Landmark Links October 18th – On Point

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Lead Story…. A bit short on time this week so I’m going to outsource the lead story.  Joe Bosquin of Builder Magazine wrote a wonderful summary about how California priced itself out of the market for entry-level home buyers titled The Unintended Consequences of Law. Spoiler: it has everything to do with Prop 13 and CEQA.  Bosquin’s piece as good as an explanation for our absurd housing prices in the Golden State as you will find.  Yours truly gets a bit more than a quick mention and they included an article  that I had written for Builder (and Landmark Links) back in May about why our impact fees are so high compared to the rest of the country.  By the way, the non-partisan Legislative Analyst Office published a piece in September in which they confirmed my thesis about the relationship between Prop 13 and impact fees.

Here’s an excerpt from Builder but you should really check out the entire article.  It’s a quick and easy read even if you aren’t a housing and development nerd:

According to a widely referenced 2015 report from the California Legislative Analyst’s Office (LAO), the Legislature’s nonpartisan fiscal and policy analysis arm, since 1980, California has built half of the housing units it needed—about 100,000 per year—to keep up with demand. And that’s just in aggregate. In high-demand locales like the San Francisco Bay Area and Los Angeles, the housing deficit is even greater. “Most of California’s coastal counties needed to build three times as much (or more) housing as they did,” the report claims.

Stated differently, during the past 36 years, California did not build the additional 3.6 million homes that it needed to keep its skyrocketing prices in check. To put that number in perspective, it would take the collective efforts of every home builder in the country, building nonstop at 2016’s projected pace of 1.26 million housing starts, three years to put a dent in the state’s problem.

The report concludes that NIMBYism, local communities’ lack of financial incentives to approve more housing, and anti-growth proponents who go to daunting lengths to block development have contributed to the problem, as well as more inveterate challenges such as a scarcity of suitable land along the coast and an ever-increasing population.

The LAO report found that the average cost of homes in California is two-and-a-half times higher than the rest of the country, and rents are 50% higher. It also points to evidence that high housing costs were making it difficult for companies to recruit employees, even in Silicon Valley, and threatened the state’s jobs base. Other reports that came out in its wake highlighted a net migration of 625,000 people out of the state from 2007 to 2014, primarily among lower income earners, attributed to housing costs.

All of which leads to the question, how did California get to a place where it tacks $75,000 onto the cost of a new home in the midst of a housing crisis that’s eroding its jobs base and pushing the country’s most populous state into an unwinnable war of the haves and have nots?

First off, major thanks to Joe Bosquin for writing this.  Also, a big shout out to Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association for calling the rest of us who cited facts in the article “morons” after he apparently couldn’t counter the points that we had made on factual grounds.  I’ll wear that one as a badge of honor.

Economy

Glass Half Empty: The downside of our technology revolution is a lack of job creation.

Warming Up: Wage growth is now at the highest level that it’s been in a year but the stock market might not be thrilled.

Visual Representation: 27 fascinating charts that will change how you think about the American economy.

Useless: The WSJ surveyed economists and found that 59% believe that there will be a recession in the next 4 years.  For those not familiar with this sort of methodology, 4 years is an incredibly long horizon in which to forecast such things.  The incredibly-accurate Bill McBride thinks that we are in the clear for 2017 and likely 2018 as well (although he cautions that even 2 years out is too far to accurately forecast).

Commercial

Bucking the Trend: While most benchmarks have remained low this year, LIBOR has climbed substantially mostly due to new money-market rules which could lead to an uptick in financing costs for commercial real estate.

Supply Exceeds Demand: Rents in Manhattan are falling as listings surge 35%.

Residential

Selection Bias: All of the Urban revival stories that you read these days are really about the amount of money flowing into urban centers than the number of people.

Viva Mexico: A condo boom in Tijuana, coupled with easier border crossing rules for regular commuters could help ease a housing shortage in San Diego….but is not without it’s risks to American buyers.

The First Step: The Federal Reserve has now acknowledged that we have a housing affordability crisis.  Admitting that you have a problem is the first step to recovery.

Profiles

Prime Time: Nearly 60% of US households and 75% of those that make over $112k per year are now Amazon Prime members.  Let. That. Sink. In.

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Pay For Play: For-profit college Devry University has finally agreed to stop using the bullshit claim that 90% of it’s graduates seeking employment found jobs in their field within 6-months of graduation.  The action came as part of a settlement with the Department of Education over misleading advertising.  That claim would be impressive (and improbable) if it was made by Harvard, let alone a lowly for-profit school that may or may not be a diploma mill depending on who you ask.

Foot in the Door: How Uber plans to conquer the suburbs by partnering with cities to ease parking congestion.

But First, Let Me Take a Selfie: Companies are starting to use facial-recognition apps that utilize smartphone snapshots to verify identity.

Chart of the Day

Things that we want are getting cheaper.  Things that we need are getting more expensive.

WTF

Hero: Regular readers know that I’m a sucker for a great headline.  Man ‘High on LSD’ Saves Dog From Imaginary House Fire is among the best that I’ve seen.

The Softer Side: That Russia is a bizarre place is pretty much self evident.  This new Vladamir Putin calendar featuring the Russian leader cuddling with kittens won’t do anything the change that perception.

Parent of the Year: A Pennsylvania woman has been charged with child endangerment after refusing to feed her 11-month old son anything other than fruit and nuts.  I’ve said it before and will say it again: veganism is a mental disorder.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 18th – On Point

Landmark Links September 16th – The Carrot and The Stick

Lead Story… Investopedia defines Behavioral Economics as the study of psychology as it relates to the economic decision making processes of individuals and institutions.  IMO, one of the more fascinating applications of behavioral economics deals with the largest investment that most people make in their lifetimes: buying a home.  It’s all a matter of motivation.  What motivates a person to buy a home versus renting?  Much of the preference is based on mobility (renting) vs stability (buying) depending on where a potential buyer or renter sees their life going in the foreseeable future.  However, there is also a very substantial financial motivation that manifests itself in the form of one of the two primary economic forces: fear and greed.

During the housing bubble of the mid aughts, greed was a primary motivating factor in converting renters to owners.  There was a (foolishly) widely adopted mantra back then that housing never fell in value and that acquiring property was a road to riches even if it meant leveraging up to your teeth.  People were buying homes up and calling them “investments” when they were really just speculating on potential future appreciation.  This type of behavior is also driven by a variation of fear: Fear of Missing Out or FOMO for short which was the chosen mantra of the “buy now or be priced out forever” crowd.  Greed in expectation of asset appreciation and FOMO are classic bubble fuel because they tend to make the current price of an asset irrelevant to a prospective buyer.  Once these forces take over the mind of a buyer, the only thing that matters to is the future projected value appreciation.  In the end, trees don’t grow to the sky and we all know how that turned out.

Today, prices are rising again but buyer motivation is quite different than it was a decade ago.  Online real estate website Redfin recently posted the results of a survey of 1,800 home buyers  taken in August that contained this fascinating statistic:

High Rent Driving Tenants to Become Owners

Nearly half of all first-time homebuyers, 45.4 percent, said they were most influenced to get into the housing market because of high rent. In comparison, a year ago 24.7 percent of first-time buyers said they were house hunting because of high rent.

Most-influenced

Among all buyers surveyed, 22 percent said the cost of rent motivated them to get into the market, up substantially from last year’s 12.8 percent but down from 24.4 percent in May.

Overall, 26.3 percent of all buyers said they were most influenced to purchase because of a recent life event, like the birth of a child or a marriage, an identical number to last August.

A whopping 45.4% of first time home buyers said that they decided to purchase a home because rent was too high.  What’s particularly notable is that number is up over 20 percentage points from a year ago.  The second most common answer was a life event.  These are hardly indicative of a bubble or market peak.  Note that those two factors add up to 48.3% for all buyers and 68.8% for first time buyers.  Unfortunately they didn’t publish the whole data set so we can’t see where “Expected Appreciation” or “Investment Return” was on the list.  However it couldn’t have been more than 31.2% for first time buyers based on the numbers provided.  This is a substantial behavioral shift from the bubble era.  I’ve never bought into the “a house is always a great investment” narrative but I don’t buy the “a house is a terrible investment” one either.  The real “investment” value of a house is the hedge that it provides against the rising cost of shelter, primarily rents.  If a buyer purchases a home in a market where future rents are expected to rise substantially (like coastal California) then he or she would typically be willing to pay more because the ownership hedge is more valuable in a market where rents are largely stable because supply can be easily added as needed (Houston, TX for example).  The Redfin findings are encouraging because they indicate that buyers are behaving rationally.  Despite rising prices, buyers today aren’t primarily motivated by FOMO or projected appreciation but rather by an analysis of whether they will be better off financially renting or owning.

Economy

A House Divided: A lack of consensus on inflation at the Federal Reserve means that the central bank is more likely to stand pat than do anything with rates.

All About the Benjamins: A new study confirms that money can’t buy happiness….but confirms that cash often does.

Finally on the Rise: After years of stagnation, median incomes are improving again, and the biggest gains are coming where they are needed most: among the poorest deciles.

Residential

On Point?  Leading VC fund Andreesen Horowitz announced this week that it’s getting into the housing business. To be more precise, the tech investor is backing a new venture called Point which is set up to purchase portion of a homeowner’s equity in a preferred position and participate in the upside at sale.  I want to take some time to digest this one a bit deeper before writing more but I can see several potential fatal issues at first read.

Great Migration: Seattle’s already-hot housing market could see a large influx of Chinese capital now that Vancouver, Canada has told foreign buyers to get lost by imposing a 15% foreign transaction tax, sending sales tumbling.

That Sinking Feeling: San Francisco’s city Building Department is getting hauled in front of the Board of Supervisors to explain how/why they approved Millennium Tower, SF’s incredible sinking luxury condo building.

Profiles

Tough Grader: Want your product to be labeled “Bear Proof”?  It’s going to have to withstand 60 minutes in an enclosure with some of the most difficult reviewers in the world: grizzly bears.

There’s No Place Like Home: The story of how Amazon out-executed both Apple and Google and positioned itself to dominate the technological infrastructure of your home.

Surf’s Up: Surf parks, or giant pools nowhere near the ocean with perfectly formed man-made waves are about to go mainstream.

Chart of the Day

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WTF

Where’s the Beef?  A restaurant patron in Florida was arrested for trashing a Wendy’s after being dissatisfied with her food.  If she expected decent quality food, I don’t know why she was in a Wendy’s in the first place.  In More Fast Food News: Burger King is about to start offering something called Cheetos Chicken Fries.  The race to the bottom for fast food continues unabated.

Apocalypse Now: What happens when millions of people in a city with poor infrastructure ceremonially sacrifice animals before a torrential monsoon downpour?  You get rivers of blood running through the city, which is exactly what is currently happening in Bangladesh.

Frivolous: An Austrian teen is suing her parents over their posting embarrassing childhood photos of her on Facebook, including potty training pictures.  If I couldn’t post embarrassing pictures of my family on social media, I’d quickly lose my will to live.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 16th – The Carrot and The Stick

Landmark Links September 9th – Misunderstood

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Lead Story… I doubt that any generation has ever been hyper-analyzed the way that Millennials have.  You can’t turn on the TV, read a news website site or open a newspaper (yes, some people still read them) without coming across an opinion piece purporting to know everything about Millennials: how to make them happy at work, where they want to live, how they want to shop, etc.  Much of it reads as if the people born between 1980 and 2000 are some type of exotic beings that are to be observed in their natural setting to understand how their species live.  Spare me.  I’ve long suspected that most of this is BS and that Millennials aren’t really that different from previous generations.  Most of the actual survey data that I’ve seen confirms this to a large extent.  This past weekend a collegue sent me the link to a study done by CBRE appropriately titled: Millennial Myth Buster: Young Americans Do Like the Suburbs (h/t Tom Reimers)  In this report, CBRE’s research group dug into actual migration and census data to show where Millennials are actually moving as opposed to where conventional wisdom says that they are moving (emphasis mine):

The most recent available annual data (2014) show that 2.8 million people moved from the suburbs to cities that year; however, 4.6 million did the opposite.1 Since this runs contrary to the prevailing narrative about urbanization, it’s worth digging into the data to see what’s behind these numbers.

There are many ways to look at domestic migration——age, education and profession are all useful in breaking it down. In recent years, media stories have frequently focused on the role of millennials——those born between 1980 and 1995, roughly——in driving the resurgence of downtown areas. The focus on this generation was not unwarranted; millennials are now the largest age group in the country and make up the largest segment of the U.S. workforce. It is fair to say, however, that census data disagree with the media on where millennials actually live and where they have been moving to.

Approximately 30% of millennials live within urban areas. The other 70% do not appear to be rushing to move downtown: In 2014, 529,000 people between the ages of 25 and 29 moved from cities to the suburbs, while only 426,000 moved in the opposite direction. For younger millennials aged between 20 and 24, the flow’s direction was even more pronounced, with 721,000 moving out of cities for the suburbs and 554,000 leaving the suburbs to pursue life in the city. It’s true that some of those moving to the suburbs were returning to childhood rooms or basements in their parents’ homes, but the migration trend still holds: not every millennial can or wants to live downtown.

Ok, so that’s just one year but the data has actually been remarkably consistent over time. This is one case where the facts are 180 degrees away from the narrative.  The US is getting more suburban, not more urban.  CBRE’s conclusion was particularly interesting as it pointed out that younger people often want urban amenities but still a suburban setting (emphasis mine):

The remarkable discrepancy between population data and the prevailing narrative raises questions about the preferences of young people in the U.S. What do they want? Simply put: space and an urban feel. One recent survey showed that 81% of young people (defined as millennials and those born in the late 70s) want three bedrooms or more in their residence. Their responses regarding geography reflected this preference: two-thirds of respondents stated a desire to live in the suburbs, while only one in ten wanted to live in a city center. Such findings are corroborated by the results of another survey, in which nearly two-thirds of millennial-aged respondents self-identified as suburbanites or rural people.

Still, millennials have a reputation for appreciating the perks of urban life, such as easy access to public transportation, shops, restaurants and offices. This does not necessarily translate into demand for downtown real estate, however. Suburbs too, can develop in ways that appeal to younger demographics, by incorporating elements of urban life in suburban areas. This is occurring in metros across the country. New terms have even been coined to describe quasi-urban areas in the suburbs——among them, ‘‘hipsturbia’’ and ‘‘urban burbs.’’

I highly suggest reading the entire piece.  IMO, the reason that the media gets this wrong is that urbanization is primarily happening in the areas where they tend to be based: NY, LA, SF, DC, etc.  Influencers live in these places, witness urbanization occurring and assume that it’s happening everywhere else as well.  These large, wealthy, mostly coastal cities do not look like the rest of the US from a demographic standpoint and their demographic trends shouldn’t be extrapolated to everyone else.  I hate to break it to many of you but the average Millennial isn’t a mustachioed hipster wearing skinny jeans and drinking organic kombucha in a Brooklyn organic juice co-op.  He or she actually looks a whole lot more like you and I than we’ve all been led to believe.

Economy

Changing Tune: Barry Ritholtz of Ritholtz Wealth Management, The Big Picture Blog and Bloomberg View was a critic of banks as a risk to the US economy long before the crash in 2008.  Now that the crisis has been over for several years, he’s finally giving the all-clear as banks have finally deleveraged a bit and refilled the FDIC’s deposit insurance fund.  See Also: A longtime proponent of financial industry regulation thinks that regulators may have taken things too far in the wake of the Great Recession, leading to mountains of red tape and rising compliance costs.

Full Turn: Inequality in the US used to be most evident in the South.  Today, it’s most pronounced along the coasts.

Eating Well: How foodie culture defied expectations and not only survived but thrived post-recession.

Commercial

Slip Sliding Away: Walmart killed off rural downtowns when they started offering goods for cheaper prices.  Walmart’s position has been steadily eroded in recent years by big box stores like Costco and e-commerce, primarily Amazon.  Two interesting related stories this week:

  1. Costco is struggling as online bulk shopping provides strong competition. (h/t Mike Nash)
  2. Amazon, which is a primary culprit in the decline of Walmart, big box stores and malls is now starting it’s own delivery fleet, which could pose an existential threat to UPS and FedEx.

Residential

If Headlines Were Honest: Alternative headline from Bloomberg early this week: Housing Boom to Keep Going Even if Rates Rise Says CEO of Highly Levered Public Home Building Company.

Staying Away: Beazer made a tender offer to buy back $300MM in debt due in 2018 in yet another example of public builders spending money on pretty much anything except for land.

Profiles

Explains a Lot: Florida resident Dave Barry recently wrote a book about his freak-show of a state, a portion of which was excerpted by the Wall Street Journal last week in a well-titled article called – Florida: The Punchline State.  I recommend that you read the whole thing if you consider yourself a connoisseur of weird Florida news.  My favorite excerpt (emphasis mine):

The point is that, yes, Florida, because of its unique shape and warm climate, does have an unusually high percentage of low-IQ people doing stupid things, frequently naked. But most of these people came here from other states, the very same states that are laughing at Florida. Those of us who live here have to contend with not just our native-born stupid, but your stupid, too. We are like Ellis Island, except instead of taking the huddled masses yearning to breathe free, we take people who yearn to pleasure themselves into a stuffed animal at Wal-Mart.

House of Cards: Some Great investigative reporting from Nick Bilton of Vanity Fair on the downfall of Theranos and founder Elizabeth Holmes.

Can You Hear Me Now: New study finds that your dog knows exactly what the hell you are talking about.

Chart of the Day

Myth Busters – Urban Migration Edition

Millennials in the Suburbs 1

WTF

Swedish Meatballs: A guy got his testicle stuck in an ill-designed Ikea chair and took to Facebook to complain about it (h/t Mandy McDonnell)

Inside Joke: North Korea just banned sarcasm. Seriously.

Bad Selfie: A battery suspect was apprehended after he used the police department’s “wanted” poster as his new Facebook profile picture, because Florida.

Misdirected Anger: A woman who was angry with her ex set the wrong car on fire,  because, once again, Florida.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 9th – Misunderstood

Landmark Links July 5th – Oh Baby

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Quick Programming Note: Expect a much shorter blog this week and possibly next as well. I’m about to drive to the hospital with Mrs. Links to do our part in contributing to the economic tailwind known as positive demographics.  This will be our second little girl and since the first one I’ve become acutely aware that my ability to write a semi-coherent sentence is inversely proportionate to the number of diapers I’ve changed and hours of sleep deprivation that I’ve experienced in a 24-hour period.

Lead Story: Last week I posted a demographics post from Calculated Risk about how we are in the early innings of a very positive demographic cycle that should be great for the home building industry as well as the US economy as a whole:

Ben Carlson of A Wealth of Common Sense wrote a follow-up blog post that summarized the impact of a demographic cycle where large numbers of people are entering their 3rd decade of life perfectly:

Based on personal experience and what I’ve seen from my peers, here’s what happens when most people start hitting their 30s these days:

  • You move out of the mega-city to the suburbs or a more affordable city so you can actually afford a house and have a normal standard of living.
  • You buy a house and you end up spending a ton of money on things you never would have expected to buy just a few years earlier — more furniture, decorations, tools, lawn care, property taxes, maintenance, stainless steel appliances, remodeling, countertops, cabinets and the list could go on forever. You can basically add $20,000-$30,000 to the estimated amount you think you’ll pay for a house $5,000-$10,000 to every estimate for renovations to your house. And houses these days are bigger and nicer than ever before.
  • Then you have kids and kids are not cheap. That means spending money on diapers, car seats, strollers, clothes, toys, daycare (basically a second monthly mortgage payment), classes, sports, camps, parties, etc. The latest estimates peg the amount to raise a child to age 18 at anywhere from $176,000 to $407,000. Maybe you end up spending a little less on yourself, but you have to expect to spend more money when you have children.
  • With kids come SUVs or minivans because you’re going to need a new car or two to carry all of that stuff that you’ve been buying for your kids everywhere. Good luck taking an Uber when you have to fill your trunk with baby supplies and use car seats for every trip you make out of the house.

Growing up is expensive. It’s like a rite of passage to spend money on these things.

Not every millennial will take this traditional route, but more will do so than most people now assume. As people get older they want different things. You can’t act or live like a 20 year old forever.

Please read the whole thing here as I think it’s well worth your while.  It’s easy to be pessimistic for a host of reasons.  However, despite current economic issues there are a lot of positive developments beginning to take shape…if you’re able to look to the long term.

Economy

Going Down: Brexit concerns have driven treasury yields towards new lows.

Upward Trajectory: College-educated workers now dominate the American workforce as never before.

Commercial

Takeover: How Amazon swallowed downtown Seattle.

High Vacancy: Take a tour inside China’s largest ghost town.

Residential

Bizarro World: Only in the perverse world of California NIMBYs could a new development with 11,000sf lots be considered “high density.”

Status Update: The US housing market in 9 charts.

Big Winners? US home owners could be the big winners in the Brexit drama due to falling mortgage rates.

Profiles

Groundhog Day: It’s the first week of July which means that the NY Mets just paid Bobby Bonilla, who hasn’t played since 2001 $1.9MM just as they will continue to do until 2033 because, Bernie Madoff.

Water, Water Everywhere…. New research finds that California actually has plenty of groundwater, it’s just really, really far below the surface and extremely difficult to get to.

Chart of the Day

Ummmmmm……

WTF

Drunkorexia: College kids are eating less and working out so that they can get wasted quicker.  These are the same people demanding safe spaces on campuses where they can be free from anything that might offend them.

Well Thought Out: A man tried to rob a Kentucky Chuck E Cheese while on a job interview.  No word if he used his real name on his application.  Let me use this as an opportunity to remind you that Chuck E Cheese is a veritable cesspool of crime and deviance.

Darwin Award Nominee: A German tourist at Peru’s historic Machu Picchu died last week when he fell off a cliff while taking a selfie (h/t Winn Galloway).

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 5th – Oh Baby