day course.You’re gunna go buzzurk. I’m going to do something unbelievably special …. Another giant, giant bonus … This is the very, very, very, very hugest … It’s not $5,000. It’s $697! No HST!”

The most aggressive salesman was realtor Tim Payne, a presenter who was expected to spill secrets on flipping houses but spent nearly two hours advertising his $995 three-day course, charging an extra $6,000 for access to contacts. “I wanna kick your legs out and choke you until you’re wealthy,” he said. As the father of six boys, he boasted to the crowd, “I feed them money. They just crap out money.”

That burden of proof was enough to convince Joseph, who stood up and headed for a registration table to pay for the course. “I just know I want to be around mansions,” he said. “I look at them. I’m in love with them. I study them.” His future house: “Marble floor. 30-foot ceilings. Maybe a tennis court, maybe not a tennis court (I’m not really a tennis guy.) And a big, big, big hangar for a variety of cars.”

Joseph currently lives with roommates in an apartment in East York for $800 per month. He works going door-to-door selling solar panels on commission. He was formerly a college basketball player and lived in Windsor with his mother, a personal support worker, but he says, “I left my family to find wealth.”

Exiting the Expo, Joseph planned to convert others to join the real estate market. He is nicknamed “The Rev,” he says, because he talks to his friends with reverend-like pedagogy. “When I ingest this, I literally spew it all out to everyone I speak with,” he says. “Maybe I’ll get into motivational speaking of my own.”

This will absolutely end in tears for everyone involved save for the so-called “gurus” who are making absurd fees for selling useless platitudes as investment advice.  The fact that anyone would take investment advice from a huckster like Tony Robbins who once presided over a “fire walk” that caused injuries to over 30 people when he convinced them to walk over hot coals is beyond me.

Done correctly, real estate investment is a rather dull business and really isn’t glamorous.  The idea that there are still con men out there trying to sell lowly door-to-door salesmen living paycheck to paycheck on the dream of getting rich quick in real estate is frankly depressing and leads me to believe that the cycle is getting a bit long in the tooth – at least in Canada.  Hint to all of the aspiring house flip multi-millionaires out there: if something sounds too good to be true, it most likely is.

House flipping in today’s market is a capital intensive and relatively low return business.  The low hanging fruit was picked off several years ago when most were too frightened to buy and capital was scarce. Ask yourself: if returns are so lucrative, why is this person with all of the supposed secrets to success spending his time doing seminars rather than devoting his waking hours to making money flipping homes? The answer is self evident and it’s not a charitable endevour but rather a scam. Perhaps if Paper Collar Joe were still alive today he’d be a real estate “guru” and would be cashing in selling expensive, worthless seminars to suckers like the ones in Toronto recently.


Extreme Bias: An individual’s economic outlook is now tied closer to partisan identity than ever before and that is not a good thing.

Rise of the Machines: A new startup in Texas has developed an army of robots to mow lawns.

Everything Old is New Again: Upside down cars are the new upside down houses.  See Also: How Wall Street is making it more difficult to buy a car as bond defaults surge and sales slump.


Shuffle: JBREC is seeing strong apartment rent growth in secondary markets, even as primary markets, which have been soaring for years begin to drop.


Correlation vs Causality: Why lower house prices tend to lead to higher student loan default rates.

Dragging their Feet: TransUnion says that affordability, driven partially by rising interest rates is the primary reason that Millennials are delaying purchasing a home.


Seems Sustainable: Airlines are such a shitty business that they now make more money selling miles than seats.  See Also: Forcibly removing a passenger from an overbooked plane so that airline employees could have a place to sit is the latest example of why United Airlines is an absolute garbage company.

Stumbling Block: A dearth of infrastructure is the primary hurdle facing widespread adoption of electric cars.  But See: Tesla, which sold 76,230 vehicles in 2016 and is not profitable now has a larger market cap than GM – which sold 10 million vehicles in 2016.

Rising Sun: How China came to dominate the solar industry through a combination of massive economy of scale scale and government subsidies.

Chart of the Day

Property Tax By State



Gonna Give Me Nightmares: Scientists have biologically engineered a chicken with the head of a dinosaur, because apparently someone out there didn’t find this idea horrifying.

Eccentric: Richard Branson just started the world’s first dyslexic-only sperm bank because apparently this is something that the world needed.

Seems Reasonable: Italian man granted divorce after claiming wife ‘possessed by devil’

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

Visit us at

Landmark Links April 11th – Flipping Out

Landmark Links April 7th – Crank it Up


Lead Story… One of the hallmarks of the housing bubble was mortgage equity withdrawal.  The market was soaring and anyone with a pulse could get a mortgage with little to no money down and then watch their net worth grow (at least on paper).  As this happened, home owners felt wealthier and wanted a way to spend their newfound treasure.  Enter the home equity line of credit or HELOC.  The product had been around for years but was taken to new extremes by lenders who were all too eager to originate new business and borrowers who succumbed to the wealth effect even as wages remained largely stagnant.  It’s a self-perpetuating cycle up to a point: borrower extracts capital from home and spends it in the economy, economy grows which helps the housing market continue on it’s upward trajectory.  Some lenders even lent at loan to value ratios above 100%!  All was well so long as housing values continued to move higher.  However, they didn’t and we all know that this story ended in over-leveraged tears and bank bailouts.  Not surprisingly, mortgage equity withdrawal went massively negative during the ensuing crash, then rebounded but stayed in negative territory for quite some time as the HELOC spigot shut down completely and borrowers went through the painful deleveraging process.  It was one hell of a party and the hangover lasted from 2008 all of the way through early 2016.

Today, values are up and mortgage equity withdrawal via HELOC is making a comeback, especially among younger home owners.  CNBC’s Diana Olick reported on the trend earlier this week (emphasis mine):

Fast-rising home prices gave homeowners more equity than many expected, and they are now tapping that equity at the fastest rate in eight years.

Homeowners gained a collective $570 billion throughout 2016, bringing the number of homeowners with “tappable” equity up to 39.5 million, according to Black Knight Financial Services. Those borrowers have at least 20 percent equity in their homes.

But the fact that mortgage rates were lower last year makes it less likely today’s borrowers would want to refinance this year. About 68 percent of tappable equity belongs to borrowers with mortgage rates below today’s levels. The vast majority of these borrowers, more than three-quarters, also have FICO credit scores well above average, which gives them more options for cashing out on their homes.

Enter the HELOC. Home equity lines of credit are second loans taken outside the primary mortgage, and millennials are leading the pack to cash in.

“The last time interest rates rose as much as they have over the past few months, we saw cash-out refinances decline by 50 percent,” said Ben Graboske, executive vice president at Black Knight. He expects to see more HELOCs instead.

And more millennials are using HELOCs than Gen-Xers or baby boomers, according to a survey by TD Bank. In fact, more than a third of millennials said they are considering applying for a HELOC in the next 18 months, which is more than twice the rate as Gen-Xers and nine times that of baby boomers.

At first glance, the idea of home owners being more likely to take on floating rate debt like HELOCs while interest rares are increasing seems crazy but it isn’t .  As stated above, borrowers generally aren’t going to refinance their existing mortgage and take cash out if today’s rates are higher than the loan that they already have.  So, if a home owner wants access to cash in his or her home, it either means taking out a 2nd mortgage or a HELOC.  The beauty of a HELOC is that the money is available but as a revolving line of credit that can be drawn on as needed as opposed to a traditional 2nd mortgage where the money comes out up front and can’t be re-drawn.  Here’s where it gets interesting from Diana Olick (again, emphasis mine):

Home remodeling was the No. 1 reason for taking out a HELOC last year, according to TD Bank, with debt consolidation coming in second. The home remodeling industry has seen a huge boost in the last year, as home prices rise and the supply of homes for sale shrinks. Homeowners are finding it harder to find and afford a suitable move-up home, so they’re increasingly choosing to stay and remodel.

Millennials are entering the housing market more slowly than previous generations, and those who have in the past few years tended to buy cheaper fixer-uppers. In just a few years, however, they’ve gained enough equity from rising prices to be able to pull cash out and remodel. They are, however, still very conservative. Borrowers doing cash-out refinances last year still had close to 35 percent equity left in their home, the lowest on record, with an average credit score of 750, according to Black Knight. Borrowers are still using HELOCs at barely one-third the rate they did in 2005.

So, while HELOC issuance is up, the money is being spent on renovations to add value, not vacations, cars, etc.  The fact that HELOC use is still 1/3 of what it was at the peak of the bubble and that borrower equity is high are positive signs as well.  This story makes a lot of sense in light of the tight supply and rising values that characterize today’s housing market for the following reasons:

  1. Older home owners are not moving as frequently as they used to, due at least partially to balance sheet issues.  These home owners are sitting on a massive portion of the move-up home stock.
  2. New home construction is still historically low, especially for this far along in the cycle, further suppressing available move-up inventory.
  3. Investors bought up a substantial number of starter homes in the wake of the crash and foreclosure crisis, reducing supply in that market segment.
  4. First time buyers who bought starter homes during the recovery are now sitting on large gains since they own an asset that has benefited from both a normalizing market and unusual scarcity.  In previous cycles, they would sell and roll those profits into a move up home.  However, they largely aren’t doing that since there are so few move up homes available and bidding can be fierce.  What good is it to take a profit on your current house only to overpay for your next house and carry a higher tax basis?
  5. The answer is to take out a HELOC, tap into equity and renovate the house that they already own.  When this is done in scale, entire neighborhoods can change.  What was once an entry level neighborhood, now becomes a move up neighborhood because the character of the housing stock changes.  As an aside, I’m seeing anecdotal evidence of this where I live that is full of houses built in the 1950s.  My neighborhood is like a construction site but the housing stock has been upgraded substantially in the past 5 years and values have risen accordingly.
  6. If you want more evidence that this is happening in a large scale, take a look at the stock of Home Depot versus the XHB Builder Index.  There is little doubt that we have been in a remodeling boom and not a housing boom despite the increase in housing prices.

Rising HELOC issuance and mortgage equity withdrawal for renovations are symptoms of a market where supply is constrained and also a cause due to the way that the money is being spent.  The lack of move up supply is having a cascading effect on supply and resulting in removal of more traditional entry-level homes through large scale renovations in entire neighborhoods.  This trend likely has some room to run given how high borrower equity currently is even if home price appreciation slows.  That being said, if equity begins to fall substantially, it will be a red flag.  A market that is reliant on ever-rising home values to prop up home equity withdrawal is not sustainable, as anyone who lived through the housing crash is all too aware.


Re-Allocation: The new face of American household debt = less mortgage and more student debt.

Click to enlarge

Large Scale: Income inequality is often discussed as the difference between individuals (ie CEO pay versus average worker pay).  However, it turns out that it’s a big issue between companies as well.  (h/t David Fierroz)

Rise of the Machines: The number of robots sold in the US will jump nearly 300 percent in the next nine years, putting more manufacturing jobs at risk.  See Also: Meet Sally, the robot chef who makes perfect salads.

Overkill: DC is one of the first cities in the US to require that child care workers have a college degree meaning that you now need a degree for a job that pays under $13/hour.  And then we wonder why college debt is soaring….  See Also: Even sex workers earn more if they get a college degree.


Big Short Redux: Hedge funds and investment banks are taking short positions against retail REITs and the bonds used to finance the properties that they own.  Big box and mall retail is a dead man walking at this point.  The concern is whether the contagion will spread to other commercial real estate sectors.  This is a story that bears watching in the coming months as it could have a large impact on the capital markets.  See Also: The CMBS delinquency rate is now at a 16-month high.

Crystal Ball: Driver-less and Electric cars are going to impact commercial real estate in ways that we can only begin to imagine.


Trouble Ahead?  Economist Tom Lawler believes that the US Census is substantially overstating population growth figures which would mean that we are also overestimating future housing demand.

Timber! The  Softwood Lumber Agreement which governs the lumber trade between the US and Canada expired back in 2015.  The lack of a viable new agreement and concerns over NAFTA’s future are creating pricing pressure and making homes more expensive to build.


Full Circle: The dating show boom that has swept world television screens for years may be coming to an end.  Guess what reality TV is going to focus on next?  Divorce.

Two Buck Chuck: How Trader Joe’s wine became cheaper than bottled water.

Gouged: A price analysis of your favorite food.  It turns out that pizza is a rip off.

Chart of the Day

The 1-month US Treasury is now 45 basis points higher than the 10-Year German Bund which seems insane.


Ground Breaking Research: New study finds that posing with a cat in a profile picture makes single men more popular on Tinder.

Obviously: A man wearing a shirt that read Drunk Lives Matter was recently arrested for Drunk Driving.  Hindsight is 20/20 but one way or another, he was doomed from the moment he purchased that shirt.

Mensa Material: Meet the Florida man who blamed his arrest for driving under a suspended license on faulty legal advice from Wikipedia.

Bigfoot Made Me Do It: An Idaho woman recently told police that she hit a deer with her car because she was distracted by a Sasquatch in her rear view mirror.  Also, drugs are bad.

What’s In Your Wallet? There is now a dating service that matches users up based on their credit scores.

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Landmark Links April 7th – Crank it Up