Landmark Links August 30th – Size Matters

Eggplant

Lead Story…  New homes have been getting larger for quite some time, since the end of the Great Recession to be exact.  Conventional wisdom had held that the size of homes would shrink after the Great Recession due to more focus on affordability and reduced financial capacity of buyers.  However, except for a brief blip in 2009 where new homes shrunk, it didn’t happen.  Instead, mortgage credit shut off for all but the most qualified buyers (read: wealthier) which pushed builders to focus on higher-end, larger homes where mortgage financing was available rather than smaller, entry level homes where mortgage financing was scarce.  This led to much hand wringing among urbanists and others that McMansions, which, in addition to being ugly are often bad investments would continue to be a dominant feature of the suburban American landscape.  The starter home market has been slow at best (McMansions make crappy starter homes for a whole bunch of reasons) and many astute housing market observers have noted that we need to see decreasing new home sizes in order for that market to emerge from it’s slump.  Fast forward to 2016 and it might finally be happening.  From CNBC:

For the first time since the recession, home size is shrinking. Median single-family square floor area fell from the first to the second quarter of this year by 73 feet, according to the National Association of Home Builders (NAHB) and U.S. Census data. That may not sound like a lot, but it is a clear reversal in the trend of builders focusing on the higher-end buyer.

An increase in home size post-recession is normal, historically, as credit tightens and more wealthy buyers with more cash and better credit, rule the market. As with everything else in this unique housing cycle, however, the trend this time is more profound.

“This pattern was exacerbated during the current business cycle due to market weakness among first-time homebuyers,” wrote Robert Dietz, NAHB’s chief economist. “But the recent small declines in size indicate that this part of the cycle has ended and size should trend lower as builders add more entry-level homes into inventory.”

Sales of newly built homes jumped more than 12 percent in July compared to June, according to the Census, and the biggest increase was in homes priced in the mid to just below midrange. The median price of a new home sold in July fell 1 percent compared to July a year ago. Again, not a huge drop, but a reversal from the recent gains in new home prices.

“The majority of it is a question of affordability,” said Bob Youngentob, president of Maryland-based EYA, a builder concentrating largely in urban townhomes. “People want to stay in closer-in locations, at least from our experience, and closer-in locations tend to be more expensive from a land and development standpoint and so, the desire to be able to keep people in those locations is translating into smaller square footages and more efficient designs.”

This is undoubtedly a positive development in the market so long as the trend holds.  What makes it even more significant is that the internals or the numbers behind the size reduction are also very positive.  First off, new homes are getting smaller at a time when new home sales have risen to a level not seen since 2007, confirming that this isn’t a trend based on weak sales volume or diminished starts in select geographies that favor smaller units.  Second, home prices fell, albeit only by 1%.  Often times, falling prices are viewed as a negative.  However, in this case, they should be viewed positively since, along with shrinking new home size and increased new home sales, they imply that product mix is moving in a more affordable direction.  Size matters and the shrinkage that new homes are experiencing could be the best news for the US housing market in quite some time.

Economy

Much Ado About Nothing: This far, experts’ dire claims about economic calamity following the Brexit haven’t amounted to much at all in the real world.

Bottom Rising: Low paying industries are seeing the fastest wage growth in the US which has positive implications for everything from consumer spending to housing.  See Also: Laid off American workers are having a better go of it than they had been over the past few years.

Staying Away: The Fed’s dislike of negative interest rates is likely to make them an observer of the controversial monetary policy rather than an implementer.

Commercial

Cookie Cutter: How over regulation led to the ugliest feature of most American cities and towns – the strip mall.

LA’s New Skyline: How Chinese developers are transforming downtown LA, just as they did in cities in China.

Residential

Alternate Universe: Only in the bizarro-world of California land use politics would construction labor unions undermine a bill that would have created substantially more construction employment opportunities.

Dumbfounded: Suburban NIMBYs oppose any and all development then act puzzled about why Millennials don’t want to move to their communities.

Profiles

Consider The Source: How Jose Canseco went from baseball’s steroids king/whistle blower to Twitter’s favorite financial analyst.

There Goes the Neighborhood: There is a new startup in Silicon Valley called Legalist that relies on an algorithm to predict court cases and will fund your business-tort lawsuit in exchange for a portion of the judgement.

Worth Every Penny: In honor of National Dog Day last week, here is a breakdown of just how much we spend on our four-legged best friends.

Chart of the Day

Mom’s basement is a really popular address in New Jersey

Source: Curbed

WTF

No I Will Not Make Out With You: A Mexican teen died from a blood clot that resulted from a hickey that his girlfriend gave him.

Bad News: A new study finds that reading on the toilet is bad for you.  Just like that, my reading location for much of Landmark Links’ content became an occupational hazard.

Priorities: An 18 year old girl who escaped from an Australian correctional facility messaged police via Facebook to ask them to use a better picture of her than the mug shot that they posted.  She even provided a picture that she wanted them to use.  Of course, police were then able to track her phone and arrested her soon after.

Video of the Day: A video taped melee on a NY subway that resulted from a crazy woman getting on a packed subway with a bucket full of hundreds of crickets and worms that she was trying to sell made me laugh so hard that I cried. And yes, I’m aware that this probably makes me a terrible person.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 30th – Size Matters

Landmark Links July 19th – One Size Fits All?

one-size-fits-all-rubber-duck

Lead Story…. Nobel Laureate Robert Shiller wrote a piece in the NY Times this weekend titled: Why Land and Homes Actually Tend to Be Disappointing Investments that caught my eye.  In the article, Professor Shiller discusses both farmland and residential land and makes a case they are both subpar investments over time (highlights are mine):

Over the century from 1915 to 2015, though, the real value of American farmland (deflated by the Consumer Price Index) increased only 3.1 times, according to the Department of Agriculture. That comes to an average increase of only 1.1 percent a year — and with a growing population, that’s barely enough to keep per capita real land value unchanged.

According to my own data (relying on the S&P/Case-Shiller U.S. National Home Price Index, which I helped create), real home prices rose even more slowly over the same period — a total increase of 1.8 times, which comes to an average of only 0.6 percent a year.What all that amounts to is that neither farmland nor housing has been a great place to invest money over the long term.

To put this in perspective, note that the real gross domestic product in the United States grew 15.5 times — or, on average, 3.2 percent a year — from 1929, the year official G.D.P. numbers began to be kept, to 2015. That’s a much higher growth rate than for real estate. But why?  For home prices, a good part of the answer comes from supply and demand. As prices rise, companies build more houses and the supply floods the market, keeping prices down.  

The supply response to increasing demand may help explain why real home prices nationwide fell 35 percent from 2006 to 2012 (and even more in some cities). Investment in residential structures in the United States was at near-record levels as a percentage of G.D.P. just before the price declines. Prices have been rebounding since then — and so has construction of new houses.

 

While the idea of supply and demand balancing out the housing market makes perfect sense from a textbook economic perspective, it quickly falls apart when you take into account the most local of all factors that has quite possibly the largest impact on both land and home prices: politics.  Essentially, there are two primary restrictions to developing more residential units.  The first is geographical.  This includes mountains, bodies of water and scarcity of available water resources for new units.  The second is political.  This includes restrictive zoning, discretionary approval rights, etc.

Shiller’s analysis is perfect for markets with little to no geographical restrictions and even fewer political restrictions.  For example, land and home prices are incredibly stable in a place like Houston, Texas where new homes can be added quickly.  However, it fits poorly in coastal California which is hemmed in by mountains and the pacific ocean, has incredibly restrictive zoning and a populace with political leanings typically hostile to new development.  I was a bit surprised that Shiller wrote this piece as he knows what I just wrote better than anyone.  In fact, the Case Shiller Index that bears his name tracks housing prices in individual cities and backs up what I just wrote.  For example, look no further than the difference between the Case Shiller Chicago Index (the don’t track Houston) and the Case Shiller San Francisco Index to see how land use restrictions can lead to explosive moves in asset pricing when coupled with real economic growth.

Shiller goes on to explain how adding density keeps land and housing prices stable over time (highlights are mine):

Of course, underneath every home is a piece of land. Although that is typically only a bit of former farmland, it is often in an urban or suburban area, where a plot of land tends to cost much more than in the country.

Sometimes that little piece of land dominates the value of the home, particularly in dense urban areas. But if we are to understand long-term trends, we need to realize what land represents, even in Manhattan or Silicon Valley or any booming area. People in such places usually aren’t buying land for its own sake but for the myriad services that housing provides. A home is not just a place to sleep and store clothing and keepsakes. It can be a place that is convenient to a stimulating place of work, good schools and entertainment and, indeed, part of an entire human community.

These services have developed enormously over the last 100 years, changing the spatial and geographic dimensions of housing. There are vastly more highways and automobiles, telephones and various electronic connections, enabling people to leave center cities and still obtain the housing services they want. Thus, from a long-term perspective, these developments relieved a great deal of the upward pressure on home prices in cities.

Right now, there are some interesting developments in the supply of housing services that economize even further on urban land. We have recently seen interest in “micro-apartments,” which may be little more than 200 square feet but manage to squeeze in a kitchen, a bathroom and an entertainment center. For many people, this tiny space, with its proximity to like-minded people, interesting neighborhoods and restaurants, is preferable to living in a house in a far-flung suburb. Carrying this idea further, keepsakes can be kept in remote storage, maybe deliverable someday, on demand, with driverless cars. Already, rules are being changed in many cities, including New York, allowing the little apartments to be built and to accommodate many more people per acre of city land. These factors could lead to near-zero future demands on valuable urban land.

First off, micro-units are wonderful as a means to drive housing prices down for those wishing to live in a high-priced urban area IF AND ONLY IF YOU ARE ACTUALLY ABLE TO GET APPROVALS TO BUILD THEM.  Clearly Professor Shiller has not attempted to get such a micro-unit development approved in a wealthy, coastal region of California – say Orange County, for example.  If a developer were to propose such a thing in a high-priced neighborhood, he’d be run out of town on a rail or worse for even daring to bring it up.  This type of concept that works great in some places (cities without restrictive zoning and economics text books) and not at all in others (pretty much every major city on the west coast and a few on the east coast as well).  In addition, adding density typically results in INCREASING underlying land values rather than causing them to fall. Please note that I’m not disagreeing with Shiller as to the premise of his article from a strictly economic perspective (at least when it comes to homes – not necessarily land) only noting that politics MUST BE taken into account because they play such an out-sized role in some regions.

I am far from an uber-bull when it comes to housing prices.  Trees don’t grow to the sky and asset values can go up in a straight line for an extended period of time.  That line of thinking has been fully debunked by the debacle that was the housing crash and Great Recession.  IMO, one buys a house for stability and as a hedge against future rising rents, especially in supply constrained regions.  If you are looking at a house soley as a means of making a large return on investment, you are doing it wrong.  Unlike say tech stocks, housing is a necessity.  Therefore the only way to properly judge it as an investment is versus the alternative: renting.  You either do better over time as a renter or an owner depending largely on economic and political factors where you live.  All real estate is local and making broad generalizations about housing supply being able to meet demand regardless of location and political climate is next to impossible even for an economist as accomplished as Shiller.

Economy

Bass Ackwards: How negative interest rates have turned the world’s economy upside down.

Delay: Britain has now pushed the projected date of the Brexit back to 2019.  The odds of this thing actually occurring are falling by the day.

Reaching: Someone published a research note on Seeking Alpha theorizing that the Pokemon Go app will lead to higher oil prices.  Color me skeptical.

Commercial 

That Didn’t Take Long: WeWork is cutting it’s revenue forecast and its CEO is asking employees to change it’s “spending culture.”

Residential

Over the Falls: London luxury home sales are plunging post-Brexit.

Profiles

Class Act: Tim Duncan was the greatest basketball player of his generation – sorry Lakers fans but deep down you know its true and not all that close.  True to Duncan’s persona, he left quietly, shunning the typically season-long distraction/going away party that players of his caliber so often demand in the modern era.

Fading Away: Why golf is going the way to the three martini business lunch.

Chart of the Day

The condo development capital stack is becoming a convoluted mess as banks pull back (h/t Tom Farrell).

(Click to enlarge)

WTF

Such a Bummer: McDonalds has stopped allowing customers to stream porn on their free in-store wifi.  It will be interesting to watch how this impacts the bottom line as I’m pretty sure that the free porn was the only reason anyone still went to McDonalds.

Headline of the Year Contender: Woman Decapitated By Passing Train During Sex will be a difficult one to beat.  In a twist that should surprise no-one, this happened in Russia and she was drunk at the time.

Inevitable: Someone shot a gun at a couple of teenagers playing Pokemon Go. Did it happen in Florida? Of course it did.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 19th – One Size Fits All?

Landmark Links July 15th – Proceeding with Caution

Squirtle

Last Tuesday, I was sitting in a hospital room with a somewhat-drugged-up Mrs. Links just after baby Hayden was born when I read an article about a new video game that had just been released. That game was just beginning to become a phenomenon like nothing I had ever seen.  I remarked to Mrs. Links that this was going to end up being the tech story of the summer.  She rolled her eyes at me in a painkiller-induced haze and told me that I had to be kidding.  I wasn’t.  If I were smart, I would have dropped everything and bought Nintendo stock.  I’m’ not.  Since then the Pokemon phenomenon has taken on a life of it’s own and not just among kids.  Twenty and thirty somethings are playing the augmented reality game which now has more users than Twitter and more engagement than Facebook.  It’s led to car crashes and muggings but has also helped to boost traffic at zoos and museums and is being utilized as a dating app by some.  I’m not a gamer and I personally find the whole thing rather lame (not for kids – for 30 year olds).  I also haven’t downloaded the app and don’t plan to although it has been a regular topic of conversation at Landmark World Headquarters.  However, there is no denying that that this game is dominating the news cycle and having an economic impact on everything from local businesses to real estate (yes, seriously).  As such, today’s blog has decidedly Pokemon Go theme…..and yes, I acknowledge that makes me almost as nerdy as the 30-somethings crowded onto Santa Monica or Newport Piers in search of imaginary cartoon characters that show up on their phones.

Lead Story… Property values in the US have recovered dramatically since housing bottom, leading to an additional $260 billion in home equity.  However, this hasn’t led to additional borrowing.  According to CNBC, this is why:

During the last housing boom, homeowners used their properties like cash machines, pulling out more equity than the house or the market could support. Arguably, no one wants to see that again, and so far, it is not happening.

“During the mid-2000s, as house prices went up, borrowing went up almost dollar for dollar. In the last few years, when house prices have again been increasing more rapidly than the long-term average, mortgage borrowing has not increased at all. In fact it has decreased,” said Sean Becketti, Freddie Mac’s chief economist.

Much of that may be due to more careful lending. The equity may be there, but lenders are far more strict about letting borrowers pull it out, especially if their incomes don’t support the higher debt.

“We are hoping that people continue to be prudent about cashing out, but part of it is, lenders are more cautious. One of our frustrations at Freddie Mac is we think we’ve set a very prudent credit box, but we find that lenders won’t go all the way out to the edge of our credit box. They are more restrictive than we would allow them to be. They just are super cautious,” added Becketti.

Mortgage refinances will likely rise on lower rates, but the same volatile global economic conditions pushing rates down are making borrowers even more cautious. The cash-out share is not expected to change, as lenders keep standards high and homeowners keep their personal leverage in check.

Economy

Vortex: How the black hole of negative rates is dragging down yields across asset classes and around the globe.  See Also: Germany just sold 10-year bunds at a negative yield.

Ancillary Benefits: How to drive insane amounts of traffic to your local business using Pokemon Go. Contra: Pokemon Go is actually terrible for the economy.  Here’s why.

Commercial

Bargain Shopping: Brexit could lead to foreigners buying up even more of London as UK real estate funds look to sell assets in order to meet redemptions as the pound continues to weaken.

No Moat: WeWork is the largest player in the co-working space, leading to a much scrutinized, sky-high valuation of $16 Billion for a real estate company.  However, the business is growing and, with very few barriers to entry, competitors are popping up everywhere.  I found this excerpt from the WSJ about valuations vs. barriers to entry particularly interesting (highlights are mine):

Some WeWork investors have compared WeWork with taxi-service provider Uber Technologies Inc. and overnight home-rental provider Airbnb Inc., saying WeWork will transform the office-space market.

But Airbnb and Uber enjoy high barriers to competition. The more drivers and hosts in their networks, the harder it is for an upstart to challenge them.

WeWork, by contrast, leases all its office space itself and then rents it out, making it more like a large hotel operator than a network that connects a buyer and seller—and potentially more susceptible to competition.

If the above is true, and scale isn’t as important as barriers to entry, that $16 billion valuation is looking awfully rich.

Residential

Millennials, They’re Just Like You and Me: Realtors marketing to Millennials are driving traffic to their open houses by advertising that Pokemon characters are present in said houses.

Profiles

Deal of the Century: I used to think that George Steinbrenner’s purchase of the Yankees for $8.8MM (now valued at $1.6 billion) or Al Davis’ purchase of 10% of the Raiders for $18,500 (worth around $800MM today) were the best investments in the history of sports. However, the UFC just surpassed both.  This past week, the Fertitta family and Dana White sold UFC for a whopping $4 billion after having bought it for a mere $2MM a mere 15 years ago.

LOL: Leadership at struggling online lender Sofi has long been highly critical of banks. However, a major slump could force the upstart company to become what it despises the most: a bank.

Podcast of the Day: The Big Man Can’t Shoot from Malcolm Gladwell’s Revisionist History series is 35 minutes long and absolutely worth the listen.  It’s about how Wilt Chamberlain (a historically terrible free throw shooter) started shooting his foul shots underhanded, was incredibly successful at it but then stopped because he was embarrassed.  The episode is much more about human behavior than basketball. I found it fascinating.

Chart of the Day

Remember this chart the next time you read an economic report referencing low productivity:

WTF – Pokemon Go Edition

Everybody’s Searching for Something: Searches for Pokemon porn are up 136% since the launch of Pokemon Go on July 6th.  The more that I learn about people, the more I like my dog.

Dragnet: A woman in Queens, NY used the Pokemon Go app to catch her boyfriend cheating on here when she noticed that he caught a Pokemon at his ex’s house.

Attempted Darwin Award: Two men fell off of a cliff in San Diego on Wednesday while trying to catch a Pokemon.  They both lived, despite their best efforts.  I can’t think of a good way to go but, when it’s my time, I don’t want a video game mentioned as the cause in my obituary.  See Also: Three people, at least one of whom was an adult were locked in a cemetery while playing Pokemon.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 15th – Proceeding with Caution

Landmark Links July 8th – The Plunge

fatcrash

First things first: Hayden Charlotte Deermount was born at 11:14am on July 5th weighing 7lbs and 13 oz. Baby Hayden and Mrs Links are both doing great! This is also Hayden’s fist blog post in a way since I wrote almost the entire thing with her sleeping on my lap….

Lead Story… Commercial real estate investors are rushing for the exits in British property funds as post-Brexit uncertainty about the future of London as a global financial center is on the rise. Withdrawals have been halted in several funds and the Pound is now at a 31 year low (and this could just be the beginning for the embattled currency). The situation could get worse before it gets better. The biggest beneficiary will likely be the US commercial real estate market which could see even further cap rate compression (yes, seriously). See Also: RBS and Lloyds have the most exposure to UK commercial real estate and could have issues if it continues to tank. 

Economy

Much Ado About Nothing? Pro Brexit politicians are dropping like flies adding to uncertainty.  Tyler Cowan of Marginal Revolution lays out 7 possible Brexit scenarios. The spoiler here is that there is a very strong argument that Brexit will not ever actually happen. See Also: Brexit fears have set a scenario in motion the could bring the yield on the benchmark 10-year US treasury note plunging to 1%.

Sea Change: Great infographic from the US Census Bureau shows just how much the “typical” 30-year old has changed from 1975 to 2015.  The difference is stark to say the least.

Commercial

Imagine That: Plateauing rents in the luxury apartment space have some developers putting new developments on hold as they acknowledge that trees can’t grow to the sky. Imagine that: housing cost inflation slows when you add more units.  Shocking. See Also: LA rents were flat from May to June according to Apartment List.

Residential

Not From The Onion: A Seattle house deemed “too dangerous to enter” sold for $427,000 after an insane bidding war with 41 offers after it listed for $200k. Perhaps the craziest part of this is that $427k for a tear down in a good neighborhood in coastal California sounds like a steal. Consider it today’s reminder that affordability is relative in local markets.

Not A Lot Remaining: Lot supply is still incredibly tight in the western US and at its lowest level since 1997.

Refi Boom: Plunging interest rates sent refinances soaring to an 18-month high even though mortgage rate spreads over the 10-year treasury are still high.

Profiles

LOL: Snapchat’s army of loyal teenage users aren’t happy that their parents are starting to use the app.

Out of Touch: Microsoft’s attempts at intern outreach are a perfect example of what happens when your grandparents try to be “hip.”
Chart of the Day


WTF

Brawl-Mart: 30 person brawl in an upstate NY Walmart that included baseball bats and a 17 year old throwing a can of food at a 52 year olds head resulted in several arrests. Nothing about this story is remotely shocking or even newsworthy except that it didn’t happen on Black Friday.

Can You Move that Plane So I Can Get a Better Shot? Idiots are increasingly putting pilots and firefighters at risk by flying drones over wildfires in an effort to get “cool” Instagram photos.  One drone almost collided with a plane late last month in Utah leading to the grounding of all firefighting planes during a blaze.

Ok Then: The brother of deceased former Colombian drug lord Pablo Escobar is asking Nexflix for a portion of the profits from the next season of Narcos, a show based on Escobar’s life. Doubt it will work but I suppose that the logic here is that If you don’t ask, you don’t get.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 8th – The Plunge

Landmark Links July 5th – Oh Baby

daddy-gasmask.jpg

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

Landmark Links July 1st – East Coast Edition

909er

Happy 4th of July!  First off, Jason Pierre-Paul of my beloved Giants and his disturbingly-mangled hand has a public service announcement for you: don’t light fireworks off in your hands as doing so can leave you disfigured and also cost you tens of millions of dollars in the NFL free agent market.  To paraphrase Apu from the Simpsons: “Celebrate the independence of your nation by blowing up a small part of it….just make sure that it doesn’t include your hand.”

Lead Story… The Panama Canal will be opening up a new lane for larger ships in the coming weeks.  One of the economic winners will be owners of industrial buildings in a quaint area of South Carolina 200 miles from the sea where a construction boom is underway to accommodate goods coming into the Port of Charleston, which is currently undergoing dredging that will make it the deepest harbor on the east coast.  Consider it the new Inland Empire of the South.  From the Wall Street Journal:

In the past few years, the rolling hills and farmland surrounding Greenville and Spartanburg have given way to massive warehouses and industrial parks. Restaurants in Greenville, S.C.’s formerly neglected downtown cater to corporate managers and engineers from Germany and Japan. Trucks clog the two main interstates, carrying engine parts and finished goods to and from the region’s growing number of manufacturing plants.

More development is on the way: over six million square feet of warehouse space is under construction in the Greenville-Spartanburg region, a scale typically seen in major cities like Philadelphia and St. Louis, according to CBRE Inc., a real-estate brokerage.

The construction frenzy is being fueled by developments at the Panama Canal, nearly 2,000 miles away. The new, wider ship channel will allow bigger ships to pass through, lowering the cost of bringing Asian-made goods directly to the East Coast.

Industrial boom

Sound familiar?  It should if you’eve ever spent time in the former cow pastures west of I-15 in San Bernardino and Riverside Counties that now have millions of square feet of class-A warehouses that serve as a massive distribution hub for the ports of LA and Long Beach.  Some are arguing that the canal widening will allow Asian exporters to hedge against the labor issues that have boiled over in LA and Long Beach in recent years, grinding commerce to a halt even at the expense of a few extra shipping days to get to market.  The counter argument is that days to market will still rule and there isn’t likely to be much of any drop off in LA and Long Beach.  Either way, the net volume of traffic going to east coast ports is likely going up to some extent and that is what industrial developers are anticipating.  This could potentially be a massive economic stimulus for an area that was formerly a textile hub and lately had best been know for automotive manufacturing. More from the Journal:

The expanded Panama Canal “is going to drive industry and create even more businesses there,” said Joel Sutherland, director of the Supply Chain Management Institute at the University of San Diego. “Having a regular flow of containers…will attract major manufacturing, then their suppliers, then their suppliers’ suppliers, and ultimately more people.”

From the Port of Charleston—which is dredging its harbor to be the deepest on the East Coast—container cargo makes the quick trip by rail to a freight hub in Greer, S.C., known as the Upstate’s “inland port.”

Trucks pick up those containers of component parts and retail goods bound for nearby factories and distribution centers. And from there, truckers can reach Atlanta or Charlotte, N.C., in two or three hours, and most of the rest of the Eastern U.S. within a day’s drive.

“The Panama Canal is not even completed, the port dredging has not been completed, but we’re already attracting major distribution and manufacturing companies,” said Trey Pennington, an industrial real-estate broker with CBRE in Greenville. “The Panama Canal will fundamentally change the market dynamics of South Carolina in the coming years.”

It’s also a given that more economic growth and well-paying jobs will lead to more residential and retail development which leads to…..you guessed it – NIMBYs who, as always are coming out of the woodwork to protest anything new being built:

In downtown Greenville, higher-end residential and retail development—a Brooks Brothers clothing shop opened on Main Street in 2013—is forcing out some longtime residents. Across Greenville and Spartanburg counties, residents say traffic congestion has never been worse.

The Upstate’s main roads are lined with razed fields where warehouse structures rise in various states of construction. Conservationists say the region’s natural landscape in the foothills of the Blue Ridge Mountains—which draws outdoor enthusiasts and an especially large number of professional and amateur cyclists—is under threat as housing and industrial construction push further out from the cities and transportation corridors.

“The Upstate needs to balance this development with protecting valuable green spaces and water quality,” said Andrea Cooper, director of Upstate Forever, an environmental advocacy group.

In a strange way, I’m relieved to see that the “If You Build It They Will Whine (and most likely sue you)” crowd doesn’t confine itself to coastal California.  If the Panama Canal expansion ends up resulting in a 10% – 20% increase in goods going through Charleston as some predict, the Upstate could be in for a prolonged economic boom that will likely keep the anti-growth NIMBY crowd busy for the foreseeable future.  If that scenario does play out, look for the region to become a prime growth corridor with all of the positives (and yes, some negatives) that go with economic expansion.  South Carolina may be getting it’s own version of the 909 so be on the lookout for the flat brimmed hats, barbed wire tattoos and lifted pickup trucks.

Economy

Stick a Fork in It: The futures markets are now saying that the Fed won’t raise interest rates until 2018 post-Brexit.  See Also: Government bonds from developed economies have been this year’s jackpot investment.

News Flash: It’s really, really expensive to raise a child in the US.  Per the US department of agriculture, the average cost to raise a child born in 2013 from birth to 18-years old is $245,340, ranging from $176,550 for low-income families to $407,820 for high-income families.   This only covers a kid to age 18 so it DOESN’T include college.  It’s truly a wonder that young people are delaying household formation coming out of the Great Recession…..

Commercial

Scarcity: 1031 exchange buyers are having a difficult time finding enough deals to trade into, leading them into unfamiliar markets and product types and helping to bid up already-high commercial real estate prices.

Residential

Unintended Consequences: There has been no group of people more wrong over the past 7 years than the “interest rates have nowhere to go but up” crowd.  The Brexit is just the latest example of why this line of thinking has been incorrect. There is also a credible argument that Brexit could set off a chain of events that would result in mortgage rates in the 2s.  I’m not saying that it will happen or even that it’s likely but the possibility shouldn’t be ignored based on the deflationary forces that we are seeing in the world economy.

Not in the Ballpark: US housing supply continues to lag far behind demand just as it has been doing since 2009.

Unsustainable: Inflation-adjusted rents rose 64% from 1960-2014 while real household incomes increased only 18%, resulting in the share of cost-burdened renters nationwide exploding from 24% in 1960 to 49% in 2014.  If you want to know why so many people struggle to save for a down payment, this is a good place to start:

Profiles

Hero: Meet the world’s first robot lawyer, a free online chatbot who has managed to overturn 160,000 parking tickets in London and New York, saving users nearly $3.9MM in fines since it was launched 21 months ago.  The 19 year old British coder who invented this should win a Nobel Prize.

Predictable: There is one industry that is about to make a fortune on the Brexit regardless of what happens with regards to markets and the economy: lawyers.

Stressed: The Federal Reserve’s annual bank stress tests have spawned a multibillion-dollar industry where banks hire consultants to manage other consultants  in order to help them pass, fueling a never-ending feedback loop of red tape and bureaucracy.

Chart of the Day.

Supply and Demand for Housing

Supply = Blue, Demand = Gold

Difference Between Housing Supply and Demand

WTF

Breast in the World: Just in time for July 4th, the Journal of Female Health Sciences recently released a new study that found the US rules the world in a very important category: American women have the world’s largest boobs.  The study excluded surgical enhancements, which of course naturally meant that only two women in Orange County – which qualifies as a very different type of Silicon Valley – were eligible to participate.  Yes, this is blatant click-bait but I’m going to milk it for all it’s worth as I feel it’s my duty to augment your base of knowledge by keeping you abreast of important news.

Video of the Day: In a development that will likely alter the path of human history, some genius figured out that beer pong is more fun and challenging if the cups are placed on top of a Roomba vacuum cleaner which is then placed on top of the beer pong table.  Bring a Roomba to your 4th of July BBQ and you will be the most popular person there.  Guaranteed.

Vegan News Roundup: Vegans are now forcing their bat-shit-crazy religion on their dogs (which, by the way are carnivores) because vegans are mostly insane.  Side note: this definitely qualifies as animal abuse.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 1st – East Coast Edition

Landmark Links June 28th – Tank Commander

Byron-Scott-Driving-The-Lakers-Tank

Lead Story…  We spend a lot of time talking about the San Francisco housing markets and rightfully so: it’s a microcosm of all that is wrong with restrictive zoning in closed access US cities and the poster child for NIMBY obstructionism.  As such, San Francisco has managed to overshadow another North American market that is incredibly expensive and getting worse: Vancouver, BC  Year-over year, Vancouver’s benchmark housing index is up 30% to just under $900k while single family detached house prices increased a whopping 40% to $1.374MM (in US dollars) in a city where median household income is around $67k in US dollars – San Francisco is in the $82k range.  So how does an MSA with such a low median household income (one of the lowest of major Canadian cities) end up with a median home price that is among the highest? 1) Massive levels of housing demand from wealthy foreign investors, especially from China; and 2) Highly restrictive zoning that makes it difficult to add enough housing units to satisfy  that demand.  One critical distinction between SF and Vancouver is that much of Vancouver’s foreign purchases appear to be for investment purposes only while SF real estate has clearly benefited from the tech boom and it’s highly compensated workforce.  This, combined with the inability to build enough new units for residents, is leaving Vancouver with empty units that transact for nosebleed prices.  The increase in value was so extreme last year that at least one mathematician estimated that the rising land value of single family homes accounted for more than the entire employment income in the City of Vancouver and now over 90% of detached houses there are worth over $1MM.

Foreign buyers have come under increasing scrutiny of late for the impact that they are having on the worlds most expensive real estate markets.  Some of it is justified.  For example, the US Treasury department now requires that title insurance companies report the people behind shell companies on all-cash purchases over a certain level in NY and Miami in order to curtail money laundering.  Others like Great Britain, which increased the stamp duty on second home purchases by 3% and raised taxes on more expensive homes in an effort to drive down demand.  Few places though, have considered responding as harshly as Vancouver, which is considering a tax on vacant homes.    From the South China Morning Post:

Vancouver’s mayor Gregor Robertson says he is considering the introduction of a tax on empty homes, amid a roiling debate in the city about the role of Chinese money and offshore investors in North America’s most unaffordable real estate market.

In an interview with Bloomberg TV on Tuesday, Robertson said he was “looking at new regulation and a carrot-and-stick approach to making sure that houses aren’t empty in Vancouver,” including a tax on vacant homes. “If you’re not using your property – either living in it or renting it out – then you have to pay more tax. Because effectively it’s a business holding, and should be taxed accordingly.”

There is a very substantial difference between adding to transaction costs or requiring ownership disclosures, as the US and Britain are doing and what Vancouver’s mayor proposed here.  The steps taken by the US and Britain either increase transaction costs or regulatory paperwork in an effort to slow demand from a certain buying segment.  The Vancouver proposal takes a very different approach: it would actually increase the holding cost of foreign-owned (but unoccupied) real estate by imposing a different tax structure.  This isn’t limited to the purchase transaction, instead its a recurring annual cost.  More from the South China Morning Post:

A tax targeting vacant properties was proposed by dozens of economists in January.The BC Housing Affordability Fund, which has been pitched to both the City and British Columbia provincial government, would impose a 1.5 per cent annual tax (based on home price) on owners who either left homes vacant or had “limited economic or social ties to Canada”.

BCHAF proponent Tom Davidoff, an economist at the University of British Columbia, said it was unclear if Robertson’s remarks on Tuesday referred to his group’s proposal. “We talked to the city and they gave us a good listen,” he said.

“I would hope that any vacancy tax would cover the bigger issue here which is not paying taxes here and not being a landlord [either],” said Davidoff, whose group’s proposal would also tax people who under-utilised properties as a “pied-a-terre”, and those whose primary breadwinner paid little or no income tax in Canada – so-called “astronaut families”.

This strikes me as the quickest way to cause an exodus of foreign capital from a given real estate market because, unlike the US and British solutions, it would not just apply to new purchases.  It is also rife with the potential for unintended consequences.  For example, who is to say if a property is under-utilized?  Who actually gets to make that distinction and is there a hard and fast rule that could be applied.  If you were a foreign (or domestic for that matter) investor or homeowner who had a house there and you knew that costs were about to go up a proposed 1.5% a year based on home price (not unsubstantial on a million dollar home) would you hang around to see how it was implemented?  This type of tax could send foreign investors rushing towards the exit before a glut of supply hits the market as investors seek friendlier locales in which to invest.  At least it appears as if cooler heads are prevailing at the provincial and national level.  Again from the South China Morning Post:

Both Canadian Prime Minister Justin Trudeau and BC Premier Christy Clark have said they worry that taking steps to curtail foreign ownership in Vancouver could imperil the equity of existing owners.

I hope that Prime Minister Trudeau and Premier Clark’s logic prevails as this would be an incredibly dumb way to tank a real estate market and the collateral economic damage done to existing homeowners would be all too real.  In all of the talk about how to bring Vancover’s prices under control, it seems as if no one (or at least very few people) are proposing a real solution: relaxing restrictive zoning codes so that more units could be built to meet demand.  Ultimately, that’s the only way to avoid what some are now calling a bubble.  Rather, we get more of the same convoluted restrictions, subsidies and taxes that don’t solve the actual problem and often do more harm than good.  The Vancouver mayor’s proposal is a tanking strategy that would make even the shittiest NBA team blush. Let’s that American cities with a large number of foreign investors don’t follow the example.

Economy

Tailwind: Per Calculated Risk, the largest population cohorts in the US are now 20-24 and 25-29 which is positive for the economy in general and housing in particular as young people begin to form households.

Brexit Breakdown: By now you probably know that UK residents voted to leave the EU, sending stock prices down the toilet around the globe and spurring demand for safe haven assets like treasuries and gold.  The betting markets got this one dead wrong as did pollsters and most government officials.  Despite the crazy market response, nothing will really change from a trade standpoint in the near-term and there is already a movement underway to try to reverse the referendum.  Either way, nothing is going to happen until this fall when British PM David Cameron resigns.  Here’s a quick roundup of what people far more knowledgeable than I are saying:

Tyler Cowen on why the Brexit happened and what it means.

George Soros on the future of Europe and why it might have more issues than Britain.

Gabriel Roth on why the actual Brexit might not ever actually happen

The BBC on the high likelihood of another Scottish independence vote as a result of the Brexit outcome.

See Also: S&P and Fitch downgrade UK credit rating.

Best House on a Bad Block: The US economy looks likely to weather the Brexit storm even if it puts the Fed on hold for a while longer.

Commercial

 

Winner, Winner, Chicken Dinner: How US REITs could benefit from the Brexit.

Residential

Scraping the Bottom: Brexit panic has pushed interest rates to record lows and mortgage rates are following and they could be headed even lower.

Profiles

Trade of the Century: The story of how George Soros’ Quantum Fund made trade of the century by breaking the British pound is especially fascinating today in light of recent world events.

Green Monsters: Avocado theft is on the rise.

Please Make it Stop: Enough with the stupid Millennial surveys already.

Chart of the Day

The US Demographic Tailwind

Population: Largest 5-Year Cohorts by Year
Largest
Cohorts
2010 2015 2020 2030
1 45 to 49 years 20 to 24 years 25 to 29 years 35 to 39 years
2 50 to 54 years 25 to 29 years 30 to 34 years 40 to 44 years
3 15 to 19 years 50 to 54 years 35 to 39 years 30 to 34 years
4 20 to 24 years 55 to 59 years Under 5 years 25 to 29 years
5 25 to 29 years 30 to 34 years 55 to 59 years 5 to 9 years
6 40 to 44 years 15 to 19 years 20 to 24 years 10 to 14 years
7 10 to 14 years 45 to 49 years 5 to 9 years Under 5 years
8 5 to 9 years 10 to 14 years 60 to 64 years 15 to 19 years
9 Under 5 years 5 to 9 years 15 to 19 years 20 to 24 years
10 35 to 39 years 35 to 39 years 10 to 14 years 45 to 49 years
11 30 to 34 years 40 to 44 years 50 to 54 years 50 to 54 years

Source: Calculated Risk

WTF

Video of the Day / Attempted Darwin Award:  It’s exceedingly rare that an attempted Darwin Award gets caught on video.  This past weekend, two morons attempted to surf a 20 + foot swell at The Wedge in Newport Beach on a rental jet ski despite being warned repeatedly by lifeguards to stay away.  It went horribly wrong with the jet ski ending up on top of the Newport Jetty before nearly sinking while getting swept out to sea as Newport’s lifeguards and local Wedge veterans saved the riders from their own epic stupidity.  No word on whether or not they got their deposit back.  Looks like it’s time to add some more chlorine to the gene pool.

Can You Spot the Irony? A man named Ronald McDonald was shot outside a Sonic in New York.

I’d Rather Eat My Shoe: Burger King recently introduced something called Mac N’ Cheetos.  The race to the bottom for the American fast food industry continues with no end in sight.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links June 28th – Tank Commander