Landmark Links May 25th – Still Dancing

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Lead Story…. In the dark days of mid-2007, right before the subprime bust and ensuing financial collapse nearly brought down the world economy, former Citigroup CEO Chuck Prince made an interesting statement during an interview with the Financial Times. Prince answered a question about his firms market posture at a risky moment with a quip that would forever be immortalized in the annals of financial history as one of the stupidest things a CEO of a major bank has ever been quoted as saying.  Via Time Magazine (emphasis mine):

The Citigroup chief executive told the Financial Times that the party would end at some point but there was so much liquidity it would not be disrupted by the turmoil in the US subprime mortgage market.

He denied that Citigroup, one of the biggest providers of finance to private equity deals, was pulling back.

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said in an interview with the FT in Japan.

As we now know, several months later the music did stop, global liquidity all-but dried up, the economy ground to a halt and Prince – along with several of his cohorts at other major banks – was shown the door for behaving recklessly.  The reason that this is still relevant in 2018 is that its the classic example of someone who is supposed to know better making a dumb statement that most observers know would age terribly, the only question being how long this would take.

The current economic cycle may have had its very own “music is still playing” moment  last week when California League of Cities spokesperson Dane Hutchings made an absolutely absurd statement about pension fund returns in an interview with Chief Investment Officer Magazine.  While Hutchings is nowhere near as high profile as Prince was, he still is a person of influence when it comes to the nations largest pension fund, CalPERS.  Hutchings take on CalPERS projected returns may prove to be just as ill-fated as “we’re still dancing.” Via Chief Investment Officer (emphasis mine):

The legislative representative to the League of California Cities urged the CalPERS Investment Committee Monday to think “out of the box” in finding a way to exceed its 7% investment return projections, saying that cities won’t be able to pay their monthly contributions to the pension plan if returns are that low.

There is so much wrong with this statement that it’s somewhat difficult to know where to start but I’ll take a stab at it:

  1. The market doesn’t give a damn what your needs are as in investor.  It could care less that California and it’s cities can’t afford the astronomical and stupid commitments that politicians made to public employees.
  2. Achieving higher returns means taking on a higher level of risk.  This is the case always and forever.
  3. The larger that a fund becomes, the more difficult it is to outperform the market.  CalPERS currently has $341.5 billion in assets.  At that size it is virtually impossible to outperform the broader market.
  4. If bonds return 3% for the next decade (28% of CalPERS current portfolio) and stocks return 5% (50% of CalPERS current portfolio) then the remaining 22% of the portfolio which is invested in real estate, private equity and other alternative investments would need to earn a whopping 16.6% net of fees in order to achieve a 7% yield which is just not going to happen.  What this means is that CalPERS is overstating their return already.  Seven percent is too aggressive but no one is willing to admit that because it would reveal an even more massive deficit than the $153 billion already reported.  Instead, they continue to partake in a strange variation of Kabuki Theater where everyone involved knows they are screwed but no one is willing to admit it publicly.
  5. We are in year 8 of an epic bull market.  If a fund can’t achieve its returns during this period, it probably won’t ever happen.  Also, taking more risk to shoot for a higher return this late in an economic cycle is incredibly unwise.

Ironically, this is not the first time that stakeholders have pushed CalPERS to push the pedal to the floor in order to attempt to plug a funding gap.  The pension fund infamously got aggressive at the wrong time during both the tech bubble of the late 1990s and the real estate bubble of the mid aughts.  The last time around ended in tears when CalPERS decided to double down on land development and housing construction around 2006-2007 figuring that they would cash in on a boom that would never end.  Things went poorly to say the least.  In one particularly glaring example of greed, stupidity and style drift, a CalPERS advisor who specialized in urban infill development persuaded the fund to invest in the recapitalization of Newhall Land and Farming.  Newhall is a massive 15,000 acre master planned community in the suburbs north of LA that was still in it’s early phases and would be contributed to a new venture called LandSource along with a hodgepodge of other land and development assets of questionable quality.  CalPERS invested $1 billion in that deal and lost ever single penny by the time that the dust cleared.  As a result of that and other missteps, CalPERS decided to pull out of the home building and land development market at the worst possible time, failing to capitalize on the recovery in land and home values while also cutting the legs out of much of the private builder community that they had previously financed in the process.  In doing so, CalPERS effectively made their own contribution to the massive affordability and supply crisis that we are experiencing today.

There are going to be painful decisions to be made about public pensions in the coming years no matter what.  I sincerely hope that CalPERS ignores the League of Cities and doesn’t give into their stupid and financially illiterate request to layer on risk in order to plug a massive funding gap at a very mature point in the economic cycle.  Then again, past missteps and current denial about projected returns don’t give a whole lot of reason for hope.


Baby Bust: US births have hit their lowest number since 1987 as the fertility rate last year saw it’s largest one-year decline since 2010.

Straight Up: Oil prices are up nearly 50% year-over-year.

Priced Out: Jobs in construction, logistics, and call-center employees are increasingly missing from expensive metros. But pricey metros have more than their share of tech, science, and high-end service jobs.

Subsidized: A large portion of the US economy has become Movie Pass – selling services and products at an unprofitable discount with the difference made up by investors, all in the name of growth.

Rollback: The House and Senate both passed a bi-partisan revision to the 2010 Dodd-Frank law that will cut regulations for small lenders and substantially raises the asset threshold at which larger regional lenders automatically face stricter rules.  However, Dodd Frank’s major planks such as emergency government powers and curbs on derivatives will remain in place.  The bill does include mortgage-underwriting-standards relief for banks with fewer than $10 billion in assets.


Mixed Use: US mall owners at the ICSC RECon convention in Las Vegas highlighted re-positioning plans to replace vacant former JC Penney and Sears stores with apartments and hotels.

Hanging In There: Commercial and multi-family originations were up 1% over 2017 in the first quarter of 2018 despite the headwind of higher interest rates.

Bottoms Up: Store owners and downtown planning committees in cities around the U.S. are organizing shop crawls—often with alcohol flowing—to spark consumer interest in an era of online shopping.


Too Big to Fix: No one can figure out what the hell to do with Fannie Mae and Freddie Mac which are still under federal conservatorship and more critical to the US mortgage market than ever before.

Nobody Walks in LA: Los Angeles has long been known as a town that loves its cars.  However, traffic and high priced parking, along with a bunch of newly-constructed high end urban condos have wealthy buyers increasingly paying a premium for walkability.

Pack Them In: Shared housing startups are taking off as housing expenses in high cost cities make it more necessary than ever to have roommates.


This Sucks: America is losing the battle against robocalls as auto-dial fraudsters continue to blast out millions of calls at little cost, utilizing software that disguises their identities despite harsher penalties for getting caught.

Locked Out: Shoppers who create headaches for Amazon by returning too many items or reporting too many problems with orders are getting banned from the service without warning.

Under the Counter: It’s still early but California’s underground pot market continues to thrive after legalization at least in part because of high state taxes and a complicated Federal tax structure that can drive marginal rates as high as 70%.

Chart of the Day

Despite worries about Baby Boomer retirement tanking the economy, the working age population is still growing:

Source: The Fat Pitch


Get Out: A NY couple is suing their son in order to evict him from their home after he refused to move, get a job, pay rent or help out around the house because Millennials.

Super Poopers: Police in Ohio are on the lookout for two people who have been caught on camera entering an under-construction home several times over the past few weeks to poop on the floor.

Plunger Needed: A high school in North Carolina was evacuated this week after a clogged toilet led to an odor so toxic that several students complained of teary eyes and burning throats.  (h/t Steve Sims)

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

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Landmark Links May 25th – Still Dancing

Landmark Links May 22nd – No Easy Way Out

No easy way out

Lead Story…. Mortgage rates are now sitting at the highest that they have been in seven years.  The standard knee-jerk reaction is that this uptick implies that home prices are on the cusp of falling across the board – which would actually be welcome economic news in some markets. However, I suspect that it won’t happen due to the impact of rising rates on supply.  Via the Wall Street Journal (emphasis mine):

The concern among economists is that higher rates will prompt homeowners to keep their low-rate mortgages rather than trade up for better properties. As rates approach 5%, the risk of the phenomenon known as rate lock grows, economists said.

A one percentage point increase in rates can lead to a reduction in home sales of 7% to 8%, according to Lawrence Yun, chief economist at the National Association of Realtors. The recent increases in home prices and mortgage rates could especially hurt first-time and moderate-income borrowers, economists said.

So far, price gains have shown little sign of slowing. The S&P CoreLogic Case-Shiller National Home Price Index, which measures typical home prices across the nation, rose 6.3% in February, up from a 6.1% year-over-year increase in January.

Beyond supply-driven affordability issue, there is another concern that I’ve written about here but is not frequently talked about: the impact of rising rates on mortgage underwriting.  It’s commonly believed that the past few years have been difficult ones for the mortgage industry but that really isn’t accurate.  Yes, regulations got a lot tougher but the industry as a whole had a strong wind at it’s back for the past seven years or so thanks to:

  1. Falling interest rates
  2. Falling unemployment
  3. Rising (albeit slowly) wages
  4. Rising home prices
  5. Falling down payment requirements

The five conditions listed above are the sweet spot for mortgage lending.  Falling interest rates and rising home prices made pitching refinances easy while rising wages, falling down payment requirements and declining unemployment meant that more people could afford to become home owners.  If you have any doubts that the past few years have been good for lenders, check out the massive growth of non-bank lenders like Quicken Loans and Loan Depot, among others who managed to avoid the worst of the subprime debacle and emerge as the new leaders in the space when the market recovered.

Here’s the problem: mortgage lenders have geared up for growth in recent years and, as such are not really set up for a flat market in loan origination volume.   Beyond that, they certainly are not set up for contraction in volume.  The once-sleepy mortgage industry has become growth oriented in recent years but conditions are now anything but conducive to growth.  Refinances have already fallen off a cliff, down 40% last year and expected to fall another 26% this year.  In addition, purchase mortgage volume is likely to face a substantial headwind since people move less – meaning less inventory to sell – when rates rise as mentioned above.  IMO, we are approaching a situation where mortgage lenders get painted into a corner where they are left with two options, assuming, of course that rates do not fall back near the prior lows:

  1. Accept that volume is going to be lower and scale back projections, budgets and staff accordingly.
  2. Ease underwriting standards and lower down-payment requirements in order to qualify more marginal first time buyers and entice cash out refinances (despite higher costs)

The first choice would not be great for the economy but would probably be more stable over the longer term and allow for the industry to be sized correctly moving forward.  The second choice would throw some rocket fuel on the market and the economy for a period of time but would likely cause plenty of problems down the road as it makes the possibility of an asset bubble more likely.  Liar loans, pick a payment negative amortization time bombs and no-doc underwriting are a thing of the past due to better regulation (THANK GOD) but that doesn’t mean that lenders – especially in the non-bank category – couldn’t start to get much more aggressive in lowering down payment qualifications and underwriting standards in an effort to prop volume up.  In a market with tight supply, creating more demand through easing underwriting standards would be like dousing a slowly burning fire with gasoline.  This would have been welcome news a couple of years ago when affordability was much better but potential buyers were stymied by the inability to qualify for a mortgage on a home that they could otherwise afford.  Today, rising home prices and mortgage rates have reduced affordability to the point where too much easing of credit standards could lead to relatively weak marginal borrowers.  There is still room to loosen standards a bit without causing a problem, to be sure.  The question is how far things will go if lenders choose this path.

If this sounds familiar it’s because it has happened before.  It’s easy to forget that the most egregious financial offenses during the housing bubble of the mid-aughts happened after the Federal Reserve began aggressively hiking rates in 2004 as lenders came up with ever-riskier products with more relaxed underwriting in an effort to keep feeding the machine long after rates had bottomed. We are in a position today where underwriting could ease quite a bit without really jeopardizing the market.  Hopefully, lenders have long enough memories to recall what happens when they take things too far though.


Contrarian:  A new BIS paper by Mikael Juselius and Elod Takats came to a surprising conclusion – inflation typically rises as the share of dependents (elderly) increases.  If true, this has profound impact on future inflation expectations with our graying demographics (emphasis mine):

Demographic shifts, such as population ageing, have been suggested as possible explanations for the past decade’s low inflation. We exploit cross-country variation in a long panel to identify age structure effects in inflation, controlling for standard monetary factors. A robust relationship emerges that accords with the lifecycle hypothesis. That is, inflationary pressure rises when the share of dependents increases and, conversely, subsides when the share of working age population increases. This relationship accounts for the bulk of trend inflation, for instance, about 7 percentage points of US disinflation since the 1980s. It predicts rising inflation over the coming decades.

Out of Whack: The yield on the US 5-year Treasury is now higher than any available 10-year yield in other G10 countries.

Drivers Wanted: America doesn’t have nearly enough truckers and even rising salaries don’ seem to be attracting more.  As a result, shipping costs are rising quickly.  IMO, this could be paving the way for self driving trucks sooner rather than later.


Not To Be Outdone: Last week I wrote about how the CA solar mandate was going to drive up housing costs substantially at a time when we can ill afford it.  Today, I give you the new Multnomah County Courthouse in Oregon that comes with a solar energy system that will take more than a century – possibly more than the effective life of the building – to pay for itself. (h/t Eric Knopf)  As previously stated, I’m all for making buildings as green as possible but a 109 year break even is obscene.

Shots Fired: A new report from Moody’s found that brick-and-mortar retail’s recent struggles has a lot more to do with poor population growth and weak economies in certain regions than with added competition from eCommerce.

Whatever it Takes: Only in California could a run-down 1940s era gas station be designated as a historical structure just because neighbors are opposed to the owner’s plan to build housing on the site.

Ramping Up: CRE crowd funding companies are scaling up their platforms rapidly.


Overstated: The concept of downsizing gets a lot of press as baby boomers continue to age.  However, it is a lot less common than people think.

Sweet Spot: 2018 could be a banner year for the Inland Empire’s housing market as the long-beleaguered region finally regains it’s footing.

In a Hole: Southern California’s housing plans must grow by 80% just to get on par with the national average hire-to-permit ratio and keep prices under control.


Get in Line: Sports betting in the US is likely to be fairly chaotic for a while as states, leagues and the federal government attempt to digest the recent Supreme Court decision.  However, it is also likely to be lucrative for those who move early.

Gold Rush: Lithium mining is the modern equivalent of a gold rush as everyone from tech companies to auto makers rushes to secure future supplies of the key battery component.

A Sucker Born Every Minute: A Wall Street Journal analysis of 1,450 cryptocurrency offerings reveals rampant plagiarism, identity theft and promises of improbable returns.

Chart of the Day

American’s are in no rush to take equity out of their homes:

One explanation for this is that housing wealth is becoming increasingly becoming concentrated among older home owners who have less borrowing needs:

Source: The Daily Shot


Shocking if True: A new study (that someone actually funded) confirmed that Adolf Hitler is in fact dead and not living on the moon.

What a Way to Go: An Oklahoma woman was mauled to death by a pack of six wiener dogs, which is the dog mauling equivalent of drowning in 2 inches of water. (h/t Trevor Albrecht)

Bonnie and Clyde: A couple stole a Walmart motorized grocery cart and went on a joyride to a nearby dive bar before being arrested because Florida.

Gotta Hear Both Sides: An Indiana woman who was sentenced to 65 years in prison after admitting to killing her husband is now suspected of killing another lover and serving his remains to unsuspecting neighbors at a barbecue.

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

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Landmark Links May 22nd – No Easy Way Out

Landmark Links May 18th – Playing with Fire


Lead Story… Generally speaking, cities tend to want to attract large employers as it’s beneficial to both the local economy and the tax base.  Employees spend money at local retail establishments, eat at local restaurants, rent apartments, buy homes and send their children to local schools.  This is why it’s not uncommon to see cities offering all sorts of perks to entice a desirable company to relocate or expand.  Ideally, the relationship between employers and business should be a symbiotic one where the businesses attracts employees and generates tax revenue and the municipality provides the infrastructure, services and housing necessary to sustain growth.

Unfortunately, this relationship has fallen apart in recent years in cities that have a large technology presence.  The companies have generally held up their end of the bargain, growing rapidly and providing tens of thousands of generally high-paying jobs which generate wages that are often re-invested in the local economy in one way or another.  However, the tech-centric cities – many of which are on the west coast – have not held up their end of the bargain as they have not provided the housing necessary to absorb all of the new affluent residents attracted by new opportunities from tech employers while maintaining a reasonable level of affordability.  The result has been nothing short of catastrophic.  People at the lower end of the middle class have been pushed to the margin and those already at the margin have been pushed onto the streets.  Homelessness has surged in these regions and tent city encampments have become the norm.  Yet, in nearly all cases the cities have accepted very little of the blame for their shortcomings and instead have passed blame off on greedy developers and in some cases, even the job creating businesses themselves.  The latest example a city attempting to deflect responsibility for its housing shortcomings took place this past week when Seattle took the bizarre step of approving a “head tax” which effectively penalizes businesses above a certain size for hiring employees.  Via ABC News (emphasis mine):

The new tax will apply to all major companies in Seattle grossing more than $20 million including Amazon and Starbucks, and will charge each business $275 per full-time employee each year. The tax will affect about 3 percent of the city’s business community, according to figures released by the city council.

Beginning January 1, 2019 and expiring five years later, the new tax is expected to collect about $48 million a year, significantly less than the initially- proposed goal of $500 per employee, which could have gathered about $75 million per year. For her part, Mayor Durkan had originally proposed a goal of collecting $40 million annually.

Not surprisingly, big employers like Amazon are less than thrilled and the e-commerce behemoth even stopped construction plans on a new office building as a result.  The irony here is that the growth from large employers like Amazon and Starbucks has resulted in a windfall for Seattle in recent years but a combination of not getting aggressive enough about construction of new housing and poor fiscal management have led them to cast blame elsewhere and bite the hand that feeds.  I think that this sums things up nicely (emphasis mine):

Officials at Amazon are “disappointed by today’s City Council decision to introduce a tax on jobs,” Drew Herdener, an Amazon vice president, said in a statement released to ABC News.

“City of Seattle revenues have grown dramatically from $2.8 billion in 2010 to $4.2 billion in 2017, and they will be even higher in 2018. This revenue increase far outpaces the Seattle population increase over the same time period,” Herdener said in the statement.

“The city does not have a revenue problem – it has a spending efficiency problem. We are highly uncertain whether the city council’s anti-business positions or its spending inefficiency will change for the better.”

Seattle’s revenues are up a whopping 50% since 2010.  Over the same time frame, the city’s population has increased from 608k to an estimated 704k for an increase of 15.7%.  Want to know why city revenue has outpaced population growth by so much?  Because large employers there are attracting high-wage employees who broaden the tax base substantially.  It really is that simple.

There is another issue at play here that makes the head tax even more absurd: scale.  Cities have allowed the cost of housing to get so out of hand that producing affordable units to get people off of the street has become incredibly expensive.  Though it may sound like a lot, $48MM is really not that much money when you consider that it costs approximately $300,000 PER UNIT to develop subsidized affordable housing in Seattle today.  In fact, it’s enough to develop one relatively small (160 unit) subsidized housing project a year.  As a result, the scale of the so-called solution is dwarfed by the problem itself.  By way of example, 95 affordable subsidized units were recently completed in San Francisco and 6,580 people applied via lottery to live there.  Put simply, those odds suck.  Want to know what would go a long way towards providing affordable housing?  How about using a substantial portion of the $1.4 billion in new revenue that has come into Seattle’s coffers since this cycle began to help build it while easing back on restrictions that make it more expensive and challenging to build market rate units at the same time.  Then again, that would require both fiscal responsibility and the courage to roll back restrictive zoning against the wishes of some residents…..and we are talking about city government here.  It seems absolutely absurd that a city would alienate it’s tax base and discourage companies from relocating there to provide a “solution” that barely amounts to a drop in the bucket to a problem that is 100% of their own doing, but that is where we are.  I guess you can’t fix stupid.


Past Due: US borrowers are now defaulting on subprime auto loans at a higher rate than they were during the Great Recession.

Cash is King: 3-month Treasury Bills now offer a higher yield than the S&P 500.

Different Standards: Part of the problem with fighting inflation is that central banks can’t even agree on how to properly measure it.

Fake It Until You Make It: Satellite data strongly suggests that China, Russia and other authoritarian countries are fudging their GDP reports in en effort to make their economies look better than they actually are.


Playing Both Sides: WeWork has set up a new entity to buy buildings where it is a tenant that will be capitalized by outside investors, creating a massive conflict of interest.

Sea Change: How the legalization of sports betting could have a substantial impact on commercial real estate in the United States and could help provide a lifeline to under-performing retail centers.


Free Falling: Apartment rents in New York are falling and landlord concessions are up as a wave of new units hits the market.  It’s good to know that the law of supply and demand is still alive and well.

Waiting it Out: New research from John Burns Real Estate Consulting suggests that Millennials typically wait an additional 5 years to buy homes than the previous generation did.

Holding Back: Economic conditions should be perfect for public home builders but their stock prices are subdued thanks to interest rate fears.


Open for Business: The Supreme Court invalidated a federal law that prohibited sports gambling in states other than Nevada earlier this week which means that major sports leagues are about to become a lot more wager-friendly.

Crypto State: Wyoming politicians are trying to turn their state into America’s cryptocurrency capital by crafting laws to lure crypto-backed companies there.

Smoke and Mirrors: A big NYC crypto conference featured lots of rented Lamborghinis and fake protests from “bankers” coordinated to generate attention.

Charts of the Day


Horton, Here’s a Poo: In possibly the least Canadian act ever, a woman got in a fight with a couple of Tim Horton’s employees dropped her pants, took a dump on the floor, threw it, grabbed some napkins to wipe her ass, threw those too, and left – you need to watch the surveillance video to fully appreciate this one. (h/t Trevor Albrecht)

Polly Want a Police Record: Police were called to investigate a domestic disturbance at a home an instead found a loud argument between a man and his girlfriend’s parrot because Germany.

Who Amongst Us…: A drunk man stripped naked and punched a police officer outside of a Burger King because the terrible fast food restaurant was closed.

Keeper: A Hitler-loving stalker sent a guy 65,000 texts after one date then threatened to kill him and broke into his house after he denied her advances.  By the way, she is now single if you’re into that sort of thing. (h/t Dave Brooks)

Fatal Attraction: An endangered marsupial found only in Australia is killing itself off by having too much sex.

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

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Landmark Links May 18th – Playing with Fire

Landmark Links May 15th – Misfit


Lead Story…..  Regular readers of this blog know that I fall pretty solidly on the side of supply and demand (inventory) holding more sway over the housing market than interest rates.  Assuming that view is correct – and it has been so far this cycle as rates have been on the rise for quite a while with no price correction in sight – home values are unlikely to fall much even if rates rise, so long as inventory stays at historically low levels.  At the same time, the old truism that all real estate is local is as important as ever today and I would add a caveat to it – real estate price segments can move independent of each other for periods of time.  Perhaps the best illustration of this is the period after the Great Recession where the high end market recovered rapidly while pretty much everything else stagnated for several years.

Today’s conditions are very different – lower priced homes are in high demand and the entry level segment is appreciating rapidly since there is little to no inventory to be found.  At the same time, high end appreciation has slowed substantially and inventory has been building.  Zillow Chief Economist Svenja Gudell pointed this out in a recent report (emphasis mine):

The total inventory of homes for sale nationwide fell 8.6 percent in March from a year ago, the 38th consecutive month of annual inventory declines, according to the March Zillow Real Estate Market Report. This general supply shortage is painful to most buyers, doubly so because demand is incredibly high, driven in large part by a good economy and the large millennial generation beginning to age into their prime home buying years.

And because they’re generally working with a more limited budget, these late-twenty/early-thirtysomethings are typically in the market for a less-expensive, entry-level home valued in the bottom-third of all homes. But as of the end of March – traditionally the first month in the busy spring home shopping season – more than half (51.4 percent) of all homes for sale nationwide were in the most expensive one-third of the market, not the least. Only about one in five (21.9 percent) U.S. homes for sale in March were in the entry-level, bottom-third.

The folks at John Burns Real Estate Consulting crunched some numbers on income distribution that was highlighted in a recent InvestorPlace article by James Brumley that shows just how out of whack inventory really is (emphasis mine):

John Burns Real Estate Consulting crunched the numbers to figure out why. The firm found that the United States true “middle class” has shrunk from 57% of the population in 1970 to 45% now. The wealthier echelon has expanded from 12% then to 19% now, while the lower third of earners now make up 35% of the country’s consumers. That figure was 31% nearly 50 years ago.

The stats above paint a picture of a very top-heavy market but one that still varies widely by region.  One of the coolest features with the charts provided in the Zillow link above is that you can sort it by city.  It’s interesting to note that supply is still incredibly low across the board in west coast markets like LA and San Francisco where the lowest tier price points are still substantially higher than the most expensive tier nationwide.  I can only assume that is due to little if any new construction in these markets and the tendency of people to stay put due to Prop 13 protection and capital gains avoidance.  At the same time, the picture is not looking great for the top tier in the non-nosebleed cities.

If 19% of potential buyers are looking for homes priced in the top tier which has 51.4% of market inventory, then prices are likely to come down or at least stagnate in that segment.  However, if 35% of buyers are looking for entry level homes and only 21.9% of the inventory falls into this range, it’s a recipe for prices to rise substantially faster than incomes at the lower end – which is exactly what has been happening.  If this condition persists for a long period of time, low-end scarcity drives the price of even the low-end homes to a level where no true entry level supply remains which is exactly what has happened in coastal California.  Those who can’t afford to buy end up renting which results in more pressure on an already-limited apartment supply, leading to rent growth that outpaces wage growth.  The end result is what we have in California today which has 24% of the homeless population in the US despite being home to only 12% of the population.  Of course, it is something that can be fixed by allowing for more development at the entry level of both for sale and for rent but for many regions via loosening of land use regulations but time is running out.


Stepping Up: How local governments are filling the infrastructure void left by the Federal Government.

Better Metric: Today’s unemployment rate is at a low not last seen since the tech bubble.  However, wages were growing much quicker in those days than they are now.  There is a growing view that economists should be judging the economy by prime age employment to population ratio, which represents the percentage of Americans between the ages of 25 and 54 who have a job.  This metric is still sitting substantially below the tech bubble era (and the mid-aughts for that matter) which helps to explain why wage growth is not accelerating like you would expect it to with such low unemployment.

Feeling the Squeeze: Gas is headed towards $3/gallon again – $4/gallon if you live in California – which will end up wiping out about a third of the increase in take home pay from tax reform.  As a quick aside, I was in the camp that thought the economy would get a boost from falling oil prices a couple of years ago and I was wrong.  Now prices are moving upward again and that’s supposed to be a headwind to the economy as well.  Heads you win, tails I lose.


Die Hard: Despite its recent controversy and supposed phase-out, Libor still underpins more than $370 trillion in instruments across various currencies.  On top of that, its chosen replacement had a less than smooth roll-out, leading to an effort to save Libor from it’s scheduled death.

Bye Felicia: Fast food restaurants are on the edge of a crisis as there are simply too many of them and their appeal is still more tailored to older generations.  Say what you will about Millennials but they do tend to have better standards for food than their elders.


Inflating: The cost of residential construction inputs is already up 4% in 2018 as cost inflation continues to be a headwind for builders.

Heads in the Sand: A new survey found that Bay Area residents still predominately blame tech companies and developers for the regions housing shortage while largely letting state and local governments, NIMBYs and environmentalists off the hook.

Loophole: New Jersey Governor Phil Murphy signed legislation to let homeowners declare property taxes as charitable donations, deductible on their annual tax filings, which will give residents of one of America’s most highly taxed states a way to avoid the new $10k cap imposed on deductability of state and local taxes.  I’m going to go out on a limb here and guess that the IRS will not take this lying down.

Don’t Call it a Comeback: Older generations fled cities for the suburbs in order to avoid crime and put their kids in better public schools.  Today’s young people are increasingly leaving cities for the suburbs due to the high cost of living.


A Different Approach: High-paying trade jobs are sitting empty while high school graduates line up to go into debt for a college degree.  A construction trade school outside of Seattle wants to help change that.

Feeding Frenzy: How a $200MM debt problem at Toys R Us could lead to an obscene $348MM in bankruptcy costs, highlighted by attorneys charging up to $1,750/hour.  The sharks have latched on to this one and they always get paid before employees or investors as the corporate bankruptcy racket rolls on.

Unit of Exchange: Wealthy investors are hoarding billions of dollars of bitcoin stored on thumb drive-like devices in underground bunkers.  This is exactly the way that a stable currency that is a unit of exchange and a store of value is supposed to work.

Chart of the Day


Hero:  Richard Overton, America’s oldest man, just turned 112 and celebrated with several cigars and a bunch of whiskey.  99% of us will ever come close to being this cool:

According to a recent profile in the Dallas Morning News, Overton’s path to longevity isn’t what most doctors would recommend.

He smokes a dozen cigars a day (smoking increases cancer risk). He enjoys whiskey and coke (alcohol is reported to cut life expectancy). And he wakes up with multiple cups of coffee (California is adding cancer warnings to coffee), the newspaper reports.

His secret to longevity? “Just keep living, don’t die.”

NOPE: A cockroach crawled into a woman’s ear and it took nine days to get it out because Florida.

Brilliant Disguise: A pet ‘dog’ raised by a family for two years turned out to be a bear because China (amazingly this did not happen in Russia).

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

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Landmark Links May 15th – Misfit

Landmark Links May 11th – Self Defeating


Lead Story…. Some times I wonder if too many posts here are spent writing about the California housing affordability crisis – easily my most frequently posted-about topic – but then I consider that the state keeps providing ample ammunition by doing so much stupid shit.  The latest in a long list of easily avoidable self-owns took place this week when the California Energy Commission voted 5-0 to approve a requirement that all newly-constructed residential buildings up to three stories high, including single-family homes and condos, be built with solar installations starting in 2020.

Before I delve too deeply into this subject, I think it’s important to note that I consider myself a solar advocate and put my money where my mouth is.  I own two houses in Southern California.  One is my primary residence and the other is a rental.  Both have solar panels on the roof for a combination of the following reasons:

  1. It increases the values of the houses
  2. It saves money on electrical costs over time
  3. Its good for the environment
  4. It provides a hedge against ever-rising electricity costs

I point out the above in order to give some context to what I’m about to write.  As my actions make clear, I am both a supporter of an believer in solar energy as a reliable source of renewable power.  That being said, the recent vote by the California Energy Commission is an incredibly stupid move to make in the middle of an affordability crisis and here’s why: when I put solar on the two houses, it was because I was able to pay the higher upfront cost in order to reap the financial benefits down the road.  In other words, it was a choice that I made on my own and not everyone has the financial flexibility to make such a decision.  However, the state is now mandating that they do so in the event that they are purchasing a new home.  Sebastian Malo and Nichola Groom of Reuters provided some context to the economics behind going solar:

Constructing a home in accordance with the new rules will add about $9,500 in immediate costs, according to estimates by the Energy Commission.

It will save homeowners about $19,000 in energy and maintenance costs over 30 years, Energy Commission spokeswoman Amber Pasricha Beck told the Thomson Reuters Foundation.

That appears to be the best case scenario for cost as builders estimate that the upfront cost increase is more in the $14,000 – $16,000 range.  For home buyers with high incomes, this isn’t much of a hardship and the investment should pay off over time.  However, for entry level home buyers it is a much bigger issue.  The $9,500 (or $14k – $16k depending on who you believe) is a much larger percentage of a $350k house than it is of a $1MM house.  If a buyer is already barely at the margin to buy an entry level home, the extra cost of solar could potentially push them out of qualifying range and back into the rental pool.  This is especially bad in a market where there are very few existing entry level homes on the market meaning that new construction has to account for a larger portion of the entry level than market than usual.  It’s even worse when you consider that this creates more renters at a time when rents are sky high and around 54% of California renters is already considered rent burdened (meaning that they pay over 30% of their gross income in rent).

For the record, about 15% – 20% of new homes built in California today include solar panels.  The California Energy Commission’s stated objective with this solar mandate is to lower carbon emissions by increasing energy generated from renewable resources –  a worthy goal.  However, California would do far better by the environment and its middle class residents to simply increase density dramatically in cities and spend the money being wasted on the bullet train boondoggle on urban mass transit.  Its a shame that many of the so-called environmentalists who push efforts like state mandated solar aren’t equally as passionate about building more in urban areas, which pretty much every credible study shows would be the best thing that we could do for the environment in the long run. Then again, that type of impactful solution doesn’t allow for either the virtue signaling or they payoff to donors such as solar companies and Tesla like mandating solar panels on newly built homes does.


Coming Due: Corporate America has been binging on cheap money for the past decade.  Now companies will need to refinance an estimated $4 trillion of bonds over the next five years in a rising interest rate environment.  Side note: this is a bigger risk for those that have eaten through their equity positions to buy back their own shares.  See Also: Credit cracks are showing if you know where to look.

Squeezed: In a sharp turn from 2015-2016, companies are now facing higher input costs.  However,  passing those costs on to consumers is proving difficult.

Dismal Science: The current rate increase cycle is proving once again that economists don’t truly understand how Federal Reserve actions impact jobs.


Ghoul Pool: From the obvious (Sears and JC Penney) to the somewhat surprising (J Crew and Neiman Marcus), here’s a list of 12 retailers who could be going bankrupt in the not-too-distant future But See: Some bright spots are showing up in retail as concept stores are taking vacant spaces.

Called It: The Blackstone acquisition of Gramercy Property Trust is a perfect example of what I wrote about back on May 1st: a massive amount of private capital is well positioned to purchase public REITs trading well below NAV.


Drained: Millennials are spending approximately 45% of their income on rent in their 20s compared with 41% for GenX and 36% for Baby Boomers when they were the same age.

Bad Choice: How California’s land use regulations favor poverty over sprawlSee Also: High housing costs are driving out lower-income Californians.

High Bar: HUD now considers $87k per year of house hold earnings for a family of four to be low income for housing subsidy purposes in Orange County.  This sounds absurdly high until you realize that a family of four in the Bay Area is considered low income if they make under $117k a year.


The Verdict is In: The Federal Reserve Bank of San Francisco provides the definitive piece on how futures trading changed Bitcoin after its manic run-up.

Blowing Off Steam:How Baghdad became a party town after the Gulf War and the war against ISIS ended.

Law of Unintended Consequences: How taxi cab industry and its overseers who crafted regulations that protects the interest of medallion owners over customers created Uber.

Fake It Till You Make It: Meet the scammers getting paid to advertise sketchy trading strategies and pyramid schemes on Instagram by posing as ultra-wealthy Millennials.

Chart of the Day


Measured Response: A Georgia man was sentenced to life in prison after being convicted of murdering his wife by attempting to decapitate her when she told him that she wanted to move to Florida.  Let me be clear: I do not condone this in any way whatsoever……but it was Florida.

Worst Job in America: I can’t imagine any non-hard-labor job worse than managing the MTA’s Twitter account where you have to respond to 2,500 often profanity-laced tweets a day from angry NYC commuters.

Thirsty: A woman was arrested after calling 911 claiming a medical emergency when she really just wanted some beer because Florida.

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

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Landmark Links May 11th – Self Defeating

Landmark Links May 8th – Caveat Emptor


Lead Story….  Generally speaking, financial regulations have gotten tighter since the Great Recession.  However, there is at least one notable exception that is causing all sorts of problems: Private Placements. Wikipedia  defines a Private Placement as:

Private placement (or non-public offering) is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors.

Over the past several years, Private Placements have take off and actually account for  a larger percentage of raised capital than public markets do, thanks in large part to tech companies putting off public offerings and privately funded real estate transactions.  Indeed, the vast majority are legitimate and the capital is raised by people who understand the investment and tap networks of sophisticated investors.  However, the Private Placement world has also drawn in a rather large contingent of scammers and unsophisticated/shady stock brokers selling crap to people who don’t know any better.  The Wall Street Journal ran a story yesterday about one such scam that had some jarring statistics.  Via the Wall Street Journal (h/t Mike Deermount) (emphasis mine):

One in eight brokers marketing private placements had three or more red flags on their records, such as an investor complaint, regulatory action, criminal charge or firing, the Journal found in a review of data including Securities and Exchange Commission records from September 2008, when they became electronically available, through 2017. That compares with one in 50 among all active brokers.

Brokers selling private placements also are six times as likely as the average broker to report at least one regulatory action against them, the Journal analysis found. (See the methodology.) The figures suggest a sharp expansion in brokered sales of private placements over the past decade has created heightened risks for individual investors.

The fact that bottom-of-the barrel-brokers are drawn to this sort of activity like proverbial flies to shit is a massive red flag in and of itself.  The way that they are reaching their potential marks may be even worse.  The WSJ detailed some of the methods being used to sell unsophisticated investors shares in a massive real estate fraud known as Woodbridge.  This included newspaper and radio advertisements making hyperbolic low-risk high return claims and self-styled investment gurus pitching the investment their weekly self-help programs.  It also included a cosmetologist (from Florida, of course) who was not licensed by FINRA or the SEC pulling in $8.1MM in revenue by setting up a scam financial advisory company and selling shares to investors.  Woodbridge ultimately filed Chapter 11 bankruptcy and charges are still outstanding against it’s founder – but, hey, at least that cosmologist (and a bunch of other financial bottom feeders) got paid.

Taking all of the above into account, here is my list of red flags if you are looking at investing in a private placement in real estate or otherwise.  If any of the following is true, stay away:

  1. The investment is being advertised on TV, radio and/or a newspaper ad.
  2. You become aware of the investment through an unsolicited blast email.
  3. Compensation from fees paid to intermediaries and the sponsor are not transparent
  4. A quick Google search of the sponsor or placement agent turns up anything questionable and the applicable party is evasive or defensive when questioned about it.
  5. The placement agent cannot clearly and concisely answer detailed questions about the subject investment and/or refers to marketing material, hyperbole or generalities when pressed.
  6. The placement agent cannot identify any potential risks when asked.  Every investment has some type of risk associated with it otherwise it would have a return profile similar to a savings account.  Anyone who tells you otherwise is lying.
  7. The opportunity is being pitched by an investment or self help guru – if they were really that smart, they would be investing their own fortune rather than trying to convince you to invest.
  8. The investment is being pitched with some variation “no-risk with large returns” – there is no such thing.
  9. Your gut is telling you that there is something wrong – if that’s the case it probably is.

At this point in the economic cycle, there is a lot of money trying to get into private deals and a lot of hucksters more than happy to separate investors from that money.  Be careful out there and remember, if something seems to good to be true, it most likely is.


Get Low: The unemployment rate has hit an incredibly low 3.9% for the first time since December, 2000 at the end of the dot com boom.

On the Upswing: The current era of low gas prices appears to be over and summer pricing is likely to be at its highest level in four years.

More Than a Setback: A recent California Supreme Court ruling made it a lot more difficult to classify workers as independent contractors and could be a major blow to gig economy as companies like Uber could eventually be required to follow minimum-wage and overtime laws and to pay workers’ compensation and unemployment insurance as well as payroll taxes.


Constructive Criticism: Cities that didn’t become finalists for Amazon’s HQ2 were given reasons for their exclusion by the tech giant and some are already making changes.

The Search for Yield: Foreign investors are still in love with the United States net lease market, even as Treasury yields rise.


Warning Signs: A some point in the future, California’s housing affordability crisis is going to lead to economic trouble as service and blue collar employees simply can’t afford to live here.

Up In The Trees: Lumber prices are going through the roof as the framing lumber chart goes parabolic to the upside.

Still Not Fixed: Despite tighter regulations since the housing crash, the expanding role that untested, non-bank lenders play in today’s market leaves reason for concern.


Beat the House: This story about a self-trained quant who dropped out of college, developed an algorithm that correctly predicted horse racing results and made a billion dollars in the process will be the best thing that you read this week.

Rules to Live By: Richard Jenrette co-founded investment bank Donaldson, Lufkin & Jenrette in 1959.  He died last month of cancer at 89 and left a handwritten note on his desk entitled “What I Learned” (How to Succeed and have a Long and Happy Life).  I highly recommend reading it – although I have to respectfully disagree about his policy towards swearing.

Bargain Basement: It’s now cheaper to get home-delivered groceries from Whole Foods than Kroger because Amazon.

Alchemy: A Norwegian scientist has patented a process to mix nano-particles of clay with water and bind them to sand particles in order to condition desert soil and make it farmable.  Trials have been successful in the UAE which could be a game changer for farming in much of the world.

Chart of the Day

Reversing Course:

WPJ News | Historical U.S. Underwater & Equity Rich Trends

Source: World Property Journal


Say Cheese: A man in India died as a result of attempting to take a selfie with a bear because Millennials. (h/t Steve Sims)

Who Does Number Two Work For? A New Jersey public school superintendent was charged with defecating on a high school athletic field on a regular basis after he was caught by police. (I would give an h/t here but about eight of you sent this one to me at the same time and I’m still not sure if that says more about you or me)

Hero: A woman bet $18 on the Kentucky Derby and won a cool $1.2MM by correctly choosing the Derby winner as well as the winners of all four races leading up to the main event.

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

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Landmark Links May 8th – Caveat Emptor

Landmark Links May 4th – No Margin for Error


Lead Story….  Sam Zell was his typically blunt self earlier this week when he spoke at the NYU’s Schack Institute of Real Estate’s REIT Symposium.  I found his comments about warehouse and industrial distribution space to be particularly interesting:

“My guess is that it’s getting too exciting. We’re building too much industrial space … We’ve got a lot of people owning a lot of industrial space today, and I’m not sure there are enough tenants.”

Being that our office is located in Orange County, CA we are pretty close to the epicenter of prime distribution markets in the US.  Due to it’s proximity to the Ports of LA and Long Beach, the Western Inland Empire industrial sub-market is widely considered to be the strongest in the US if not the world.  Over the past few years, market dynamics have remained incredibly strong and vacancy in that market is in the very low single digits.  Every major retailer and logistics operator has jumped in with both feet.  Land that would have sold at $15/sf just a few short years ago is now valued at close to $30/sf.  Yes, rents have increased as well but with land and construction costs soaring, the yields on new class A product have begun to resemble Treasury bonds in certain cases.

The markets closer to the coast are in a similar situation, albeit for different reasons.  For years, industrial buildings in Orange County and much of LA County that went on the market were purchased by residential developers, demolished and re-developed as apartments or for sale homes.  The buildings that weren’t bought by residential developers typically either sold to owner-users or 1031 exchange buyers.  As a result, there has been very little new product built in these markets.  With supply dwindling but demand remaining stubbornly high, prices have pushed through the roof.  We are starting to see select cases where the previously inconceivable scenario of industrial developers outbidding residential developers has become a reality.

This recent industrial market activity in California runs more than a bit counter to Sam Zell’s statement above.  it certainly doesn’t seem as though Southern California is  experiencing the overbuilt condition that he referenced above considering the dwindling supply and almost non-existent vacancy in the market today.  However, we seem to have reached a point where the market is priced to perfection and any upward movement in vacancy or downward movement in rents will be exacerbated by the incredibly tight underwriting required to make a Southern California industrial development pencil in the current environment.  Well-located class-A industrial property appears to have entered the phase where no yield is too low from an investor/developer standpoint and the asset class is largely viewed as safe money – taking the baton that multi-family has held for several years.

It seems to me that this is the point of the market cycle that should warrant the most caution since underwriting assumptions are now aggressive to the point that they are getting difficult to achieve, even under the best conditions.  But here’s the rub: much like what we are seeing in the residential market, it’s very difficult to have a market correction without excess supply.  The prime industrial markets in California have sub 2% – in some cases sub 1% vacancy.  In addition, the coastal markets have been losing square footage – for example, Orange County has lost around 7 million square feet of industrial space in the past 15 years – rather than getting overbuilt.  It’s easy to look at astronomical prices and thin returns and assume that the market is topping out.  It’s considerably more challenging to figure out what will cause supply to increase to the point where it causes prices to peak.  In closing, I don’t doubt Mr Zell when he says that there are markets where distribution space is getting overbuilt but Southern California is not one of them.


End of an Era: Over the past decade, Americans have enjoyed the rare trifecta of soaring stocks, cheap loans and low inflation.  However, that appears to be coming to an end.

Unsustainable: California’s pension crisis is bad and only getting worse as municipalities cut back on services to cover shortfalls yet CalPERS continues to forecast an absurd 7% per annum return.  If this is what things look like seven years into a recovery, I can’t wait to see what the next recession will bring.

Stay Calm: Although the yield curve is flattening, it’s probably not yet time to worry about an actual inversionSee Also: Why bigger deficits don’t always mean disaster.

Tale of the Tape: Federal Reserve officials worry that the economy is too good yet workers still feel left behind.

Crystal Ball: Perhaps the best way to spot the next financial crisis is to look at who was spared by the last one.  Under this theory, Australia, Canada and other countries who benefited from the lowest global interest rates in history, without first suffering the economic meltdown that led the US and Europe to take emergency action could be in for some challenging times.


Back to the Future: How falling retail rents coupled with rising online advertising and shipping rates could lead to a resurgence in brick and mortar retail.

Shocking: That WeWork bond offering that I trashed last week is already trading down to 95 cents on the dollar.

Changing their Stripes: The new tax law has REITs that are trading at a substantial discount to NAV pondering the previously unthinkable – converting to C Corps.


On The Ledger: SoFi’s former CEO has raised $50MM and lined up with two global banks to launch a home equity loan startup backed by blockchain technology that promises to streamline approvals and property information.

Infuriating: A 67 year old woman in New York got an ill 85-year old man to adopt her on his death bed so that she could inherit his succession rights to a $1,500/month rent controlled apartment that is locked in at $100/month.  She now rents it out to guests for $50/night on AirBnB.  This is yet another example of why rent control always fails to meet its stated objective

Gaining Traction: Loans backed by single family homes newly-constructed with the intent to rent are starting to gain traction in the securitization market.


Cash Crop: How dysfunctional federal banking laws governing with marijuana business restarted a conversation about public banking in America that can appeal to both conservatives and liberals alike.

Burn Rate: Tesla doesn’t burn fossil fuels but it sure does have a knack for burning through cashSee Also: Experts say Tesla has repeated car industry mistakes from the 1980s.

Scrubbed: Youtube is trying to fix the mess that it made by allowing its algorithms to promote propaganda, dangerous hoaxes and videos of tasered rats.  However, that same promotion of questionable material also made it a massive financial success.

Chart of the Day

The trailing twelve month average of median new home sale prices in the United States reached a new high in March 2018, where preliminary data puts that figure at $326,217.

At the same time, the value of the typical new home sale price in the U.S. is 5.57 times as much as the typical household income, which also represents a new record.

Source: Political Calculations


Called It: Peppa Pig, a cute British children’s show that my kids love has been scrubbed from Chinese video sharing platforms for being “a subversive symbol of the counterculture“.  The elaboration of the ban from The Global Times, a state-run newspaper, is pure comedic gold:

People who upload videos of Peppa Pig tattoos and merchandise and make Peppa-related jokes “run counter to the mainstream value and are usually poorly educated with no stable job”, . “They are unruly slackers roaming around and the antithesis of the young generation the [Communist] party tries to cultivate.”

Winged Rats: Federal judges ruled that a homeless man can sue the city of Los Angeles for euthanizing 18 of his “pet” pigeons because California.

Playing the Field: Facebook is releasing its own version of Tinder.  If this isn’t called F&ckbook, then Facebook is officially dead to me.

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

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Landmark Links May 4th – No Margin for Error