Landmark Links October 14th – What’s the Solution?

ken-bone

Lead Story… A pudgy, mustachioed, red-sweater-wearing star was born during Sunday’s Presidential Debate.  Kenneth Bone was selected to ask the candidates one of the final questions of the night and, his earnest question about how to balance fears of fossil fuel job loss with environmental concerns, combined with his appearance resulted in him essentially taking over the internet…and cable news…and late night TV…and leading to a bunch of hysterical memes.  Mr. Bone was somewhat of a breath of fresh air in a night otherwise marred by childish personal attacks and enough bullshit to fill a rodeo ring. He put a serious question on the table at least for a few minutes and acted as a reprieve from all of the tiresome mudslinging.

Unfortunately, housing has played little if any role in this election cycle despite the critical role that it plays in the US economy and the supply and affordability crisis that we are now facing (to it’s credit, the current Administration has at least taken a public position advocating for more much-needed development even while the candidates rarely if ever mention it).  Among the biggest problems facing the industry today is a massive labor shortage.  That got me thinking: what if the housing industry had it’s own Ken Bone at the debate last weekend?  Rather than focusing on energy policy, his question would have gone something like this:

“What steps will your housing policy take to address the construction labor shortage, while at the same time increasing affordability for American families?”

Industry website Constructiondive.com posted a story based on the recent Construction Management Association of America’s National Conference & Trade Show in San Diego that essentially asked just that.  From Construction Dive (emphasis mine):

While the majority of the conversation around the construction labor shortage has focused on the trades, firms are struggling to snag qualified professionals and white-collar workers as well. A nationwide survey of 1,459 contractors — conducted by the Associated General Contractors of America during July and August — found that 69% are having difficulty finding workers to fill hourly craft positions, 38% are having difficulty hiring salaried field positions and 33% are having difficulty hiring salaried office positions.

“We’re already pressed in terms of the ability to service all the clients with what’s currently on the docket, let alone what’s coming,” said Allyson Gipson of Artemis Consulting, in San Diego. She noted that the recession led to a “geographical depletion of talent,” as well as a large void of industry expertise. 

The aging workforce is also a primary concern for construction professionals, as baby boomers are retiring, but a new generation isn’t filling their place.

On the construction services side, the recession brought increased competition as “everybody was scrambling for work,” Gipson said. Interest rates have remained consistently low, energy credit tax provisions have been extended and private sector spending has risen. All these factors have spurred a boom in multifamily, highway, retail and office construction, she noted.

However, with that increased construction spending comes more demand for services from an industry already struggling to keep up with current projects. Myrna Dayton, deputy director and deputy city engineer for the City of San Diego, said that despite the agency’s efforts to improve recruiting efforts, “We always seem to be short. It’s a constant struggle.” 

Construction Dive then laid out three potential tactics to help solve the labor shortage sumarized below:

Partner with schools and encourage internships to develop the next generation of industry professionals

The gap between graduation and employment can be especially daunting in the construction industry, where students must transition from a classroom environment to the field. Without classes that prepare them for real-life tasks and challenges of a day on the job site, students often struggle to succeed in the industry.

Change hiring requirements to adapt to current conditions

Experts also said standard hiring requirements are often out-of-date for the current industry environment. With owners mandating countless certifications, “those people who have the skills set are going down the road,” Gipson said. “The best construction managers running a building program aren’t all necessarily licensed architects.”

Find ways to attract millennials to the industry

The construction industry has consistently struggled to attract younger workers to fill the gap left by retiring professionals. “We have an industry that is less appealing to millennials,” Gipson said. “We’re not really a sexy industry.”

She encouraged companies to focus on cultivating interest in construction among middle school and high school students. As millennials seek to use their creativity in a work environment that offers autonomy, the industry can tout its ability to offer those kinds of roles.

While the above tactics are a good start, there is a simple reality that needs to be addressed: construction worker pay needs to increase in order to attract more workers.  In an environment where some coastal cities are moving towards a $15/hour minimum wage there is simply no way to entice someone to do manual labor if it doesn’t pay substantially more than making lattes.  However, unlike your typical fast food restaurant or coffee joint, home builders aren’t currently in much of a position to pass additional labor costs on to consumers since 1) They are constrained by mortgage qualifying criteria; and 2) Home building profit margins are already low leaving little room to raise prices and slow absorption without taking a major hit to the bottom line.  That being said, there is common sense solution that would allow builders to attract more workers while not driving prices higher or eating into thin margins: reduce the growing regulatory burden associated with new home building which has soared nearly 30% since 2011 to a whopping $85,000 per new home.  This was partially addressed in the Obama Administration’s Housing Development Toolkit that was released last month.  Reforms that reduce the regulatory burden back to even their 2011 levels at least theoretically allow for construction wages to adjust higher in order to attract workers to fill the many vacant construction positions today without driving up prices or killing builder returns.  Reducing red tape and it’s associated costs, along with the three strategies that Construction Dive outlined above would go a long way towards solving the construction labor shortage and allowing the construction industry to once again become the economic growth driver that it has historically been.

Economy 

Stable and Slow: Great post and chart from Cullen Roche of Pragmatic Capitalism about how economic expansions are getting longer despite (or perhaps because of) slower growth rates.

Golden

See Also: Millennials aren’t as big spenders or risk takers as prior generations were and that is likely to have a profound impact on the economy.

Running on Empty: Nearly 7 in 10 Americans have less than $1,000 in savings including 29% of those who make over $150k and 44% of those who make between $100k and $150k.

Right on Schedule: So far, 2016 is going pretty much exactly as Bill McBride of Calculated risk predicted it would: slow, steady growth.

Residential

Shady Subprime Redux: Why the hell is the Federal Government allowing solar panel loans with 10% interest rates to get senior priority to GSE backed mortgages in the event of a default?

Under Pressure: Deutsche Bank says that rising mortgage rates in Japan, resulting from the BOJ’s plan to push long term yields higher could cause Tokyo condo prices to fall 20%.

Profiles

Water, Water Everywhere: Israel is one of the driest places on earth.  However, their focus on advances in desalination technology has provided them with something that would be unimaginable just a decade ago: a water surplus.

Fire In the Hole!  Samsung is ending production of the Galaxy Note 7 because the damn things keep lighting on fire.  See Also: Samsung is sending fireproof boxes and gloves to Galaxy Note 7 owners for their recall in case the devices spontaneously combust in transit.

Hope for the Future: A new study finds that only one of five Millennials has actually tried a Big Mac.

Chart of the Day

A 5,000 year low.

Even the ancient Egyptians didn't enjoy the low interest rates we see today.

WTF

Bone Zone: A porn company has offered red-sweater-wearing, presidential debate star Ken Bone $100k to appear in an adult film.

Peak Florida: “A 350-pound Florida man ran from a Walmart with two stolen TVs, but his getaway was compromised when his pants–containing his ID–“fell off as he ran away,” according to cops who yesterday apprehended the suspect, who had a crack pipe stuffed with Brillo buried in his anus at the time of his 3:43 AM arrest.”

Clowning Around: A couple in Wisconsin left their 4 year old kid at home alone while they terrified a neighborhood dressed as creepy clowns.  They are now facing child neglect charges.  See Also:  A British woman was so terrified by a creepy clown that jumped out of the bushes that she went into premature labor.

That’s Loser with an “L”: Some guys are paying over $1,200 a year for a fake girlfriend to text and Snapchat with them.  You can read the article if you’d like or just take my word that it’s every bit as pathetic as you are assuming.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 14th – What’s the Solution?

Landmark Links August 16th – Out of Balance

Usain Bolt

Lead Story… They say that demographics are destiny and by 2030, 56 countries will have more people aged 65 and above than children under 15.  By 2075, there will be more people 65 and older than children under 15 worldwide.  This is the result of two developments that have been taking place in developed countries for decades: 1) People are waiting longer to have kids and then having fewer of them; and 2) People are living longer.

The implications of this demographic imbalance in a world with an ever-growing pension bill are huge.  From Bloomberg:

While the prospect of longer lives is a good thing, problems arise when a shrinking work force cannot foot the pension bill. Several decades ago, you could have had about 10 workers per retiree, but that could shrink to the point where in Italy,  for example, you had three workers per retiree. While the political choices are unsavory — increase taxes or cut benefits — governments are running out of time to act.

As partially outlined above, the potential solutions are relatively straightforward, if difficult:

  1. People in developed countries need to start having more kids.
  2. Retirement ages need to increase substantially since people are living much longer.
  3. Benefits need to get slashed or begin at a substantially older age since pension plans were not designed to support people who live as long as they do today while retirement ages stay the same as they were decades ago.

Option one is a trend that likely won’t reverse for a whole bunch financial and cultural reasons so I’m guessing that the solution will have to come from two or three or some combination thereof, both of which are politically toxic in today’s global political climate.  Or we could just bury our heads in the sand, pretend that the problem doesn’t exist and continue to borrow money to bridge the gap.  On the plus side, at least interest rates are really low……

Economy

Confidence Inspiring: Federal Reserve officials are beginning to question accepted wisdom about what actually causes inflation.

Vultures Circling: PE funds have now raised over $100 billion to buy oil assets that no one else wants.

Pay the Toll: German Banks are now charging depositors to hold deposits as negative rates take a toll.  I’ve said this before and I’ll repeat now: there is no way that this isn’t deflationary.

Commercial

Let’s Make a Deal: Lease incentives are becoming a major feature of the San Francisco apartment market for the first time since 2009.  See Also: as rental supply grows, landlords negotiate.

Residential

Confidence Game: Home builders are becoming more optimistic about the market for single family homes as the supply of existing homes continues to tighten which they believe will lead to more starts.  One word of caution here: in this cycle, with it’s emphasis on proximity to cities, existing homes typically have a large advantage over new homes in that they are both less expensive and have location advantages.  See Also: Calculated Risk says that the slow, sluggish housing recovery is still on track.

Profiles

Plenty of Blame to Go Around: California’s gas prices are sky high compared to the rest of the US.  Stringent environmental regulation is partly to blame but that’s only part of the story.

Life Lessons: An old friend of mine, Charlie Buckingham recently competed in sailing at the Rio Olympics in the Laser Class.  Charlie finished 11th out of 46, missing out the the medal race on a tiebreaker.  It was a strong finish against the best sailors in the world in arguably the toughest Olympic sailing class, although I know that he had been aiming higher.  He penned an excellent short piece about what he learned on his Olympic journey for Sailing World Magazine.  The article is ostensibly about sailing but extremely applicable to life in general.  Here’s a quick excerpt but I’d highly recommend reading the whole thing:

Plan to be flexible
Sailboat ­races are in a constant state of flux. The fleet changes positions around you, the wind shifts and changes velocity, and you need to keep your own boat moving as fast as possible at all times. All of this makes it hard to plan the perfect approach in ­advance. Detailed plans can even give a false sense of security, causing one to ignore the present. Have the outcome in mind, but be open and ready to adapt to what is thrown at you during the race.

Tinfoil Hats: Believe it or not, there are still people who believe that the earth is flat and think that there is a massive conspiracy to cover it up.  Mic.com published a feature article last week that took a deep look at this and other kooky conspiracy theories.  It’s as entertaining as it is bizarre.

Chart of the Day

WTF

Hell NO: Burger King is coming out with a hamburger-burrito hybrid called a Whopperito featuring the same disgusting, artificially smoke-flavored beef found in a Whopper.  The race to the bottom by fast food restaurants continues unabated.

A Sucker Born Every Minute: Sketchy bootleg LA celebrity tour buses are lying about where stars live and causing serious and frightening issues for homeowners when stalkers show up at their homes.

Video of the Day: I could watch this video of a Pittsburgh Pirates fan going for a foul ball and ending up with a plate full on nachos on his face all day.

Brilliant Disguise: A man in China tried to smuggle his pet turtle through airline security by disguising it as a hamburger.  He was busted when security agents noticed “odd protrusions” sticking out of a hamburger in his bag.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 16th – Out of Balance

Landmark Links June 28th – Tank Commander

Byron-Scott-Driving-The-Lakers-Tank

Lead Story…  We spend a lot of time talking about the San Francisco housing markets and rightfully so: it’s a microcosm of all that is wrong with restrictive zoning in closed access US cities and the poster child for NIMBY obstructionism.  As such, San Francisco has managed to overshadow another North American market that is incredibly expensive and getting worse: Vancouver, BC  Year-over year, Vancouver’s benchmark housing index is up 30% to just under $900k while single family detached house prices increased a whopping 40% to $1.374MM (in US dollars) in a city where median household income is around $67k in US dollars – San Francisco is in the $82k range.  So how does an MSA with such a low median household income (one of the lowest of major Canadian cities) end up with a median home price that is among the highest? 1) Massive levels of housing demand from wealthy foreign investors, especially from China; and 2) Highly restrictive zoning that makes it difficult to add enough housing units to satisfy  that demand.  One critical distinction between SF and Vancouver is that much of Vancouver’s foreign purchases appear to be for investment purposes only while SF real estate has clearly benefited from the tech boom and it’s highly compensated workforce.  This, combined with the inability to build enough new units for residents, is leaving Vancouver with empty units that transact for nosebleed prices.  The increase in value was so extreme last year that at least one mathematician estimated that the rising land value of single family homes accounted for more than the entire employment income in the City of Vancouver and now over 90% of detached houses there are worth over $1MM.

Foreign buyers have come under increasing scrutiny of late for the impact that they are having on the worlds most expensive real estate markets.  Some of it is justified.  For example, the US Treasury department now requires that title insurance companies report the people behind shell companies on all-cash purchases over a certain level in NY and Miami in order to curtail money laundering.  Others like Great Britain, which increased the stamp duty on second home purchases by 3% and raised taxes on more expensive homes in an effort to drive down demand.  Few places though, have considered responding as harshly as Vancouver, which is considering a tax on vacant homes.    From the South China Morning Post:

Vancouver’s mayor Gregor Robertson says he is considering the introduction of a tax on empty homes, amid a roiling debate in the city about the role of Chinese money and offshore investors in North America’s most unaffordable real estate market.

In an interview with Bloomberg TV on Tuesday, Robertson said he was “looking at new regulation and a carrot-and-stick approach to making sure that houses aren’t empty in Vancouver,” including a tax on vacant homes. “If you’re not using your property – either living in it or renting it out – then you have to pay more tax. Because effectively it’s a business holding, and should be taxed accordingly.”

There is a very substantial difference between adding to transaction costs or requiring ownership disclosures, as the US and Britain are doing and what Vancouver’s mayor proposed here.  The steps taken by the US and Britain either increase transaction costs or regulatory paperwork in an effort to slow demand from a certain buying segment.  The Vancouver proposal takes a very different approach: it would actually increase the holding cost of foreign-owned (but unoccupied) real estate by imposing a different tax structure.  This isn’t limited to the purchase transaction, instead its a recurring annual cost.  More from the South China Morning Post:

A tax targeting vacant properties was proposed by dozens of economists in January.The BC Housing Affordability Fund, which has been pitched to both the City and British Columbia provincial government, would impose a 1.5 per cent annual tax (based on home price) on owners who either left homes vacant or had “limited economic or social ties to Canada”.

BCHAF proponent Tom Davidoff, an economist at the University of British Columbia, said it was unclear if Robertson’s remarks on Tuesday referred to his group’s proposal. “We talked to the city and they gave us a good listen,” he said.

“I would hope that any vacancy tax would cover the bigger issue here which is not paying taxes here and not being a landlord [either],” said Davidoff, whose group’s proposal would also tax people who under-utilised properties as a “pied-a-terre”, and those whose primary breadwinner paid little or no income tax in Canada – so-called “astronaut families”.

This strikes me as the quickest way to cause an exodus of foreign capital from a given real estate market because, unlike the US and British solutions, it would not just apply to new purchases.  It is also rife with the potential for unintended consequences.  For example, who is to say if a property is under-utilized?  Who actually gets to make that distinction and is there a hard and fast rule that could be applied.  If you were a foreign (or domestic for that matter) investor or homeowner who had a house there and you knew that costs were about to go up a proposed 1.5% a year based on home price (not unsubstantial on a million dollar home) would you hang around to see how it was implemented?  This type of tax could send foreign investors rushing towards the exit before a glut of supply hits the market as investors seek friendlier locales in which to invest.  At least it appears as if cooler heads are prevailing at the provincial and national level.  Again from the South China Morning Post:

Both Canadian Prime Minister Justin Trudeau and BC Premier Christy Clark have said they worry that taking steps to curtail foreign ownership in Vancouver could imperil the equity of existing owners.

I hope that Prime Minister Trudeau and Premier Clark’s logic prevails as this would be an incredibly dumb way to tank a real estate market and the collateral economic damage done to existing homeowners would be all too real.  In all of the talk about how to bring Vancover’s prices under control, it seems as if no one (or at least very few people) are proposing a real solution: relaxing restrictive zoning codes so that more units could be built to meet demand.  Ultimately, that’s the only way to avoid what some are now calling a bubble.  Rather, we get more of the same convoluted restrictions, subsidies and taxes that don’t solve the actual problem and often do more harm than good.  The Vancouver mayor’s proposal is a tanking strategy that would make even the shittiest NBA team blush. Let’s that American cities with a large number of foreign investors don’t follow the example.

Economy

Tailwind: Per Calculated Risk, the largest population cohorts in the US are now 20-24 and 25-29 which is positive for the economy in general and housing in particular as young people begin to form households.

Brexit Breakdown: By now you probably know that UK residents voted to leave the EU, sending stock prices down the toilet around the globe and spurring demand for safe haven assets like treasuries and gold.  The betting markets got this one dead wrong as did pollsters and most government officials.  Despite the crazy market response, nothing will really change from a trade standpoint in the near-term and there is already a movement underway to try to reverse the referendum.  Either way, nothing is going to happen until this fall when British PM David Cameron resigns.  Here’s a quick roundup of what people far more knowledgeable than I are saying:

Tyler Cowen on why the Brexit happened and what it means.

George Soros on the future of Europe and why it might have more issues than Britain.

Gabriel Roth on why the actual Brexit might not ever actually happen

The BBC on the high likelihood of another Scottish independence vote as a result of the Brexit outcome.

See Also: S&P and Fitch downgrade UK credit rating.

Best House on a Bad Block: The US economy looks likely to weather the Brexit storm even if it puts the Fed on hold for a while longer.

Commercial

 

Winner, Winner, Chicken Dinner: How US REITs could benefit from the Brexit.

Residential

Scraping the Bottom: Brexit panic has pushed interest rates to record lows and mortgage rates are following and they could be headed even lower.

Profiles

Trade of the Century: The story of how George Soros’ Quantum Fund made trade of the century by breaking the British pound is especially fascinating today in light of recent world events.

Green Monsters: Avocado theft is on the rise.

Please Make it Stop: Enough with the stupid Millennial surveys already.

Chart of the Day

The US Demographic Tailwind

Population: Largest 5-Year Cohorts by Year
Largest
Cohorts
2010 2015 2020 2030
1 45 to 49 years 20 to 24 years 25 to 29 years 35 to 39 years
2 50 to 54 years 25 to 29 years 30 to 34 years 40 to 44 years
3 15 to 19 years 50 to 54 years 35 to 39 years 30 to 34 years
4 20 to 24 years 55 to 59 years Under 5 years 25 to 29 years
5 25 to 29 years 30 to 34 years 55 to 59 years 5 to 9 years
6 40 to 44 years 15 to 19 years 20 to 24 years 10 to 14 years
7 10 to 14 years 45 to 49 years 5 to 9 years Under 5 years
8 5 to 9 years 10 to 14 years 60 to 64 years 15 to 19 years
9 Under 5 years 5 to 9 years 15 to 19 years 20 to 24 years
10 35 to 39 years 35 to 39 years 10 to 14 years 45 to 49 years
11 30 to 34 years 40 to 44 years 50 to 54 years 50 to 54 years

Source: Calculated Risk

WTF

Video of the Day / Attempted Darwin Award:  It’s exceedingly rare that an attempted Darwin Award gets caught on video.  This past weekend, two morons attempted to surf a 20 + foot swell at The Wedge in Newport Beach on a rental jet ski despite being warned repeatedly by lifeguards to stay away.  It went horribly wrong with the jet ski ending up on top of the Newport Jetty before nearly sinking while getting swept out to sea as Newport’s lifeguards and local Wedge veterans saved the riders from their own epic stupidity.  No word on whether or not they got their deposit back.  Looks like it’s time to add some more chlorine to the gene pool.

Can You Spot the Irony? A man named Ronald McDonald was shot outside a Sonic in New York.

I’d Rather Eat My Shoe: Burger King recently introduced something called Mac N’ Cheetos.  The race to the bottom for the American fast food industry continues with no end in sight.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links June 28th – Tank Commander