Landmark Links November 4th – Who’s On First?

funny-baseball-player-falling-picture

Lead Story…. It seems like nearly everyone in the real estate industry likes to use the baseball analogy to describe the real estate cycle.  There’s a little known rule that every home builder/developer conference has to have a panel where participants are asked what inning the current cycle is in by a moderator.  I suppose that this was considered either novel or informative at some point but today it’s neither.  The problem is that it’s difficult to classify real estate, especially real estate development in such broad and generalized terms.   Whenever I’m asked such a question, I answer the same way: what asset class and what market?  Another important clarification is the time frame of the recovery that began the cycle in question.  Most people consider our current cycle to have begun in June of 2009 which was when the National Bureau of Economic Research (NBER) marked the end of the last recession.  However, when it comes to home building and by extension the economy as a whole, it’s not that simple as Bloomberg’s Conor Sen wrote this week (emphasis mine):

The National Bureau of Economic Research marked the end of the last recession at June 2009. Similarly, the stock market hit bottom in the first half of 2009. The four-week moving average of initial jobless claims peaked in April that year. And the unemployment rate peaked in October. All of these suggest a broad-based trough at some point during 2009, making the economic expansion at least seven years old by now.

But given the severity of the financial crisis and the shock to the economy, the beginning of the recovery was not like moving from recession to expansion. It was more like moving from depression to recession. Rather than a normal business cycle in which four steps forward are followed by two steps back, the Great Recession was more like five steps back. Should the ensuing first two or three steps count as part of the next expansion, or something else?

The growth in the early part of this recovery was abnormal. Part of it was caused by government fiscal stimulus, which proved to be inadequate and was then followed by federal, state and local austerity. Part of it was caused by a “dead cat bounce,” as output fell so hard, below consumption in industries like the auto sector, that a certain amount of recovery was inevitable as producers had to increase output merely to match consumption. And then some part of the recovery was caused by the energy sector and the boom in fracking, a localized boom that eventually went bust.

So what went missing in those first few years of “recovery”?  The answer is home building which is the reason that I think much of the current cycle’s math is a bit off.  More from Sen (emphasis mine):

The missing piece was housing, the bread and butter of the American economy. The Housing Market Index from the National Association of Home Builders didn’t begin to increase from depressed levels until October 2011. Similarly, single-family-building permits didn’t begin to increase from depressed levels until 2011. It’s here, in late 2011, that I would claim the current expansion began, making it barely five years old, quite young in the context of a downturn that lasted four or five years rather than just two.

Ultimately, housing is the driver of the U.S. economy, which is why any understanding of the recovery of the economy must factor in the recovery of housing. Single-family-building permits peaked in the second half of 2005. Subprime mortgage originators started going bankrupt in 2007, the same time that housing prices started falling significantly. Outside of globally attractive real estate markets like San Francisco, New York and Miami, housing prices and activity continued to fall well into 2011.

The early years of the housing recovery, from 2010 to 2012, were more driven by investors and institutions buying foreclosures and investment properties with cash than by owner-occupiers coming back to the market. In the past few years, housing demand has been soaking up inventory created during the bubble years and pushing home prices back toward their mid-2000s levels. First-time home-buying remains below normal.

Only now are we seeing tertiary markets like exurban areas start to expand again, and construction remains below the level of household formation. One of the metro areas that was a poster child of the housing bubble, the Riverside-San Bernardino metro area in Southern California, is still building 80 percent fewer single family homes than it was at the peak of the last cycle.

That last highlighted section is something that I’ve written about frequently.  Although LA, Orange County and San Diego get a lot of attention for their great weather, beautiful beaches and affluent communities, it’s actually the Inland Empire that is the engine of growth in Southern California.  Especially when it comes to creating new housing for first time buyers and blue-collar workers that can’t afford to live closer to the coast.  That this region is still building 80% fewer units than it was at the peak of the last cycle is nothing short of shocking.  IMHO, it can’t be classified as much of a recovery at all.  As Sen points out in his article, every economic sector doesn’t necessarily recover in unison.  Just because tech has boomed or energy has boomed then busted doesn’t mean that other sectors are doing the same.  When it comes to a traditional growth sector like housing, this can have a massive impact on a regional (or even national) economy.  For some traditional growth markets like the Inland Empire, perhaps the appropriate question isn’t what inning of the cycle we are in but rather when the recovery will actually begin in the first place.

Economy

Even Keeled: Calculated Risk’s Bill McBride is still not on recession watch.

Setting the Stage: The Fed didn’t raise rates at their November meeting but certainly indicated that they are open to doing so in December.  See Also: The Fed’s latest statement indicates that they are not going to target inflation rates above 2%.

Commercial

Going Strong: Chinese investment in US commercial real estate is still on the rise.

Residential

Put a Lid on It: Low FHA limits are killing home building in California’s secondary markets.

Imagine That: San Francisco home sales surged in September thanks to a large supply of newly-completed condos.

The Oracle of Home Building? Berkshire Hathaway just purchased the largest home builder in Kansas City.  It’s the just the latest purchase for Warren Buffett who has been buying up builders in the south and Midwest.

Profiles

Ain’t No Free Lunch (Or Shipping): Why the free shipping that you love so much from online retailers is mostly a lie.

Shocker: This years Black Friday deals will probably be exactly the same as last year’s Black Friday deals.

Subprime Redux: Rising automobile repossessions show the dark side of the car buying boom.

SMH: The University of California at Irvine, which is in Landmark’s back yard wants to be the Duke basketball of online gaming (aka video games).  Ok, fine but can they please stop calling it a “sport”?

Chart of the Day

ie-permits

WTF

Hero: A woman sustained burns after causing a fire by farting during a surgery, igniting a laser.  Pain is temporary but glory lasts forever.  See Also: Ten people who were arrested for farting.

Guaranteed Contract: Former NBA star and certified crazy person Gilbert Arenas just received the final check from the $111MM contract that he signed in 2008. If you’re not familiar with Arenas, he once got into a locker room altercation with a teammate that involved a firearm and hadn’t played in the NBA in nearly 5 years. Great investment. (h/t Tom Farrell)

That’s Going to Leave a Mark: A drunk 28-year old Florida man fell out of his pickup truck on the way home from a strip club and immediately ran his leg over before it crashed into a house.  He’s apparently still at large.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links November 4th – Who’s On First?

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 June 17th – WTF

Caddyshackfisher

Lead Story….  Generally, I try to keep this blog focused on national and regional real estate and economic issues (and strange news out of the swamps of Florida).  Ever so often though, a local story comes up that illustrates the bat-shit-crazy nature of entitlement and real estate development in coastal California and the discretionary gauntlet that developers must run in order to get a project approved.  Today is one of those days.

There is a property in Costa Mesa near our office called the Autoplex Strip Mall.  It’s an older project that was built back in the 1950s or 1960s (I’m guessing) that has several automotive repair shops, small restaurants and gyms as tenants.  It’s a bit of a hodgepodge to say the least.  It’s also at the foot of the John Wayne Airport runway. Seriously, planes are taking off over your head and the runway ends right across the road.  I want to be upfront about three things here: 1) I know one of the owners well but have actually never discussed this project with him (I first became aware of it about a week ago when a tenant was handing out flyers – we’ll get to that later); 2) One of the sandwich shops in the center is a Landmark favorite and we go there at least twice a week – we do not want to see it go; and 3) Landmark is not involved in current or future financing of the property at this time.

Now that we have that out of the way, the center has become financially unsustainable due to the decline of the auto tenants that dominate it, due in part to dealerships incentivising repair services and parts in house.  As such, the owner made the strategic decision around a year ago to process a zoning change and redevelop the property as self storage along with a food hall concept that I believe is modeled after 4th Street Market in Santa Ana.  The owner proposed a sustainable structure that would reduce traffic, improve curb appeal and make the property economically viable in the future.  They also gave the tenants advance notice last August rather than evicting them before the process as many landlords do when they are re-developing.  Groundbreaking wouldn’t happen until at least October, 2017.

On the surface, it looks like the owner did everything right:  he left the tenants in place to give them plenty of time to find a new locations, designed a sustainable, aesthetically pleasing building that provides amenities that the area needs, reduces traffic impact and is economically viable.  But doing things right doesn’t count for much when it comes to the bizarre and often borderline-capricious world of land entitlements in California.  As the Daily Pilot reported, the project lost a 4-1 vote at planning commission:

The Costa Mesa Planning Commission recommended Monday that the City Council deny a proposed 744-unit self-storage project, saying the developers should do more to soften the blow for business owners who would be displaced by the project.

Commissioners voted 4-1, with Chairman Robert Dickson dissenting, to advise the council to reject plans to demolish the 37,883-square-foot Autoplex strip mall at 375 Bristol St. and replace it with a two-story facility with about 98,800 square feet of storage space, plus a freestanding 5,000-square-foot food hall and a 1,200-square-foot management office.

A project getting shot down at the Planning Commission level is not newsworthy in and of itself.  It happens all the time.  In fact, Planning Commission merely makes a recommendation to the City Council and Council then gets the final vote on whether or not the project gets approved.  What is unusual here is why this proposal got shot down.  Again, from the Daily Pilot (highlights mine):

Commissioners repeatedly praised the project’s design but were concerned by the strident opposition of Autoplex tenants whose shops would face the wrecking ball if the proposal moves forward.

“I have a lot of trouble approving this project, not because there are deviations with it or because I think it generates traffic or that it’s too tall, but because I don’t think we’ve done enough good-faith efforts to deal with the ramifications of the project,” Commissioner Colin McCarthy said.

So the Planning Commission denied a project, not because it was poorly designed or didn’t fit the surrounding area but because they had concerns about the existing commercial tenants in a complex that isn’t economically viable.  Apparently the Costa Mesa Planning Commission missed the 8th grade civics class where property rights was discussed.  How did the tenants manage to put so much pressure on Planning Commission?  They put together an organized campaign and were handing out fliers to their customers asking them to write emails to the Commission in order to oppose the project.  I know this because I received one.  But it gets even worse.  Planning Commission actually asked project spokesman Paul Freeman whether relocation assistance had been considered for displaced businesses.  Mind you, this isn’t a situation where a developer is tearing down affordable apartments to build a new tower, displacing long-time residents who can’t afford new housing in the area.  These are commercial tenants operating for-profit businesses in a center that someone else owns that is becoming economically obsolete.  When asked for comment about relocation assistance, Mr. Freeman sounded understandably frustrated:

“We haven’t discussed that and I don’t know what precedent there is for that.  At the end of the day, what do we have? We have a property owner making a decision that the current business model is not sustainable. And what have we brought in? We’ve brought in a project that has less traffic, no variances. It increases the most popular uses, the food, and is a really beautiful building.”

In an added bit of absurdity, commissioners acknowledged that the property owners have a right to redevelop the property (at least they got that part right) but still held on to the notion that the tenants somehow come before that right.  In an email to the Daily Pilot, Mr Freeman wrote that it seemed that the property owners were being

“Effectively punished for doing the right thing. Rather than kick out the tenants immediately and go to the city with a plan to redevelop empty buildings, they chose to give years of notice and promise to pay in the event of early terminations.   The commissioners said they loved the project except they couldn’t support it owing to the tenants’ opposition, which commissioners took as a measure of the owners’ failure to do what they should have done to ‘work things out,’ I’ve rarely seen anything like it.”

 The moral of this story is that no good deed goes unpunished in the wacky world of California entitlements.  Ironically, the landlord would have been better off servicing the tenants with termination notices rather than letting them stay in place while entitlements were being processed, leaving them to effectively organize their opposition.  The leases between the Landlord and Tenant should govern the rights of each party, not Planning Commission which should stick to reviewing projects relative to zoning and design conformance with surrounding neighbors rather than sticking it’s nose where it clearly doesn’t belong.  Hopefully Costa Mesa City Council overturns this nonsense in short order.

Economy

Stuck in the Mud: As expected the Fed didn’t raise rates at their June meeting.  In addition, Janet Yellen acknowledged that the forces holding rates down may be around for a long time, causing the Fed to rethink the anticipated pace of future increases. The 10-Year US Treasury Bond is now at it’s lowest yield since 2012.  See Also: The German 10-Year bond yield dipped into negative territory for the first time on record this week which begs the question: is German government debt riding a bubble?

Wage Rage? Despite the latest blah jobs report, the Federal Reserve Bank of Atlanta’s wage growth tracker is indicating that the labor market is tightening which should lead to higher wages.

Black Box: China’s 134 city commercial banks which hold 15% of the nation’s commercial banking assets are piling into opaque investment products as bad loans are increasing. This financial engineering could lead to catastrophe if credit quality continues to decline.

Residential

End Around: The California Environmental Quality Act or CEQA has long been utilized as a weapon against new development by NIMBY’s, environmentalists and extortionist attorneys.   But developers are fighting back.  Their newest weapon?  The ballot box.

Nowhere Near the Top: Real estate licensees boomed back in the bubble days.  As Calculated Risk shows, despite increasing prices, they are still way down (31.9% for agents and 11.8% for brokers) from the highs.

On the Ledge?  Luxury urban housing is one segment of the market that has performed quite well in this cycle.  According to Chapman University Economist Joel Kotkin, it was largely built on a myth: that wealthy retired Baby Boomers were going to move to urban markets in droves.  In reality, there has been more migration by Boomers to the suburbs than there has to the city even as the luxury urban pipeline continues to expand.  The buyers (and renters) of the luxury urban units are often wealthy foreign nationals, a source of demand that can change based on several factors including capital controls and currency fluctuation versus the dollar.  Foreign demand is waning and Kotkin believes that the luxury urban market will soon be on the ropes. Contra: How an influx of younger, wealthier residents has transformed US cities.

Profiles

Linked Up: Microsoft bought Linkedin for over $26 billion this week in a transaction that may have been more driven by Linkedin’s reliance on stock-based compensation of the than many realizee.  See Also: Why is Microsoft borrowing money to purchase Linkedin when it has $100 billion of cash on it’s balance sheet?  Taxes.

Shake Down Street Vendors: Street vending in NY was once a path to a better life for many immigrant entrepreneurs.  However, the black market for cart permits, spurred on by city over-regulation and limits to the number of permits issued can cost a vendor tens of thousands of dollars a year often traps would be entrepreneurs in a spiral of low wages that’s virtually impossible to escape.

Chart of the Day

WTF

He Who Smelt it Dealt It: A smelly fart in a Key West bar led to a brawl, because Florida. See Also: A Florida man’s flatulence in bed resulted in a can of pepper spray being discharged and the arrest of his wife.

Fairy Tale Romance: Meet the pig and kangaroo who have been carrying on an illicit affair on an Australian farm for more than a year.  I honestly can’t do this justice with words so I’m going to post a couple of pictures.

A Sydney student photographed a kangaroo and a pig getting intimate while on a research trip to the Northern Territory Mr Frazer said when the kangaroo was 'finished' the pig tried to jump on his back to 'reciprocate'

FAIL: A few years ago, villagers in Xianfeng, China brought in 73 of macaque monkeys to live there in order to increase tourism.  It didn’t work but the monkeys don’t seem to care.  Their numbers have multiplied to 600 and they have now overwhelmed the village, damaging crops and biting tourists.

That’s One Way to Deal with It: A New Mexico man set fire to his apartment to avoid escape his neighbors’ loud sex.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links June 17th – WTF

Landmark Links April 29th – The Fix is (Maybe) In

pete-rose-as-envisoned-by-someone-with-no-eyes-and-no-soul

Lead Story…. Earlier this month we linked to a story about how the already-reeling CMBS market was about to take another hit via a “risk retention” provision due to take effect later this year that would take a big chunk out of issuer profitability.  The House Financial Services Committee voted on a bill dubbed the Preserving Access to CRE Capital Act which would lessen the potentially devastating impact on CMBS.  It passed with bi-partisan support:

The bill would exempt single-asset or single-borrower CMBS from the risk retention rule. It would also make it far easier for CMBS pooled together from different borrowers to get an exemption, for example by scrapping term requirements.

Pretty much every commercial real estate trade group in the US supports this bill for good reason according to Konrad Putzier from The Real Deal:

In February, turmoil in global bond markets and the prospect of risk retention rules combined to drive mid-sized CMBS lender Redwood out of business and led to broader concerns over the health of the CMBS market. “We have concluded that the challenging market conditions our CMBS conduit has faced over the past few quarters are worsening and are not likely to improve for the foreseeable future,” the firm’s CEO Marty Hughes said in a statement on Feb. 9.

Bond markets have since calmed. The spread between 10-year Treasury swaps and most types of CMBS bonds fell between February and April, according to Trepp.

But the onset of risk retention could drive spreads up again at the worst possible time. A staggering $99.47 billion in U.S. CMBS loans are set to mature in 2017 – up from $52.42 billion this year – according to a recent report by Morningstar Credit Ratings. 46.9 percent of those loans have a loan-to-value ratio of 80 percent or more (see chart above), and Morningstar reckons “successfully refinancing many of these loans will be very difficult without sharp improvement in cash flow through 2017.”

It still needs to be voted on by the full House but this is a step in the right direction.  If lawmakers decide that they want to crack down now to lessen future risk of this sort, it could lead to some very rough times for the industry with the mountain of maturities in 2017.  Stay tuned…. (h/t Ethan Schelin)

Economy

Casino is Open for Business:  For those of you who haven’t noticed, commodities from oil to metals have rallied hard over the past few weeks, leading in part to the Federal Reserve openly pondering whether or not to raise rates in June.  However, fundamentals haven’t really changed.  Commodity markets are still oversupplied and economic data from both China and the United State is still soft at best.  Rupert Hargreaves over at Value Walk explains what has changed: Chinese investors are pouring money into the commodity future casino betting on more infrastructure stimulus:

It has since been touted that the tidal wave of money hitting commodity futures could be from the legions of private investors in China who are looking for somewhere to park their excess cash or gamble with.

This new market phenomenon coming out of China is something Bank of America Merrill Lynch’s China equity strategy research team looked at last week in a report titled, Commodity futures, Game of Thrones?….

….As China’s economic outlook is still extremely uncertain and investors are reluctant to invest in any real businesses, they have been shifting money around to invest/speculate in various assets that they believe have a good chance of increasing in price. China’s A-share rally, corporate bond rally and most recently the spike in demand for properties is possibly all the evidence you need to support this view.  Add loose credit conditions, margin trading and a small market that’s relatively easy to manipulate into the mix and you get all the right conditions for an asset bubble.

The BAML report sited above used this chart to illustrate the point of just how much money is pouring into the Chinese commodity futures markets:

Commodity BoA chart one

 

 

 

 

 

 

 

 

 

The reason that I’m posting this is twofold: 1) Sometimes fund flows between asset classes or rank speculation is more important than fundamentals in the short or even medium term; and 2) This sort of thing could have a very real impact on the US economy if it persists and the Federal Reserve starts to see the impact of higher commodity prices in real inflation data.  In other words, don’t believe everything that you see.  See Also: In (not at all) coincidental news, commodity hedge funds are hot again.

Avoid at All Costs: In a sign of just how much tech companies are shunning the public markets, there could be more tech de-listings than IPOs in 2016.  See Also: Tech companies are raising money under “dirty” structured deals with toxic terms in order to maintain sky-high valuations and avoid going public as VC investment continues to wane.

Commercial

On the Ropes: Suburban malls are hot garbage right now as anchor tenant department stores are closing up in droves, often causing a reduction in foot traffic that kills off other smaller retailers and results in virtual retail ghost towns.  This may not be an issue for high end retail centers but I can’t imagine a worse landlord situation than a mall anchored by Sears, JC Penny, KMart, etc.

Residential

Last One In: I’m generally a huge fan of the OC Housing News site.  This has to be one of Larry Roberts’ (Irvine Renter) best posts ever:

Whenever a family buys a new house, the builder constructed that house only because no local opposition group was strong enough to prevent its construction; however, once new homeowners move in, many of them immediately adopt the belief that traffic congestion is out of control and any new development will ruin the character of their neighborhood, so these nimbys band together to prevent others from obtaining the same benefit they enjoy. Through willful ignorance, these new homeowners fail to comprehend the hypocrisy of this attitude and behavior.

Undue Risk: Believe it or not, Turkey has the world’s best performing housing market right now despite social unrest and the myriad of problems associated with sharing a border with Syria.  Generally speaking, Turkish borrowers are lightly leveraged and have an extremely low rate of default.  However, the Turkish home building market is beginning to show some serious signs of distress with sales slowing, incentives increasing non-performing development loans on the rise.  Why, you ask?  For one, developers are getting way, way over their skis in terms of leverage.  From Bloomberg earlier this week:

The share of Turkey’s borrowing represented by developers is higher than at any time in the last decade, and represents almost a fifth of all corporate loans, according to the nation’s banking association. An increasing portion of those debts is going bad, with the industry’s portion of non-performing loans nearly doubling in the past five years.

“Mortgages are not the problem,” said Ercan Uysal, a banking analyst at Istanbul-based research firm Integras. “Developer leverage is.”

That sounds bad but it gets much, much worse.  It seems as if Turkish developers are also taking currency risk on top of the risk inherent in development in an effort to prop the market up and have now exposed their balance sheets to the whims of the US Federal Reserve.  Turkish developers are taking on debt and then offering below-market financing to home buyers as a loss leader:

To keep sales brisk, builders are helping buyers defray their costs. For instance, at Istanbul’s $1.5 billion Maslak 1453 development, whose name recalls the Ottoman conquest of Constantinople, the developer is offering to secure below-market interest rates and accept a 10 percent deposit — below the 25 percent minimum required for a bank mortgage…..

The dangers of a weakening currency are exacerbated for builders, because they account for a disproportionate share of Turkey’s foreign-exchange borrowing, Narain said. That creates a risk when their income is mostly in lira, a currency whose value eroded 20 percent over the course of last year.

Developers made up a fifth of the companies gaining bankruptcy protection from creditors in the first three months of this year, the most of any industry, Uysal said, citing figures from sirketnews.com, which compiles the data.

You read that correctly, they are borrowing in foreign currency (mostly dollars) when their revenues are in lira.  This would be very profitable if the dollar fell in value vs. the lira. That hasn’t been the case lately as Federal Reserve moves and rhetoric have driven the dollar higher, hitting Turkish developers hard.  I have never been involved in a real estate deal in Turkey but I can assure you that this doesn’t end well.  The developers are essentially taking foreign exchange risk in order to offer below market financing to buyers to boost absorption.  Development is risky enough without trying to take a currency bet to boost sales.

Not What it Used to Be: The wealth effect from rising home prices has been cut in half:

But See: Why the wealth effect is bunk.

Profiles

A Whale of a Problem: A 60,000-pound grey whale washed up on the beach at Lower Trestles San Onofre State Beach last weekend (it died of natural causes), drawing tourists and locals to pay their respects and take pictures.  Now comes the hard part for the California State Park System: exactly how do you get rid of a 30-ton rotting whale carcass that’s attracting sharks and stinking up the beach?  According to one resident: “It’s like the worst garbage smell you can think of,” he said, his eyes watering. “I almost threw up. It’s like death.”  Exactly what you want on your beach as we head into summer.  Apparently, the beach isn’t wide enough to bury the whale and it can’t simply be pushed into the ocean because the currents will likely push it back on the beach again.  The solution that officials have come up with is to chop it into pieces and take it to a landfill. As disgusting as that sounds, there aren’t many options and the situation is only going to get worse the longer that the whale stays on the beach decomposing. On the bright side, at least officials appear to have learned from past failures.  Back in the late 1970s, Oregon state highway officials strapped dynamite onto a dead rotting whale and attempted to dispose of it demolition style. That ensuing disaster that crushed a car 1/4 mile away lives on in what I still consider to be the most un-intentionally funny news segment ever aired.

Chart of the Day

Submitted from Visual Capitalist

Visualizing Data: How the Media Blows Things Out of Proportion

WTF

Employee of the Month: Watch a disgruntled airport employee destroy a jet with a backhoe.  I’m guessing this happened in Russia  mainly because this seems like something that would happen in Russia.

That Wasn’t on the Menu: Customer found a deep fried chicken head, beak and all in their meal at a fast food restaurant in France.  Let this be a reminder to all of you that fast food is disgusting.

Well Paid: Meet the Minnesota auto body shot owner who (allegedly) compensated his employees with meth bonuses.

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Landmark Links April 29th – The Fix is (Maybe) In