Landmark Links September 23rd – What’s the Point?

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Lead Story… Former Federal Reserve Chairman Paul Volker once said that the only useful modern financial innovation was the ATM.  While that’s a rather harsh assessment, there is a bit of truth to it.  Too often, financial products ranging from subprime loans, to derivatives to leveraged ETFs are created more as profit and marketing opportunities for those selling them than they are to fill an actual need of the people that they are being sold to.  That being said, I’m still somewhat fascinated by the FinTech industry because there are segments of the market that are not covered by traditional sources where FinTech companies can provide real value to consumers.  There have been several such products from online mortgage lenders to crowd funding platforms for real estate deals that fill a need.  I’m especially interested when a FinTech startup is aimed at our beleaguered national housing market.  Last week, top tier Venture Capital investor Andreessen Horowitz announced a new venture called Point which was created to invest in a portion of the equity in a home in exchange for a portion of the return when you sell or refinance.  Point lowers a homeowner’s monthly payment because you don’t pay current on Point’s equity investment and that all of their profit is realized upon sale or refinance of the home. Although this reduces a homeowner’s current pay, it could cost a lot more in the long term depending on whether your house appreciates and by how much.  When Point was announced via press release, the financial blogosphere when into a bit of a tizzy which was somewhat predictable given that: 1) The concept of offloading equity in a home, typically a family’s largest asset, has been around for some time but this seems to be the first time someone has attempted to do it in scale; and 2) Andreessen Horowitz is known for making smart investments – so people naturally assume that their involvement validates Point’s business plan.  I wanted to hold off on offering my opinion until I had time to do a bit of reading and research on the product.  There is still  a lot of information that hasn’t been released on how the product works but I’ve been able to piece together enough to get a decent ideal.

First off, let’s explain how the product works.  The best way to do that is probably the example from their own website:

 

Check if you qualify

Enter your address and answer a few questions. The process is free and takes less than 5 minutes.

5 minutes

  • You provide us with basic information about your home and your household finances.
  • To be eligible for Point, you’ll need to retain at least 20% of the equity in your home after Point’s investment.
  • We can instantly give you pre-approval or denial based on the information you provide.

Point Makes you an offer

Point makes a provisional offer to purchase a fraction of your home. We will provide you with an offer based on the value of your home today.

1-3 days

  • If pre-approved, we provide a provisional offer based on the data you provide.
  • The offer is typically for between 5% and 10% of your home’s current value.
  • We’ll ask you to complete a full application and provide documentation for our underwriting team.
  • If possible, we will improve on our pre-approval offer.

Schedule an in-person home visit

Pick a time for a licensed appraiser to visit you. We want to ensure the price is correct by checking the place out — no cleaning necessary 🙂

5-8 days

  • We will schedule time for a home valuation visit.
  • You will be charged for the cost of the appraisal, which is typically between $500 – $700.
  • The appraiser will visit and inspect your home.
  • We will share the appraiser’s report with you once it’s complete. The appraiser’s value is an important component of the final offer.

Point pays you

We usually send the money within 4 business days of closing.

3-5 days

  • We finalize the offer following the appraisal and receipt of all supporting application documents.
  • You will meet with a notary to sign the Point Homeowner Agreement.
  • Point files a Deed of Trust and Memorandum of Option on your property in your county recorder’s office.
  • Once the filings have been confirmed, we transfer the offer funds (less Point’s processing fee of 3% and the escrow fee) electronically to your bank account.

Sell the home or buy back from Point when the time is right for you

Point is paid when you i) sell your home, or ii) at the end of the term, or iii) during the term, when you choose to buy back. Regardless of the timing, there’s no early buyback penalty.

1 to 10 years

  • If you sell your home within the term then Point is automatically paid from escrow.
  • If you don’t sell, you can buy back Point’s stake at any time during the term at the then current appraised property value.
  • Point is paid a fraction of the home’s value. If the home has declined significantly in value, Point may be due less than its original investment.
 Sounds simple enough but as usual, the devil is in the details.  A few caveats:
  1. Point collects a processing fee of 3% upfront in addition to appraisal and escrow fees
  2. You need at least 20% equity in your home to qualify
  3. You are guaranteeing repayment in 10 years
  4. Point is in a preferred position, meaning that they get paid first in the event that your home loses value
  5. When Point first went live last week, they gave an example of their pricing on their website (they have since taken it down for some reason).  In this example, Point put up 10% of the value of the home and received 20% of the appreciation (net of any improvements done by the home buyer in return.
One of the primary issue holding back the market is a lack of capacity for down payments by first time home buyers.  Low interest rates may be great for monthly payment affordability but they do nothing when it comes to a buyer’s ability to save a 20% down payment for a conforming loan.  There is a real need for investors in this space and some platforms have tried to tackle it.  For example, FirstRex which was profiled by Bloomberg back in 2013 will put down up to 50% of a homebuyer’s downpayment in exchange for a portion of the profit.  However, I am not aware of there being a substantial need for people who already have a large amount of equity in their homes to be able to extract that equity, especially when cheap HELOCs or reverse mortgages ( for seniors) are readily available.  Both HELOCs and reverse mortgages allow an owner to extract their equity WITHOUT giving up 20% of the upside in their home.  In order to illustrate this I ran a scenario outlined in Point’s press release.  For the sake of simplicity, I didn’t include property taxes, insurance or maintenance as these would be the same with or without Point.  I also didn’t include any loan fees in an effort to keep things simple.  This analysis has 2 scenarios:
Scenario 1: Borrower buys a home for $500k.  Borrower takes out a $400k with a down payment of $100k.  The mortgage has a 4% coupon.
Scenario 2: Borrower sells $50k in equity (10% of the total value of the home to Point, reducing the loan size to $350k, again with a 4% coupon.  Under this scenario, Point gets 20% of the home price appreciation.
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As you can see, it’s substantially less expensive to use a traditional mortgage if you experience any home price inflation – and Point’s website and press release both imply that it will be targeting higher priced markets that will likely experience more inflation.  If a borrower lives in a market that experiences home price inflation of less than 2%, Point makes some sense.  Above that, it doesn’t appear to.
So what’s the Point (Pun fully intended)?  IMO, this would be a great investment program if it were structured as some form of down payment assistance (like the FirstRex example above) – I’m even willing to bet that they could get more aggressive splits if it were designed to fill that substantial need in the market.  However, as currently offered, it’s an expensive preferred position that sits in front of a substantial amount of equity (again, assuming that there is any home price inflation).  I’m just not sure that there is much of a need for a product that allows people with a lot of equity to extract it from their homes when HELOCs are available, cheap and flexible and reverse mortgages are an option for seniors.  Borrowers that need something like this (and would be willing to pay for it) to defray their down payment can’t qualify and those who would qualify have better options if they want to extract equity from their homes or finance a purchase.  As such, I just can’t see how this is something that will be very scalable in it’s current form.

Economy

Surprise, Surprise: The Fed chose not to raise rates at their meeting this week but signaled that 2016 rate increases are still likely.  For those keeping track at home, they did exactly the same thing that they’ve done at pretty much ever meeting this year.

You Want Cream or Sugar with That? Yes, there is a Millennial underemployment crisis but it only extends to those with liberal arts degrees.

Commercial

Bottom of the Barrel: The ongoing dumpster fire that is K-Mart announced that it’s closing 64 stores and laying off thousands of employees.  I honestly had no idea that there were 64 K-Marts still open to begin with.

Going Long: Blackstone jumped back into the logistics business after selling IndCor Properties in 2015 by purchasing a $1.5 billion mostly-west-coast portfolio from Irvine-based LBA.  See Also: How Amazon is eating the department store, one department at a time.

Residential

Flipper’s Back: Home flipping continues to make a comeback and is now at it’s highest level since 2010.  A lot of the activity has been taking place in secondary markets like Fresno which could be a good sign that things are getting better.

Soaring: According to the Federal Reserve Bank of St. Louis, urban rents in US cities are rising quicker than they have in any time in recorded history.

Kicked to the Curb: Cities are starting to follow New York’s example by allowing developers to eliminate or reduce parking requirements for condos and apartments in order to provide more density and cheaper prices.  However, there is a lot of concern over the impact of this move with regards to on-street parking in cities where mass transit infrastructure hasn’t kept up.

Profiles

Talking Your Book: One of Lyft’s co-founders believes that private car ownership will go the way of Johnny Manziel’s NFL career by 2025.

Grudge Match: Tesla’s battle with car dealers has the potential to reshape the way that cars are sold in the US.

The Paradox of Leisure: The rich were meant to have the most leisure time. The working poor were meant to have the least. The opposite is happening.  Here’s why.

Chart of the Day

Rise of the regional banks

RCA-CRE-capital-trends

WTF

Terrifying: A crazy woman from New Zealand made a handbag out of a dead cat and is trying to sell it for $1,400.

Broken Clocks: Brangelina broke up this week, meaning that those tabloid headlines that you’ve seen every time that you go to the grocery store for the last 10 years were finally correct.  If you believe Us Weekly, they broke up at least 31 times in the last decade.

Hero: Meet the 110 year old British woman who attributes her longevity to drinking whiskey on a daily basis.  See Also: New study suggests that people who don’t drink alcohol are more likely to die young.

Hell NO: South Carolina residents warned about clown trying to lure children into woods.

Video of the Day: Watch a diver catch video of great white shark attack on his GoPro off the coast of Santa Barbara (don’t worry, no blood).

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 23rd – What’s the Point?

Landmark Links September 20th – Young Man’s Best Friend

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Lead Story… If you follow the news even casually, you probably know that Millennials are less likely to own cars and homes or be parents than prior generations.  However, there is one area where Millennials are out ahead: Pets.  The Washington Post published the results of a study of pet ownership among young people and the results were somewhat stunning (emphasis mine):

Three-fourths of Americans in their 30s have dogs, while 51 percent have cats, according to a survey released by research firm Mintel. That compares to 50 percent of the overall population with dogs, and 35 percent with cats.

The findings come at a time when millennials, roughly defined as the generation born between 1980 and 2000, are half as likely to be married or living with a partner than they were 50 years ago. They are also delaying parenthood and demanding flexible work arrangements — all of which, researchers say, has translated to higher rates of pet ownership.

“Pets are becoming a replacement for children,” said Jean Twenge, a psychology professor at San Diego State University and author of “Generation Me.” “They’re less expensive. You can get one even if you’re not ready to live with someone or get married, and they can still provide companionship.”

You read that correctly, 75% of American’s in their 30s have dogs!  That is a yuge percentage and makes this self-proclaimed crazy dog person quite happy.  As with most publications though, WAPO seems to be implying that Millennials’ penchant for animal companionship makes them somehow different from the rest of “us.”  Indeed, if Millennials were going to forego family life permanently in favor of living with only dogs or cats it would have dire demographic implications.  Instead, I would suggest the pet ownership trend fits nicely with my theory about Millennials: they aren’t any different from prior generations, they are just taking longer to hit certain milestones than previous generations did.  Human beings need companionship and pets fill that gap before young people are ready to start families.  The increase in pet ownership is a good thing.  There are a ton of healthy benefits to having a pet as a family member, not the least of which is reducing stress.

Why am I so certain that dramatically increasing pet ownership among young people isn’t a harbinger of demographic doom? Well, for one, I’ve lived it.  I was born in 1979 so I’m not technically a Millennial but I didn’t get married until later in life.  I rescued a Black Labrador named Shadow when I was 24 who was my best friend for 10 years.  Despite my attachment to my dog, I ended up getting married in my mid-30s and had kids soon after. Shadow passed away several years ago and Pepper, a 2 year old Golden Retriever is now an important member of our family.  Also, I can’t imagine a scenario under-which we wouldn’t have a dog.

All that being said, there was one segment of the article that really frightened me (emphasis mine):

Millenials were also twice as likely than Baby Boomers to buy clothing for their pets, a phenomenon Richter chalks up to the prevalence of social media.

“The clothing is, for them, an opportunity for performance — they put it on their dog or cat, take them for a walk, post a picture on Facebook,” Richter said. “It’s increasingly about getting a digital stamp of approval.”

On second thought, I take back everything that I just wrote.  Maybe Millennials are the hipster weirdos that the press makes them out to be after all.

Economy

Nada: The reason why the stimulus from low oil prices never boosted the economy – it was 100% offset by the reduction in energy investment.  Mea Culpa on this one.  I was dead wrong.

Crossroads: The Fed is basically in the dark when it comes to the relationship between “full employment” and inflation in today’s economy.  As we approach what was traditionally considered “full employment,” they have a decision to make.

Commercial

Out of the Shadows: Shadow lenders are stepping up to fund development deals as regulators force banks to pull back on commercial real estate exposure.

See Ya: Mall owners are totally over department stores and not sad to see them go as retail tenant mix remains in flux.  But See: Nervous bond investors are hedging their exposure to malls with mortgage derivatives.

Residential

Building Up or Building Out: Awesome time-lapse graphics from the Washington Post this past weekend on density in major urban areas over time and the conundrum that cities face when it comes to keeping housing affordable: do you build up or do you build out?  See Also: Some suburbs are trying to add urban-style development projects to attract young workers and the employers who covet them.

Profiles

Always Be Closing: How Wells Fargo’s high pressure sales culture spiraled out of control and led to a massive checking account scandal.

Fleeced: Back in 1999 former recalled CA governor Gray Davis gave away the farm to public employee unions that had supported his election bid in the form of increased pension benefits based on the bullshit assumption that  CalPERS’ annual returns would average 8.5% forever. Davis sold benefits increase to taxpayers by claiming it would cost them nothing since all of the increase would be borne by CalPERS’ return on investment.  Needless to say, things didn’t go as planned.  Today the unfunded liabilities total $241 billion.

Battle of the Buzz: How the alcohol and pharmaceutical industries are bankrolling the fight against marijuana legalization.  See Also: There is a land rush going on in some of California’s worst real estate markets and commercial pot is the reason.

Chart of the Day

Europeans are not as happy with big-city living as commonly believed.

WTF

Florida Grudge Match: Nothing says Florida quite like an octogenarian brawl on the shuffleboard courts. (h/t Steve Sims)

Buy Gold: A notorious runaway Russian robot that has escaped it’s lab twice has been was arrested by police at a political rally.  And so it begins…

Somebody Walks in LA: Meet LA’s first “People Walker,” a bearded hipster and wannabe actor who will go on a walk with you for $7/mile. (h/t Ingrid Vallon)

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 20th – Young Man’s Best Friend

Landmark Links August 9th – Flipper Does Seattle

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Lead Story…  I came across a story from the Seattle Times this weekend that reminded me of perhaps the most obvious sign that a real estate market has overheated: Flipping.  First off, not all flipping is created equally and there are two primary categories of flippers:

  1. Fix and Flippers: This type of real estate investor looks for bargain properties that need some work, completes improvements – cosmetic or otherwise and sells…hopefully at a profit.  The flipper calculates what they can likely re-sell the house for, how much money they will need to spend on upgrades and repairs and what profit margin they need to make and bids on the subject property accordingly. It’s a legitimate business that is highly reliant on execution rather than purely market direction.
  2. Speculators: As the name implies, this type of flipper is extremely reliant on the direction of the market.  Speculative flipping is a pure risk play with little to no skill required other than filling out a contract (and possibly a loan application) which is often done with the help of a realtor anyway.  A speculator puts a new home or condo under contract before it is complete, waits for the market to go up and sells at a higher price.  Builders often offer lower prices in the early phases of a project in order to generate sales momentum and raise them incrementally in later phases.  Speculative flippers hope to capitalize on that momentum as well as an upward-trending market.  This type of flipping was made popular during the housing bubble, and returns were often juiced with a BS subprime loan that had a low teaser payment, the potential for negative amortization, and little to no documentation.  There isn’t any real business plan here as the speculative flipper isn’t adding any value whatsoever to a brand new property.  There are only three outcomes here.  When the market goes up, you make money.  If the market doesn’t move, you lose a little bit of money (after sales and closing costs are accounted for) assuming that you can sell in a timely manner.  If the market goes down, you lose your ass, especially if other flippers in your condo development or subdivision are present and flood the market with inventory as conditions are softening.

This brings us to Seattle and it’s white hot market.  It’s been well-noted that Seattle is one of the top-performing housing markets in the US.  Back in May Curbed posted a story about how the average Seattle listing sells in a mere 8 days.  News outlets in the Pacific Northwest have also run stories about people camping out to reserve downtown condos. All that considered, the story from the Seattle Times about how flippers in a downtown condo called Insignia were making flip profits on homes that had never been occupied was somewhat surprising as I can’t recall seeing this sort of thing since the mid-aughts:

Just how hot is the Seattle real-estate market? People are now reserving condos under construction and then flipping them for a six-figure profit before they even open.

Matt Goyer, a local real-estate broker and blogger, combed through some recent sales at the new Insignia high-rises in the Denny Triangle. He found several brand-new condos that their owners reserved during construction over the last couple of years and just sold again before ever living in them.

The condos fetched an average of $637,000, up from their original purchase price of about $526,000 — a profit of 21 percent.

That’s pretty good money for a speculative play with no value add component whatsoever even after sales commissions and closing costs are taken into account.  I have to admit that I was somewhat relieved when I went to Matt Goyer’s blog referenced above to find out a few more details.  The good news is that this isn’t rampant.  There were only a hand full of speculative flips out of the 348 units in the project:

The North Tower of Insignia has now closed 207 of 348 units with 130 left to close and only 11 left to sell. We’ve seen a handful of resales come up in the North Tower were people are flipping their units, having never occupied them. Curious about this we decided to dig in more and found only four flips so far which feels like a low percentage overall.

North Tower

402N – Pending. Listed for $629,500. Originally bought for $516,000.
503N – Sold for $629,950. Originally bought for $530,000.
808N – Pending. Listed for $649,950. Originally bought for $534,000.
905N – Pending. Listed for $639,000. Originally bought for $525,000.

And here’s a look at the South Tower, though some of these are legit resales where folks lived there and then decided to sell.

South Tower

209S – Sold 4/19/2016 for $680,000. Originally bought for $587,600.
405S – Sold 2/22/2016 for $730,000. Originally bought for $646,500.
511S – Sold 5/21/2016 for $794,000. Originally bought for $705,000.
1601S – Sold 3/21/2016 for $795,000. Originally bought for $695,200
1706S – Pending. Listed for $1,119,800. Originally bought for $1,032,900.
1802S – Sold 3/19/2016 for $915,000. Originally bought for $844,000.
1907S – Pending. Listed for $1,415,000. Originally bought for $1,291,290.
2107S – Sold 2/27/2016 for $1,350,000. Originally bought for $1,249,800.
2207S – Sold 2/23/2016 for $1,358,000. Originally bought for $1,259,800.
3806S – Sold 4/18/2016 for $1,750,000. Originally bought for $1,611,540.

Still, this is the type of activity that can spread quickly when word of flipping success gets out and people start talking about it at cocktail parties.  As stated earlier, speculative flipping takes requires little-to-no skill set, only enough cash for a down-payment and some large huevos.  So, is this a big issue?  Of course not, at least currently.  Fortunately, we are not seeing much evidence that this sort of thing is rampant and a small hand-full of units in a high-end Seattle condo project are not much reason for concern.  It does bear monitoring though if speculative juices start flowing more broadly again…..

Economy

Momentum: A second straight month of strong job gains has re-framed the economic outlook as the Federal Reserve continues to ponder what to do next.

Catch Me If You Can: Roughly 16% of the 43MM Americans who have student loan debt are in long term default.  The federal government is locked in a battle to get them to pay with taxpayers are on the hook for the $125 billion that they owe.

Anything That Isn’t Nailed Down: Central Banks are now starting to buy corporate bonds as they search for ever-more unconventional ways to spur growth.

Commercial 

Going Hungry: Farmland just experienced it’s first decrease in valuation since 2009 as corn and soybean prices extend their slumps.

Residential

Haves and Have Nots: Downtowns throughout the rust belt and parts of the northeast are increasingly becoming a center of economic growth at the expense of close-in suburbs.

Hitting a Different Target: DR Horton designed it’s entry level Express line to appeal to Millennial first time home buyers.  However, downsizing Baby Boomers seem to like it a lot as well.

Profiles

Solar System: Can Tesla go from a luxury car company to a one-stop-shop clean energy empire?

The Science of Speed: What’s behind Usain Bolt’s record setting runs?  It’s not that he goes faster than other runners but rather that he doesn’t slow down as quickly once he reaches peak speed.

To the Moon: Seattle is becoming the Silicon Valley of space start-ups.

Chart of the Day

WTF

Verified: A new study based on Facebook profiles just confirmed every cat person stereotype you can imagine:

After analyzing the aggregate, anonymized data of about 160,000 U.S. users who’ve posted photos of dogs and/or cats, Facebook found that dog-posters tend to be more extroverted, more upbeat and luckier in love than their feline-photographing friends. Meanwhile, cat people tend to be single, to express a “wider range of emotions” (including, chiefly, exhaustion and annoyance), and to harbor an unusually strong interest in fantasy, anime and science fiction.

High Voter Turnout: Because what wealthy town wouldn’t want their mayor involved in a meth-for-sex bust?

Dumpster Diving: Philadelphia has a problem with residents renting dumpsters to use as neighborhood swimming pools in it’s streets, causing the city to issue a statement telling them to knock it off.  If you have ever known any Philadelphia Eagles fans, this will make perfect sense.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 9th – Flipper Does Seattle