Landmark Links November 15th – Restraint

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Lead Story… To say that the past few days have been a shit storm in the fixed income market would be an understatement.  As I wrote last week, we’ve spent the past 6 or-so years becoming conditioned to believe that every major financial or geopolitical disruption would result in a flight to quality trade into US Treasuries, lowering borrowing costs for real estate.  Last week’s surprise election result obviously broke that trend and, even the few people out there that got the election result correct mostly got the bond market response incorrect.  As such, are now in a position where things could dramatically change in the lending market which would obviously have profound implications on real estate in general and housing in particular.  Interest rates are already up substantially as talk about potential tax cuts, a mountain of infrastructure spending and de-regulation of mortgage markets abounds.  What seemed to be a grindingly slow and somewhat boring market just a couple of weeks ago is now changing rapidly, leaving some worried and others excited.

But here’s the thing: no one really knows what this new administration is going to look like in terms of economic or housing policy or how it will interact with a congress that, although of the same party was often hostile towards the President-elect during the election.  Political campaigns have become little more than 2 years of mudslinging and bullshit and the one that mercifully just finished was far worse than most.  Markets appear to be jumping to the conclusion that it’s going to be easy for everyone on the right side of the isle to simply come together after all of their inter-squad fighting and slam through broad changes.  This line of thinking largely discounts that there is a very narrow majority in the Senate while disregarding the fact that there are major, major disagreements on key issues between the incoming administration and legislative branch.  Maybe they suddenly come together and do everything that market participants seem to believe they will, leading to higher inflation.  Maybe they don’t.  The fact is that we simply don’t know at this point.

Oaktree’s Howard Marks is one of the most brilliant and successful investors in the world.  His response to the election and policies that may or may not be enacted in the next 4 years is something that everyone should read.  From Financial Review (emphasis mine):

“I am in the ‘I don’t know camp’. We should not rush to conclusions,” the founder of $US100 billion ($131 billion) fund manager Oaktree told the audience at the Sohn Hearts & Minds Investment Leaders conference in Sydney on Friday.

“On paper he should be a pro-business president and objectively speaking he should be more pro-business than Hillary Clinton would have been,” Marks said, but added he will be watching to see which policies Trump will pursue and will be able to pursue and who he appoints.

“He said lots of things people didn’t like but he said some supportive things for the business environment such as cutting taxes. The negative is his view on trade.”

Another positive is Trump’s pledge to invest in America’s infrastructure.

“It will be a nice thing and put people to work but I don’t think it will redirect the trajectory of the economy, but it’s a plus and something people can agree on.”

The rise of populism would become a feature of the US political and economic environment.

“The Trump candidacy didn’t make people angry – it touched on an anger and a division.”

“Globalization and automation has cut into jobs and is going to cut in further.”

He feared that sustained lower growth will be a challenge for the nation.

That’s one of the world’s most successful investors freely admitting that he doesn’t know what’s going to happen with the economy from a policy standpoint.  If only all of the talking heads on the TV and internet could show such restraint….

The crux of the matter is this: infrastructure spending, tax cuts and financial de-regulation are all inflationary.  Protectionist trade policy and tarrifs are deflationary.  At this point, there is no way to tell whether the pro-growth or populist side will win out.  There is a fine balance to be struck here.  During the Bush administration, the regulatory pendulum swung too far towards de-regulation.  The result was banks gone wild and, eventually the Great Recession / housing crash.  Somewhat predictably it swung hard in the other direction during the Obama administration, leading to retulatory stagnation, a lack of bank credit and incredibly low interest rates.  My hope is that the new administration and Congress ease up on regulation enough to get banks lending again but not so much that we go back to the bad old days of 2005 which was basically the lending equivalent of the wild west.  IMO, we need policies that are more pro-growth but not at the expense of stability. To be sure, it’s a difficult tightrope to walk. We don’t know if it will happen or not but I’m remaining open minded until I know more.

 

Economy

Glass Half Full: Higher interest rates mean long term gain at the expense of short term pain.

Positive Trend: The prime working age population (ages 25 – 54) is finally growing again which should help to provide a positive economic tailwind.  See Also: 40-somethings are the prime drivers of US productivity but no one really understands why.

Breaking Away? As you can imagine, a large portion of Silicon Valley was not happy with the results of last week’s election.  Several tech titans got together and are now working on an initiative to put a referendum for California secession on the 2018 ballot.  Here’s why that would be an incredibly dumb idea from an economic standpoint.

A New Direction?  As I previously wrote, last week’s Election results have traders betting on more inflation in the near future.

Commercial

Giving Away the Farm: Manhattan landlords are offering more concessions than ever due to an oversupply of available apartment units.

Virtual Reality: Some online retailers are turning to physical locations in an effort to connect with consumers better.

Residential

Paying Up: A post-election Treasury sell-off that resulted in higher mortgage rates has home affordability in the United States waning.

Bullish: While the nation as a whole may be divided, construction firms are quite bullish on the result of the presidential election.

New Direction?  Silicon Valley is the poster child for the housing affordability crisis in the US.  However, the election of several pro-development candidates in local city council races should be a positive for a region that has become so expensive that it’s not uncommon to see Tesla’s in trailer park driveways.

Chart of the Day

More sensitive than an America college student.

Here’s what happens to values when rates rise 1%

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And here’s what happens to values when they fall 1%

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WTF

Good Boy: A town in Minnesota re-elected a dog as mayor for a third term.  In related news, if anyone asks me what leaders I admire I’m going to direct them to Duke the Great Pyrenees.

Cat Lady: A woman in Texas was arrested last week after police discovered three tigers, a cougar, a skunk and a fox in her house along with her and her 14 year old daughter.

Bottoms Up: A new study found that drinking a beer a day helps prevent stroke and heart disease.  You’re welcome.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links November 15th – Restraint

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 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 30th – Size Matters

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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 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

Landmark Links May 6th -Exodus?

Rush to the Exit

Lead Story… We’ve been talking a lot about the Bay Area market over the past few weeks and there are a few signs that some of the most egregiously expensive ones like San Francisco are nearing a breaking point where even well-paid employees can’t afford to live there anymore and may begin to leave.  A survey by the Bay Area Council published earlier this week found that 34% of Bay Area residents are considering leaving due to high housing costs and traffic.  I know that I’m starting to sound a bit like a broken record but….

“We can whine about this, or we can win by solving our traffic and housing problems,” Carl Guardino, president of the Silicon Valley Leadership Group, told The Mercury News. “The last time the Bay Area had seemingly solved its traffic problems was the worldwide recession of 2008. A recession is not how we want to solve our traffic and housing problems.”

I think it goes without saying that relying on massive global recessions to correct your cost of living and traffic issues is far from a viable long term solution.  For years now, service workers, educators, policemen, firemen, etc have been priced out of these and similar markets.  It should not come as a surprise that Bay Area school districts are facing a teacher retention crisis along with their housing crisis.  Teachers haven’t been able to purchase homes in the area for years.  Now they can’t afford to rent either.  Their salaries aren’t adequate to justify a long commute.  Cities have been aggressively increasing teacher pay but they can’t keep up with cost of living increases:

For a teacher earning $73,000 — the average teacher salary in the nine-county Bay Area — a rent payment of $1,800 would eat up 30 percent of monthly income. And just finding a rental at that price would be very difficult in this economy. The average monthly price for studio apartments in the Bay Area is $2,137, according to RealFacts, and two-bedroom, two-bath apartments are going for $2,850 — and for much more in hot markets.

“Every year we have a problem. It’s always a challenge to make sure that the schools are staffed,” said Jody London, an Oakland Unified school board trustee. “But with the rapidly rising housing market, the fact is it’s crazy right now. And it’s getting harder for teachers to stay in Oakland.”

And that’s in Oakland, which, while expensive isn’t close to Silicon Valley or San Francisco.  So how do you fix things?  Beyond building more housing  (which many younger residents are now in favor of much to the dismay of aging hippy NIMBYs), one idea is dramatically build out infrastructure to the outlying suburbs in order to fix the commuting issue and add more units where it is more affordable.    The BART is already being extended but this would require something far larger (and more efficient for that matter) in order to work.  From the Bay Area Council survey mentioned above:

Rather than building more housing in the Bay Area, 60 percent of residents say it should be built outside the region, with 84 percent saying they support stronger transportation networks between the Bay Area, Sacramento and other areas in the Central Valley to take pressure off regional housing supply.

“This is an understandable reaction to decades of failing to keep pace even minimally with the Bay Area’s housing needs and the transportation to support it,” said Jim Wunderman, President and CEO of the Bay Area Council. “There’s now an entrenched misperception that our region doesn’t have the capacity to add the housing we need. What’s unfortunate is that pushing housing outside the region still doesn’t solve the problem of supply and affordability in the Bay Area. It simply means that fewer working families and workers in lower-income jobs can afford to live here. It hurts the diversity of our region and our economy. It also means workers are commuting longer and longer distances in their cars, which pushes up damaging carbon emissions.”

The issue is that it would cost a fortune, take forever to build and would likely lead to environmentalist/NIMBY lawsuits.  Think of this as a Marshall Plan to fix area housing…assuming that it can actually get done which is, IMHO a stretch.  What I can assure you won’t work is what the City of San Jose is currently doing.  Silicon Valley’s largest city (and the nations 10th largest) has a goal of building 35,000 new units between 2014 and 2023 with 60% of that total being affordable.  Sounds like a great objective until you get into the details.  Rather than incentivizing developers to build more units,  the city is charging them an increased impact fee of $17/sf on all housing built by those evil “for-profit” developers which will then go into subsidized housing, which is apparently what San Jose means when they say “affordable” since it gets incredibly difficult to build market rate housing that’s anything close to affordable when you start layering on fees. Naturally, developers are mostly staying away and the city built only 426 units of affordable housing last year, around 20% of it’s lofty goal of 2,100/year.

Back to my broken record: the only way to fix the affordability crisis is to build more units to satisfy the demand in the region.  That won’t happen so long as cities continue to hike fees to the moon and make the entitlement process increasingly difficult.

Economy

Leading Indicator: The Wall Street Journal has seemingly cracked the code to the health the tech sector: sales of ping pong tables from a store in San Jose.  Lets just say that the tables have turned.  I bet you can find a great ping pong table on Craigslist though.

How Low Can You Go: Earlier this year, the dollar was on a tear as the Federal Reserve indicated that they would raise rates at least 4 times in 2016.  That likely isn’t happening as a sluggish economy plus mounting financial disasters abroad have made the Fed increasingly dovish, sending the greenback into a tailspin and leaving it at a 15-month low.  Interest rates and mortgage rates have both stayed low now that sluggish growth appears here to stay for the foreseeable future.  If dollar depreciation continues, one must wonder if a resurgence by foreign investors is in the cards.

Commercial

Market Update: Our friends at JCR Capital see market fundamentals disconnecting from tepid investor appetite, creating opportunity.  As always, their quarterly market commentary is a must read.  It goes hand in hand with our comments about the land market versus the home sale market that we made previously.  In a related story, fundraising for private equity real estate funds is slowing.

Don’t Call it a Comeback: After starting the year off extremely poorly, CMBS loans for multi-family assets are making a comeback, albeit with tougher underwriting standards.

The Commercial Real Estate Market in Once Sentence: FOOP (Fear of over paying) is the new FOMO (fear of missing out).

Residential

Shots Fired: Bill Pulte, the founder and largest shareholder of Pulte Homes had some very pointed criticism of his hand-picked CEO Richard Dugas before the company’s annual shareholder meeting this week. Basically, Pulte accused Dugas, a former protege of being incompetent when it came to monetizing existing land positions, leading to poor company performance and demanded his resignation.  Analysts don’t anticipate Dugas leaving anytime soon.  In recent years, the company has focused on profitability over growth and was mostly sidelined from buying land positions in 2012-2013 when others were active.  Much of this stems from the Centex merger in 2009 according to the Wall Street Journal.  That transaction saddled the new company with a ton of land inventory that they had to write down effectively sidelining them from buying lots at a better basis when the market bottomed out.  They are still sitting on some of those lots today even while out buying more.

Sluggish: The previously-hot million-million-dollar-plus home sale market is slumping. See Also: Some of America’s fastest moving housing markets are slowing down.

Profiles

Hero: The next time that someone asks me why I like dogs more than people, I’m going to send them this:

A four-year-old white Labrador called Dayko has been hailed as a hero after rescuing seven people from the aftermath of the Ecuador earthquake – before dying from exhaustion.

RIP Dayko….and now I need a Kleenex.

Chart of the Day

I’m finding myself wishing that I was seeing more of this….

WTF

Finger Lickin’ Good: A woman in Florida (naturally) reported to local police that a chicken sandwich that she ordered “contained semen.”  Consider this a friendly reminder that fast food is disgusting.  Also, if you absolutely must eat at a KFC, don’t ask for extra mayonnaise.

Mistaken Identity: Villagers in Indonesia were disappointed to learn that an “angel” that fell from the skies is actually a sex toy.  The quote from this article is to good not to post:

The tale begins in Bangaii, days after an auspicious solar eclipse appeared over the region. A 21-year-old fisherman was walking the beach when he spotted a beautiful, lonely angel on the sand. Naturally, he took her appearance as a sign from heaven and he gently bundled her up and took her home.

There, he attired her in a blouse and skirt, which his parents changed daily as a sign of respect. Intrigued by reports (or maybe just really bored), local police visited the house to see the angel for themselves.

There, they made the less-than-holy discovery.

“It was a sex toy,” police chief Heru Pramukarno told a local newspaper.

What was unclear was whether that ruined or made the fisherman’s day.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links May 6th -Exodus?