Landmark Links October 21 – Dense Hypocrisy

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Lead Story… There is little that I enjoy more than reading (or writing) about the hypocrisy of self-important celebrities.  However, one of my primary rules for writing this blog is to avoid politics – unless it’s land use politics (or water politics).  As such, I haven’t had the opportunity to write much about celebrity hypocrisy, despite frequent gnawing temptation to do so.  Today’s blog will be different.

At this point in his career, Leonardo DiCaprio is almost as well known for his environmental activism as he is for his acting, or, for that matter the number of supermodels that he’s slept with.  This is despite the fact that his anti-fossil fuel stance is frequently juxtaposed against his high-rolling lifestyle of flying around the world on carbon-spewing private jets and spending his vacations on yachts rented or borrowed from oil sheikhs, all of which is evidenced by his massive carbon footprint.    However, the above examples may not even be his most egregious examples of hypocrisy since they only deal with his individual actions and lifestyle.  His views on land use politics are far more disturbing and far more destructive from an environmental prospective.

So, now we come to the land use part of this story.  It’s not a controversial notion that the best thing that a city can do to cut down on pollution is build more density in it’s core as higher density in urban centers leads to less automobile use, which leads to less carbon emissions.  If residents are located closer together, there is less need to transport people and goods over further distances.  Therefore energy use is reduced, as well as water usage for that matter since higher density typically means less large lawns to water.  This is roughly as objectionable as someone making an argument that water is wet or that orange juice tastes like oranges.  So, imagine my surprise (end sarcasm here) when I recently read a story on Curbed LA about how self-styled environmental crusader Leonard DiCaprio (among other celebrity “activists”) had signed onto an anti-development campaign known as the Neighborhood Integrity Initiative demanding the following:  From Curbed LA  (emphasis mine):

(1) Direct officials to halt amendment of the City’s General Plan in small bits and pieces for individual real estate developer projects, and

(2) Require the City Planning Commission to systematically review and update the City’s community plans and make all zoning code provisions and projects consistent with the City’s General Plan, and

(3) Place City employees directly in charge of preparation of environmental review of major development projects, and

(4) For a limited time, impose a construction moratorium for projects approved by the City that increased some types of density until officials can complete review and update of community plans or 24 months, whichever occurs first.

This list of demands was presented to Mayor Eric Garcetti.  The group claims that they have enough signatures to get their measure on the ballot should Garcetti not submit to their demands.  This is NIMBYism, plain and simple.  There is just no other way to describe it  From Curbed LA (emphasis mine):

So, quite literally, the single best thing that a city can do for the planet is locate destinations—houses, jobs, grocery stores, schools—closer together so its residents expend less time, less money, and fewer fossil fuels traveling among them.

That’s how LA needs to think about density—as a long-term solution for climate change that will also deliver short-term social and economic benefits.

The problem with anti-density campaigns is that their boosters aren’t thinking about our city in a way that looks beyond what they see on their own block today.

Santa Monica’s anti-density measure, LV, is the most troubling, as it would require a citywide vote to approve any new structure over 32 feet. This would make it politically (and economically) difficult to erect buildings more than two stories tall in a prohibitively expensive city that already has limited room to grow, pushing workers farther and farther away from their jobs.

Again, as stated previously, the fact that increasing density in urban cores is good for the environment is not particularly controversial, nor is it an issue opposed by those on either the right or the left….until it happens near when they live.  In this case, it’s a matter of wealthy hypocrites who claim to be environmentalists trying to stop development because it happens to inconvenience their lifestyle a bit, despite the fact that the development would have a substantial positive impact on the environment that they claim to care so much about.  Again, from Curbed LA (emphasis mine):

Restricting building height and planning for cars goes against everything that environmental leaders and sustainability experts have been saying for decades: If you’re erecting a multi-use structure in a dense, transit-accessible neighborhood with centralized freight delivery systems, the environmental impact of that structure is lessened significantly over time.

Building a two-story building surrounded by a city-mandated parking lot on an extra wide street is not the worst thing you could do for the planet. The worst thing you could do for the planet is codify this kind of development into the land use and planning policies of your city to make building anything else impossible.

That’s why many cities and states are incentivizing dense, transit-accessible development as part of a larger climate-friendly mandate to not only decrease emissions, but also improve public health, clean the air, and slash energy costs.

My broader point here is that you can’t have it both ways.  This isn’t an issue where there is a credible case that increasing density in urban cores isn’t better for the environment than doing the opposite: incentivizing sprawl by making it impossible to build in urban areas.  You can’t be an environmental advocate only when it suits your personal interests and expect not to get called out on your hypocrisy, especially when you stake out as hard-line of a position as DiCaprio has.

Economy

Watching the Horizon: According to Bloomberg, odds are that the next financial crisis will come from depressed lenders, shadow banks or China.

Conscientious Uncoupling: How a massive surge in divorce rates in couples over 50 years old is forcing people to work longer and putting retirements at risk.

Commercial

Rise of the Machines: Industrial robots are driving some major changes in both warehouse design and workforce composition.

Residential

History Lesson: The New York Times published a fairly balanced history of the story behind the prop 13 tax revolt and it’s consequences.

Bad Rap: Luxury condos and apartments get a bad rap when it comes to the increasing cost of housing when restrictive zoning is more often the real culprit.

The Missing Middle: By continuing to focus primarily on housing prices in San Francisco and NY, the media is missing a bigger story – rentals are becoming un-affordable nation-wide for middle class families.

Profiles

What’s the Story?  HGTV has achieved something incredible: a bunch of hit shows with no serialized narrative drama that is the hallmark of the modern successful series.

Video Of the Day: Meet Rox Zee, the Boise State football team’s kickoff tee fetching Labrador Retriever.  In related news, I think that I just became a Boise State fan.

Troll So Hard: Twitter’s infamous army of anonymous trolls played a roll in Salesforce passing on offering to acquire the troubled social media platform.

Farm to Cart: Target is experimenting with so-called vertical farms where produce is grown in-store.

Chart of the Day

WTF

Political Metaphor: A Hillary Clinton tour bus was busted dumping human waste down a storm drain in an Atlanta suburb, resulting in a hazmat team getting dispatched to the site.  If you’ve ever seen National Lampoon’s Christmas Vacation, you are aware that this can end really, really terribly.  On a personal note, I can’t wait for this election season to end.

Revealing Protest: Porn actors (I never understood why they are all called stars) are picketing on the streets in Hollywood to protest a ballot proposition which would impose mandatory condom use for any adult video filmed in the state.  Los Angeles passed a similar law in 2012 that decimated the adult industry, causing permits to plunge from 480 in the year it was passed to just 25 last year.

Pack a Day: Meet Azalea, the chain smoking chimp who has become the star of North Korea’s new national zoo in Pyongyang.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 21 – Dense Hypocrisy

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

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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