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

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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 June 24th – Follow the Money

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Lead Story…. Urban Dictionary (my go to source for all things slang) defines a tiger mom as:

“A mother who is overly strict with her child in order to foster an academically competitive spirit.  This form of upbringing is intended to direct a child towards financially successful careers at the potential risk of feeling emotionally unfulfilled and/or socially inept.”

Just my opinion, but it sounds like a rather terrible way to grow up.  I’ve always assumed that children who were raised in such an environment would be the ones most likely to end up driving the porcelain bus in a dorm bathroom once they go to college and finally obtained their first taste of freedom from overbearing parents.  However, there is a relatively new trend where tiger moms, typically from China are following their children to college to ensure that their offspring’s hard work doesn’t get flushed down the drain in a torrent of booze and late night parties. From The Economist (h/t Jeff Condon):

EVERYONE knows that Chinese students are flooding American campuses. Less widely known is that their mothers are coming, too. Last year 394,669 pupils from China were studying at American universities, secondary and primary schools, the largest contingent of all international students. Increasingly their parents are moving in with them, buying local properties or investing at least $500,000 in businesses to try to qualify for a green card.

The tiger mums usually come to America alone, leaving their husbands behind. “When I wasn’t here, my son would survive on instant noodles and energy drinks for several days without eating fruit or vegetables,” says Wenxue Hu, mother of a masters student studying applied mathematics at the University of Pennsylvania. She gave up her job as a corporate finance director in Shenzhen to cook for him in Philadelphia. Through a local church she met other Chinese tiger mums, most of whom entered with a tourist visa that allows them to stay up to six months each time. New Haven, Connecticut now boasts a “Yale Chinese grandparents’ village”, with 15 residents. The old folk live under the same roof as their children, mostly PhD and post-doctoral students at Yale who are too busy to take care of their own offspring.

On one hand, I suppose this keeps kids more focused on school helps to make good on the massive investment the college represents.  On the other, college is supposed to be the time when young people strike out on their own, make mistakes and learn from them – rather than continuing to live under the thumb of their mothers.  As you can probably imagine, this is having a massive impact on housing markets in markets around top universities.  Again, from The Economist (highlights mine):

Last year China became the largest source of foreign property investment in America, pouring in $28.6 billion. Roughly 70% of inquiries from the Chinese indicated that education was the chief motive, says Matthew Moore, president of the American division of http://www.juwai.com, a Chinese international-property website. In Chicago estate agents anticipate more Chinese parents buying expensive condominiums. In Irvine, California, about 70-80% of buyers of new-builds are Chinese parents whose children attend, or plan to attend, nearby colleges, says Peggy Fong Chen, the CEO of ReMax Omega Irvine. Other college towns such as Los Angeles, Seattle, Boston and Dallas, see a similar trend.

The Irvine statistic surprised me a bit.  Irvine has long been a hot spot for Chinese buyers and much of that demand has been driven by it’s phenomenal schools.  However, I’d always assumed that the demand was driven more by it’s public schools than surrounding colleges such as UC Irvine.  Then again, UCI’s student body is 46.2% Asian and 11.7% international with a student body of around 24,500 undergrads and 5,500 graduates so it’s not hard to see how this could drive demand for housing if there are 3,500 foreign students at UCI and even a small percentage have parents who move with them and buy a home. According to The Economist, buying a house can make good financial sense, as well as  cultural sense for a Chinese investor/parent:

For the rising middle class in China, parking their wealth overseas also makes good business sense. The near-bubble in housing prices at home and the depreciation of the yuan have made them nervous, so diversification becomes pressing. As property prices shoot up in some college towns, more Chinese buyers are drawn in, says Susan Wachter, a real-estate professor at the Wharton School of the University of Pennsylvania. Ownership, rather than renting, becomes more attractive, because their children can rent extra bedrooms to classmates to cover utility and tax bills, while also being able to benefit from future price rises.  Some tiger mums also try to help their children get married by making the down-payment or even meeting the full cost. In Chinese culture, owning a property gives a sense of security and helps to attract a spouse.

Coming out of the Great Recession, there has been no better housing bet than going where the Chinese investors want to be.  If their buying demand is really being dictated by higher education, I would imagine that this is a trend that could continue for quite a while, especially given the ever-rising cost of college at top schools and the growing number of newly-wealthy people in China that can afford it.

Economy

Say What? Every now and then, Jose Canseco emerges from his steroid-induced coma, pulls a needle out of his butt and goes on Twitter to impart his wisdom of all things finance – which I try to cover here whenever possible.  This week our roid-addled friend opined on the Brexit vote and the it was everything that you would expect financial advice from Jose Canseco to be. Update: UK citizens declined Jose’s advice and voted to leave the EU.  Market chaos this morning and Jose declined offers to go on air with both Bloomberg and Yahoo finance because they wouldn’t pay him (I’m not making this up. You NEED to follow him on Twitter). 

The Whole Story: We often hear about how the top 1% of Americans is doing dramatically better than everyone else.  While that is true it misses a larger point: the upper middle class (defined as any household earning $100,000 to $350,000 for a family of three) is growing rapidly as well.  According to a new study from the Urban Institute:

“The size of the upper middle class grew from 12.9 percent of the population in 1979 to 29.4 percent in 2014. In terms of shares of total income, the middle class controlled a bit more than 46 percent of all incomes in 1979, while the upper middle class and rich controlled 30 percent. By 2014, the rich and upper middle class controlled 63 percent of all incomes, while the middle class share had shrunk to 26 percent.”

This goes a long way towards explaining why the luxury segment of the housing market has done so much better than lower segments in recent years.  If you don’t have time to read the full report, the Wall Street Journal put together an excellent summary.

70 is the New 65: According to PIMCO, demographics support rates staying lower for longer.  See Also: The yield curve is nearing its cycle low.

Commercial

Sea Change: Someday we are going to talk about department stores the way that our parents talk about switch board operators.  They are being eaten alive by internet retailers.  Great news for class-A distribution warehouse space.  Not so great news for retail.  I could go on but this chart from Bloomberg tells the story better than I can:

Residential

Non-Starter: When is a starter home not a starter home?  When no one can afford it.  Yes, inventory is extremely low nationwide but in some markets buyers are dropping at a quicker pace than inventory is, leading to softening prices.  From Trulia:

One might think that falling starter home inventory over the past year would cause starter home prices to rise, and for the most part, that’s what has happened in most markets. In places like Portland, Dallas, and Colorado Springs, Colo., large decreases in starter home inventory has led to double-digit increases in starter home prices. However, price movements aren’t just determined by changes in supply (inventory) – they’re also affected by the number of home buyers actively bidding on homes. In fact, in 20 of the 74 markets where starter inventory has dropped, demand has fallen at faster pace and so prices have fallen.

For example, starter home inventory has fallen by about 20% of the past year in both Columbia, S.C., and Charleston, S.C., but starter home prices have actually fallen in these markets by 0.8% and 5%, respectively. And these two cities aren’t outliers – 18 others large metros that have experienced a drop in inventory have also seen price drops, including New York, Kansas City, and Montgomery County-Bucks County-Chester County, Pa.

Don’t get too excited though if you’re a prospective homebuyer.  Trulia found that affordability is still getting worse in many of the hottest markets:

Starter homes continue to experience the largest drops in inventory over the past year, followed closely by trade-up homes. While starter home buyers in California have seen some of the largest decreases in affordability, those in central Florida are non-California metros in the West are starting to feel their pain. But a fall in inventory for trade-up and premium homes is occurring at a time when demand for those homes is rising, so those buyers are feeling a tighter pinch than starter home buyers in markets where demand has fallen enough to keep prices from rising.

 

Profiles

Unintended Consequences: Rule 34 states that: “If it exists, there is porn of it – no exceptions.”  As skeevy and disturbing as that sounds, it’s been scientifically proven to be pretty much true.  There is a corollary to Rule 34 that if you provide free wifi, it will be used to watch porn.  This should be obvious by 2016 unless you are incredibly naive, which the City of NY apparently is.  The city announced an initiative earlier this year to convert former payphones in Times Square to wifi-enabled screens to provide free internet to citizens.  But well-meaning project went horribly wrong when homeless men figured out that they could use the ill-conceived devices to stream porn in public.  For those of you unaware of the history of Times Square, it used to be a haven for peep shows and seedy adult video stores until it was cleaned up back in the 90s, thanks mainly to then-mayor Rudy Giuliani.  From the NY Post (for whom this story was tailor-made):

“I used to come here in the ’70s, and I remember thinking Times Square was as skeezy as you could get, but I was wrong,” said former New Yorker Richard Herzberg, 61, who now lives in Dallas, Texas.

“This is as skeezy as Times Square could get. I mean, in the old days there was plenty of porn, but you could only see it behind closed doors. So at least there was that level of modesty.”

To their credit the city responded by installing filters (which will likely be compromised any day now).  As you can imagine the homeless guys weren’t too happy about losing access to their free porn:

“I was watching porn on one of them things on, like, Saturday,” said a homeless man who identified himself as Hakeem, 44.

“Then on, like, Monday or Tuesday, all of a sudden I couldn’t,” he added.

“Once word got around, it stopped. It sucks, man. It was great.”

Looks like the NYC homeless population will have to find their porn elsewhere for the time being.

Mad Money, Questionable Ethics: Multiple studies have shown that Jim Cramer’s stock picks basically suck and don’t come close to beating the S&P – while taking substantially more risk, yet he continues to use his CNBC show as an infomercial to promote his $59.95/month stock picking service.

Of Buggy Whips and Floppy Disks: Apple is indicating that headphone jacks are on the way out.

Chart of the Day

Growth of Upper Middle Class

 

WTF

I Wonder What He Had For Lunch: A Swedish soccer player was ejected from a game recently for ripping a fart.  I know that soccer players are notorious for being drama queens but this feud between the ref and player over whether it was intentional or not is next level (h/t Tom Farrell):

The referee explained himself. “I perceived it as deliberate provocation,” Kako said, adding that he’d once given a player a yellow for peeing by the field as well. “He did it on purpose and it was inappropriate. Therefore, he received a yellow card.”

Ljungkvist then re-litigated the matter to Aftonbladet, which definitely is a newspaper. “To provoke anyone with a fart is not particularly smart or normal,” he said. “It’s nonsense – I just broke wind and got a red card. I spoke to the referee afterwards, I was annoyed, but there were no bad words. I just said he was a buffoon.”

Follow Friday: Every now and then I stumble across a must-follow Instagram or Twitter account.  City Subway Creatures (@subwaycreatures), an account that posts pictures of the odd folks who ride the NYC subway system is one such account.  Follow them today.  You won’t regret it unless you don’t have a sense of humor or are easily offended – then don’t both.

Indecent Exposure: Meet the inmate who stripped naked and ran into a court room in the middle of a trial to yell: “Court is back in session“!  He is now facing additional charges.

Special Delivery: Meet the Wyoming man who was arrested for going door-to-door selling cocaine and meth. When asked for comment, he replied “it wasn’t going to sell itself.”

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links June 24th – Follow the Money