Landmark Links September 23rd – What’s the Point?

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Lead Story… Former Federal Reserve Chairman Paul Volker once said that the only useful modern financial innovation was the ATM.  While that’s a rather harsh assessment, there is a bit of truth to it.  Too often, financial products ranging from subprime loans, to derivatives to leveraged ETFs are created more as profit and marketing opportunities for those selling them than they are to fill an actual need of the people that they are being sold to.  That being said, I’m still somewhat fascinated by the FinTech industry because there are segments of the market that are not covered by traditional sources where FinTech companies can provide real value to consumers.  There have been several such products from online mortgage lenders to crowd funding platforms for real estate deals that fill a need.  I’m especially interested when a FinTech startup is aimed at our beleaguered national housing market.  Last week, top tier Venture Capital investor Andreessen Horowitz announced a new venture called Point which was created to invest in a portion of the equity in a home in exchange for a portion of the return when you sell or refinance.  Point lowers a homeowner’s monthly payment because you don’t pay current on Point’s equity investment and that all of their profit is realized upon sale or refinance of the home. Although this reduces a homeowner’s current pay, it could cost a lot more in the long term depending on whether your house appreciates and by how much.  When Point was announced via press release, the financial blogosphere when into a bit of a tizzy which was somewhat predictable given that: 1) The concept of offloading equity in a home, typically a family’s largest asset, has been around for some time but this seems to be the first time someone has attempted to do it in scale; and 2) Andreessen Horowitz is known for making smart investments – so people naturally assume that their involvement validates Point’s business plan.  I wanted to hold off on offering my opinion until I had time to do a bit of reading and research on the product.  There is still  a lot of information that hasn’t been released on how the product works but I’ve been able to piece together enough to get a decent ideal.

First off, let’s explain how the product works.  The best way to do that is probably the example from their own website:

 

Check if you qualify

Enter your address and answer a few questions. The process is free and takes less than 5 minutes.

5 minutes

  • You provide us with basic information about your home and your household finances.
  • To be eligible for Point, you’ll need to retain at least 20% of the equity in your home after Point’s investment.
  • We can instantly give you pre-approval or denial based on the information you provide.

Point Makes you an offer

Point makes a provisional offer to purchase a fraction of your home. We will provide you with an offer based on the value of your home today.

1-3 days

  • If pre-approved, we provide a provisional offer based on the data you provide.
  • The offer is typically for between 5% and 10% of your home’s current value.
  • We’ll ask you to complete a full application and provide documentation for our underwriting team.
  • If possible, we will improve on our pre-approval offer.

Schedule an in-person home visit

Pick a time for a licensed appraiser to visit you. We want to ensure the price is correct by checking the place out — no cleaning necessary 🙂

5-8 days

  • We will schedule time for a home valuation visit.
  • You will be charged for the cost of the appraisal, which is typically between $500 – $700.
  • The appraiser will visit and inspect your home.
  • We will share the appraiser’s report with you once it’s complete. The appraiser’s value is an important component of the final offer.

Point pays you

We usually send the money within 4 business days of closing.

3-5 days

  • We finalize the offer following the appraisal and receipt of all supporting application documents.
  • You will meet with a notary to sign the Point Homeowner Agreement.
  • Point files a Deed of Trust and Memorandum of Option on your property in your county recorder’s office.
  • Once the filings have been confirmed, we transfer the offer funds (less Point’s processing fee of 3% and the escrow fee) electronically to your bank account.

Sell the home or buy back from Point when the time is right for you

Point is paid when you i) sell your home, or ii) at the end of the term, or iii) during the term, when you choose to buy back. Regardless of the timing, there’s no early buyback penalty.

1 to 10 years

  • If you sell your home within the term then Point is automatically paid from escrow.
  • If you don’t sell, you can buy back Point’s stake at any time during the term at the then current appraised property value.
  • Point is paid a fraction of the home’s value. If the home has declined significantly in value, Point may be due less than its original investment.
 Sounds simple enough but as usual, the devil is in the details.  A few caveats:
  1. Point collects a processing fee of 3% upfront in addition to appraisal and escrow fees
  2. You need at least 20% equity in your home to qualify
  3. You are guaranteeing repayment in 10 years
  4. Point is in a preferred position, meaning that they get paid first in the event that your home loses value
  5. When Point first went live last week, they gave an example of their pricing on their website (they have since taken it down for some reason).  In this example, Point put up 10% of the value of the home and received 20% of the appreciation (net of any improvements done by the home buyer in return.
One of the primary issue holding back the market is a lack of capacity for down payments by first time home buyers.  Low interest rates may be great for monthly payment affordability but they do nothing when it comes to a buyer’s ability to save a 20% down payment for a conforming loan.  There is a real need for investors in this space and some platforms have tried to tackle it.  For example, FirstRex which was profiled by Bloomberg back in 2013 will put down up to 50% of a homebuyer’s downpayment in exchange for a portion of the profit.  However, I am not aware of there being a substantial need for people who already have a large amount of equity in their homes to be able to extract that equity, especially when cheap HELOCs or reverse mortgages ( for seniors) are readily available.  Both HELOCs and reverse mortgages allow an owner to extract their equity WITHOUT giving up 20% of the upside in their home.  In order to illustrate this I ran a scenario outlined in Point’s press release.  For the sake of simplicity, I didn’t include property taxes, insurance or maintenance as these would be the same with or without Point.  I also didn’t include any loan fees in an effort to keep things simple.  This analysis has 2 scenarios:
Scenario 1: Borrower buys a home for $500k.  Borrower takes out a $400k with a down payment of $100k.  The mortgage has a 4% coupon.
Scenario 2: Borrower sells $50k in equity (10% of the total value of the home to Point, reducing the loan size to $350k, again with a 4% coupon.  Under this scenario, Point gets 20% of the home price appreciation.
  fullsizerender
As you can see, it’s substantially less expensive to use a traditional mortgage if you experience any home price inflation – and Point’s website and press release both imply that it will be targeting higher priced markets that will likely experience more inflation.  If a borrower lives in a market that experiences home price inflation of less than 2%, Point makes some sense.  Above that, it doesn’t appear to.
So what’s the Point (Pun fully intended)?  IMO, this would be a great investment program if it were structured as some form of down payment assistance (like the FirstRex example above) – I’m even willing to bet that they could get more aggressive splits if it were designed to fill that substantial need in the market.  However, as currently offered, it’s an expensive preferred position that sits in front of a substantial amount of equity (again, assuming that there is any home price inflation).  I’m just not sure that there is much of a need for a product that allows people with a lot of equity to extract it from their homes when HELOCs are available, cheap and flexible and reverse mortgages are an option for seniors.  Borrowers that need something like this (and would be willing to pay for it) to defray their down payment can’t qualify and those who would qualify have better options if they want to extract equity from their homes or finance a purchase.  As such, I just can’t see how this is something that will be very scalable in it’s current form.

Economy

Surprise, Surprise: The Fed chose not to raise rates at their meeting this week but signaled that 2016 rate increases are still likely.  For those keeping track at home, they did exactly the same thing that they’ve done at pretty much ever meeting this year.

You Want Cream or Sugar with That? Yes, there is a Millennial underemployment crisis but it only extends to those with liberal arts degrees.

Commercial

Bottom of the Barrel: The ongoing dumpster fire that is K-Mart announced that it’s closing 64 stores and laying off thousands of employees.  I honestly had no idea that there were 64 K-Marts still open to begin with.

Going Long: Blackstone jumped back into the logistics business after selling IndCor Properties in 2015 by purchasing a $1.5 billion mostly-west-coast portfolio from Irvine-based LBA.  See Also: How Amazon is eating the department store, one department at a time.

Residential

Flipper’s Back: Home flipping continues to make a comeback and is now at it’s highest level since 2010.  A lot of the activity has been taking place in secondary markets like Fresno which could be a good sign that things are getting better.

Soaring: According to the Federal Reserve Bank of St. Louis, urban rents in US cities are rising quicker than they have in any time in recorded history.

Kicked to the Curb: Cities are starting to follow New York’s example by allowing developers to eliminate or reduce parking requirements for condos and apartments in order to provide more density and cheaper prices.  However, there is a lot of concern over the impact of this move with regards to on-street parking in cities where mass transit infrastructure hasn’t kept up.

Profiles

Talking Your Book: One of Lyft’s co-founders believes that private car ownership will go the way of Johnny Manziel’s NFL career by 2025.

Grudge Match: Tesla’s battle with car dealers has the potential to reshape the way that cars are sold in the US.

The Paradox of Leisure: The rich were meant to have the most leisure time. The working poor were meant to have the least. The opposite is happening.  Here’s why.

Chart of the Day

Rise of the regional banks

RCA-CRE-capital-trends

WTF

Terrifying: A crazy woman from New Zealand made a handbag out of a dead cat and is trying to sell it for $1,400.

Broken Clocks: Brangelina broke up this week, meaning that those tabloid headlines that you’ve seen every time that you go to the grocery store for the last 10 years were finally correct.  If you believe Us Weekly, they broke up at least 31 times in the last decade.

Hero: Meet the 110 year old British woman who attributes her longevity to drinking whiskey on a daily basis.  See Also: New study suggests that people who don’t drink alcohol are more likely to die young.

Hell NO: South Carolina residents warned about clown trying to lure children into woods.

Video of the Day: Watch a diver catch video of great white shark attack on his GoPro off the coast of Santa Barbara (don’t worry, no blood).

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 23rd – What’s the Point?

Landmark Links September 20th – Young Man’s Best Friend

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Lead Story… If you follow the news even casually, you probably know that Millennials are less likely to own cars and homes or be parents than prior generations.  However, there is one area where Millennials are out ahead: Pets.  The Washington Post published the results of a study of pet ownership among young people and the results were somewhat stunning (emphasis mine):

Three-fourths of Americans in their 30s have dogs, while 51 percent have cats, according to a survey released by research firm Mintel. That compares to 50 percent of the overall population with dogs, and 35 percent with cats.

The findings come at a time when millennials, roughly defined as the generation born between 1980 and 2000, are half as likely to be married or living with a partner than they were 50 years ago. They are also delaying parenthood and demanding flexible work arrangements — all of which, researchers say, has translated to higher rates of pet ownership.

“Pets are becoming a replacement for children,” said Jean Twenge, a psychology professor at San Diego State University and author of “Generation Me.” “They’re less expensive. You can get one even if you’re not ready to live with someone or get married, and they can still provide companionship.”

You read that correctly, 75% of American’s in their 30s have dogs!  That is a yuge percentage and makes this self-proclaimed crazy dog person quite happy.  As with most publications though, WAPO seems to be implying that Millennials’ penchant for animal companionship makes them somehow different from the rest of “us.”  Indeed, if Millennials were going to forego family life permanently in favor of living with only dogs or cats it would have dire demographic implications.  Instead, I would suggest the pet ownership trend fits nicely with my theory about Millennials: they aren’t any different from prior generations, they are just taking longer to hit certain milestones than previous generations did.  Human beings need companionship and pets fill that gap before young people are ready to start families.  The increase in pet ownership is a good thing.  There are a ton of healthy benefits to having a pet as a family member, not the least of which is reducing stress.

Why am I so certain that dramatically increasing pet ownership among young people isn’t a harbinger of demographic doom? Well, for one, I’ve lived it.  I was born in 1979 so I’m not technically a Millennial but I didn’t get married until later in life.  I rescued a Black Labrador named Shadow when I was 24 who was my best friend for 10 years.  Despite my attachment to my dog, I ended up getting married in my mid-30s and had kids soon after. Shadow passed away several years ago and Pepper, a 2 year old Golden Retriever is now an important member of our family.  Also, I can’t imagine a scenario under-which we wouldn’t have a dog.

All that being said, there was one segment of the article that really frightened me (emphasis mine):

Millenials were also twice as likely than Baby Boomers to buy clothing for their pets, a phenomenon Richter chalks up to the prevalence of social media.

“The clothing is, for them, an opportunity for performance — they put it on their dog or cat, take them for a walk, post a picture on Facebook,” Richter said. “It’s increasingly about getting a digital stamp of approval.”

On second thought, I take back everything that I just wrote.  Maybe Millennials are the hipster weirdos that the press makes them out to be after all.

Economy

Nada: The reason why the stimulus from low oil prices never boosted the economy – it was 100% offset by the reduction in energy investment.  Mea Culpa on this one.  I was dead wrong.

Crossroads: The Fed is basically in the dark when it comes to the relationship between “full employment” and inflation in today’s economy.  As we approach what was traditionally considered “full employment,” they have a decision to make.

Commercial

Out of the Shadows: Shadow lenders are stepping up to fund development deals as regulators force banks to pull back on commercial real estate exposure.

See Ya: Mall owners are totally over department stores and not sad to see them go as retail tenant mix remains in flux.  But See: Nervous bond investors are hedging their exposure to malls with mortgage derivatives.

Residential

Building Up or Building Out: Awesome time-lapse graphics from the Washington Post this past weekend on density in major urban areas over time and the conundrum that cities face when it comes to keeping housing affordable: do you build up or do you build out?  See Also: Some suburbs are trying to add urban-style development projects to attract young workers and the employers who covet them.

Profiles

Always Be Closing: How Wells Fargo’s high pressure sales culture spiraled out of control and led to a massive checking account scandal.

Fleeced: Back in 1999 former recalled CA governor Gray Davis gave away the farm to public employee unions that had supported his election bid in the form of increased pension benefits based on the bullshit assumption that  CalPERS’ annual returns would average 8.5% forever. Davis sold benefits increase to taxpayers by claiming it would cost them nothing since all of the increase would be borne by CalPERS’ return on investment.  Needless to say, things didn’t go as planned.  Today the unfunded liabilities total $241 billion.

Battle of the Buzz: How the alcohol and pharmaceutical industries are bankrolling the fight against marijuana legalization.  See Also: There is a land rush going on in some of California’s worst real estate markets and commercial pot is the reason.

Chart of the Day

Europeans are not as happy with big-city living as commonly believed.

WTF

Florida Grudge Match: Nothing says Florida quite like an octogenarian brawl on the shuffleboard courts. (h/t Steve Sims)

Buy Gold: A notorious runaway Russian robot that has escaped it’s lab twice has been was arrested by police at a political rally.  And so it begins…

Somebody Walks in LA: Meet LA’s first “People Walker,” a bearded hipster and wannabe actor who will go on a walk with you for $7/mile. (h/t Ingrid Vallon)

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 20th – Young Man’s Best Friend

Landmark Links September 16th – The Carrot and The Stick

Lead Story… Investopedia defines Behavioral Economics as the study of psychology as it relates to the economic decision making processes of individuals and institutions.  IMO, one of the more fascinating applications of behavioral economics deals with the largest investment that most people make in their lifetimes: buying a home.  It’s all a matter of motivation.  What motivates a person to buy a home versus renting?  Much of the preference is based on mobility (renting) vs stability (buying) depending on where a potential buyer or renter sees their life going in the foreseeable future.  However, there is also a very substantial financial motivation that manifests itself in the form of one of the two primary economic forces: fear and greed.

During the housing bubble of the mid aughts, greed was a primary motivating factor in converting renters to owners.  There was a (foolishly) widely adopted mantra back then that housing never fell in value and that acquiring property was a road to riches even if it meant leveraging up to your teeth.  People were buying homes up and calling them “investments” when they were really just speculating on potential future appreciation.  This type of behavior is also driven by a variation of fear: Fear of Missing Out or FOMO for short which was the chosen mantra of the “buy now or be priced out forever” crowd.  Greed in expectation of asset appreciation and FOMO are classic bubble fuel because they tend to make the current price of an asset irrelevant to a prospective buyer.  Once these forces take over the mind of a buyer, the only thing that matters to is the future projected value appreciation.  In the end, trees don’t grow to the sky and we all know how that turned out.

Today, prices are rising again but buyer motivation is quite different than it was a decade ago.  Online real estate website Redfin recently posted the results of a survey of 1,800 home buyers  taken in August that contained this fascinating statistic:

High Rent Driving Tenants to Become Owners

Nearly half of all first-time homebuyers, 45.4 percent, said they were most influenced to get into the housing market because of high rent. In comparison, a year ago 24.7 percent of first-time buyers said they were house hunting because of high rent.

Most-influenced

Among all buyers surveyed, 22 percent said the cost of rent motivated them to get into the market, up substantially from last year’s 12.8 percent but down from 24.4 percent in May.

Overall, 26.3 percent of all buyers said they were most influenced to purchase because of a recent life event, like the birth of a child or a marriage, an identical number to last August.

A whopping 45.4% of first time home buyers said that they decided to purchase a home because rent was too high.  What’s particularly notable is that number is up over 20 percentage points from a year ago.  The second most common answer was a life event.  These are hardly indicative of a bubble or market peak.  Note that those two factors add up to 48.3% for all buyers and 68.8% for first time buyers.  Unfortunately they didn’t publish the whole data set so we can’t see where “Expected Appreciation” or “Investment Return” was on the list.  However it couldn’t have been more than 31.2% for first time buyers based on the numbers provided.  This is a substantial behavioral shift from the bubble era.  I’ve never bought into the “a house is always a great investment” narrative but I don’t buy the “a house is a terrible investment” one either.  The real “investment” value of a house is the hedge that it provides against the rising cost of shelter, primarily rents.  If a buyer purchases a home in a market where future rents are expected to rise substantially (like coastal California) then he or she would typically be willing to pay more because the ownership hedge is more valuable in a market where rents are largely stable because supply can be easily added as needed (Houston, TX for example).  The Redfin findings are encouraging because they indicate that buyers are behaving rationally.  Despite rising prices, buyers today aren’t primarily motivated by FOMO or projected appreciation but rather by an analysis of whether they will be better off financially renting or owning.

Economy

A House Divided: A lack of consensus on inflation at the Federal Reserve means that the central bank is more likely to stand pat than do anything with rates.

All About the Benjamins: A new study confirms that money can’t buy happiness….but confirms that cash often does.

Finally on the Rise: After years of stagnation, median incomes are improving again, and the biggest gains are coming where they are needed most: among the poorest deciles.

Residential

On Point?  Leading VC fund Andreesen Horowitz announced this week that it’s getting into the housing business. To be more precise, the tech investor is backing a new venture called Point which is set up to purchase portion of a homeowner’s equity in a preferred position and participate in the upside at sale.  I want to take some time to digest this one a bit deeper before writing more but I can see several potential fatal issues at first read.

Great Migration: Seattle’s already-hot housing market could see a large influx of Chinese capital now that Vancouver, Canada has told foreign buyers to get lost by imposing a 15% foreign transaction tax, sending sales tumbling.

That Sinking Feeling: San Francisco’s city Building Department is getting hauled in front of the Board of Supervisors to explain how/why they approved Millennium Tower, SF’s incredible sinking luxury condo building.

Profiles

Tough Grader: Want your product to be labeled “Bear Proof”?  It’s going to have to withstand 60 minutes in an enclosure with some of the most difficult reviewers in the world: grizzly bears.

There’s No Place Like Home: The story of how Amazon out-executed both Apple and Google and positioned itself to dominate the technological infrastructure of your home.

Surf’s Up: Surf parks, or giant pools nowhere near the ocean with perfectly formed man-made waves are about to go mainstream.

Chart of the Day

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WTF

Where’s the Beef?  A restaurant patron in Florida was arrested for trashing a Wendy’s after being dissatisfied with her food.  If she expected decent quality food, I don’t know why she was in a Wendy’s in the first place.  In More Fast Food News: Burger King is about to start offering something called Cheetos Chicken Fries.  The race to the bottom for fast food continues unabated.

Apocalypse Now: What happens when millions of people in a city with poor infrastructure ceremonially sacrifice animals before a torrential monsoon downpour?  You get rivers of blood running through the city, which is exactly what is currently happening in Bangladesh.

Frivolous: An Austrian teen is suing her parents over their posting embarrassing childhood photos of her on Facebook, including potty training pictures.  If I couldn’t post embarrassing pictures of my family on social media, I’d quickly lose my will to live.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 16th – The Carrot and The Stick

Landmark Links August 26th – Transition

Bruce JennerLead Story… Two particularly troublesome issues in the US real estate market are the need for more affordable housing and figuring out what to do with vacant malls and other underutilized retail sites.  The Westminster Arcade in Providence Rhode Island, the oldest mall in the US offers an interesting solution: converting un-used portions of malls to micro apartments:

As more people turn to the internet to buy what they need, shopping malls across the country are closing their doors. But one historic mall has found a creative way to re-purpose its former retail space: America’s first shopping mall, the Westminster Arcade in Providence, Rhode Island, has now been turned into micro lofts, offering people the chance to truly live inside a piece of history.

The Westminster Arcade opened in 1892, introducing the English-style indoor shopping experience to the United States. But in recent years, like so many other retail locations across the U.S., the mall had fallen on hard times. Despite undergoing a renovation, the space ultimately closed its doors in 2008 due to economic reasons.

But instead of being demolished, developers decided to give the mall a second life. The first floor is still being rented out as commercial space, but the top two floors have been turned into micro apartments. And the 38 units, which range in size from 225 to 300 square feet, are designed to accommodate the growing masses cramming into Rhode Island’s urban areas.

So far, residents are generally young professionals who don’t have much stuff, and so don’t mind living in such cramped quarters. Rent starts at $550 a month, and there’s already a waiting list of those eager to move into the “cozy” spaces.

This seems like an efficient way to kill two birds with one stone.  It’s relatively cost effective to build out the residential units since the structure is already there and just needs to be converted in order to transition to mixed use (I’m assuming that there are some issues with plumbing capacity so it may not work everywhere), meaning that rents can be on the low side for smaller units.  This is where the demand is anyway at a time when most new multi-family projects are expensive luxury product.  In addition, the upper-floor renters provide foot traffic to sustain the ground floor retail that now doesn’t need to rely on department stores.  To take it a step further, the department store spaces can be re-purposed for medical uses – which would fit perfectly if the apartment units were targeted towards seniors – or self storage which would be in high demand for residents of micro-units.  On the surface, it seems like a win-win.  Anyone out there have any thoughts as to why this wouldn’t work?

Economy

Still Holding Up: Despite some hiccups,  the underlying trend shows people are getting jobs, earning more money, and then spending some of those funds, meaning that the economy is still headed in the right direction.

Dirty Secret: There’s one part of central banking that central bankers often don’t like to talk about – their inflation targets are completely arbitrary.

The Old Fashion Way: How to get and stay rich in Europe – inherit money for 700 years.

Residential

Facepalm: The mayor of Palo Alto would prefer to see less job growth rather than more housing in order to “solve” his city’s housing crisis.  I guess when you buy a house for $490k in 1994 and it’s now worth $4mm, it’s difficult to see past the economic self interest in keeping housing scarce.

Rebuttal: I was going to write a rebuttal to the piece that I posted on Tuesday about the non-NIMBY argument for restrictive zoning but ran out of time.  Preston Cooper at Economics 21 did a better job than I would have anyway.  Long story short, it eventually results in the country looking like something moderately resembling The Hunger Games.

Imagine That: The 15% foreign buyer tax in Vancouver that we have posted about previously is already throwing ice water all over the already-cooling housing market there.  See Also: The white hot Seattle market is showing some early signs of cooling a bit. (h/t Scott Cameron)

Priorities: Apartment hunters are increasingly selecting units based on convenience for a very important family member: the dog.  As a self-professed crazy dog person I totally relate to this.

Profiles

Valuable Commodity: The fascinating story of how Instant Ramen Noodles overtook tobacco to become the black market currency of choice in America’s prisons (hint – the food there is really, really bad and getting worse).

Color Coordination: Great Britain decided that it was a good idea to give all of their Olympic athletes identical red suitcases which led to a hysterical epic FAIL upon their return to Heathrow after the closing ceremonies.

LOL: Looks like someone may have leaked the top secret recipe for KFC’s fried chicken.

Chart of the Day

Consider this your daily reminder that houses in CA are incredibly expensive

WTF

Friday Quiz: See if you can figure out whether or not some really arcane sports were ever actually in the Olympics.

Darwin Award Attempt: If you feel the need to jump from rooftop to rooftop to impress your date than you probably shouldn’t be dating.

Fight!  Watch a group of women beat the crap out of each other in a Chicago Walmart.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 26th – Transition

Landmark Links August 23rd – Blind Sided

pool push

Animated photo in wordpress.com link (trust me, it’s worth it)

Lead Story… A massive number of Home Equity Lines of Credit (also known as HELOCs) were originated from 2005-2007, many of which have not been refinanced due to a combination of increased underwriting scrutiny and falling values (depending, of course on where the home is located).  Nearly all of these loans were revolving lines with adjustable rates that are interest only for the first 10 years.  Now those loans are beginning to convert to amortizing which is leading to an increase in missed payments and a whole bunch of headachese.  From the WSJ:

The bill is coming due for many homeowners on a type of loan that was widely popular in the run-up to the housing bust, causing a rise in delinquencies at banks.

More homeowners are missing payments on their home-equity lines of credit, or HELOCs, a type of loan that allows borrowers to withdraw cash from their house to pay for renovations, college tuition or almost any other expense. These loans typically require interest-only payments for the first 10 years, but then principal payments kick in for the next 15 or 20 years.

The increased cost of the loan can become a strain for some borrowers. This is becoming an issue now because many borrowers signed up for Helocs in the run-up to the housing bust as home values kept rising. Roughly 840,000 Helocs taken out in 2006 are resetting this year, with principal payments on an additional nearly one million loans expected to hit in 2017.

Borrowers who signed up for Helocs in early 2006 were at least 30 days late on $2.8 billion of balances four months after principal payments kicked in this year, according to Equifax. That represents 4.4% of the balances on outstanding 2006 Helocs. Delinquencies were at 2.9% before the reset.

Resets can lead to payments jumping by hundreds, or in some cases, thousands of dollars a month. Consider a Heloc with a $100,000 balance and a 4.5% interest rate. It would have a $375 interest-only monthly payment, which would then rise to about $633 when principal payments kick in, assuming a 20-year repayment period, according to mortgage-data firm HSH.com.

Consider this part of the lasting hangover from the Great Housing Crisis.  Banks, the government and borrowers spent a lot of effort in working through issues arising in the massive primary mortgage market both during and after the Great Recession but spent almost no time on HELOC’s.  This made sense as the primary market is far larger than the HELOC market and represented a much larger systemic risk.  Also, as stated earlier, almost all HELOC’s are adjustable meaning that borrowers generally benefited from falling interest rates over the past 10 years or so even if the loans couldn’t refinance.  Many borrowers who thought that they were mostly out of the woods are now getting blindsided by letters from their HELOC lender informing them that the payment is about to increase because it’s about to start amortizing.  Those with significant equity (mostly in the expensive coastal markets that have recovered the most) will probably refinance.  Those who don’t have significant equity are either going to have to absorb the higher payment, sell or try to work out a deal with their lender (who probably doesn’t want to foreclose and assume responsibility for the 1st DOT being that there is little to no equity and the HELOC itself might be underwater).  This is probably not a catastrophe in the making since it’s nowhere near the size of the primary mortgage market and inventory is generally tight to begin with.  However, it is another headwind in a housing market (and an economy for that matter) that is finally showing tepid signs of a real recovery.

Economy

New Normal: Federal Reserve officials are begrudgingly coming to the conclusion that they have long feared – the unconventional tools that they have had to use during and after the Great Recession are likely to be needed for a long time.

About Time: Middle-income jobs are finally showing signs of a rebound.

Resilient: A handfull of shale drillers are ramping up drilling in the oil patch again as prices close in on $50/barrel.

Commercial

The Beneficiaries of Hoarding: Self storage has been white hot and could be for some time, benefiting from declining home ownership, new management systems and better technology. (h/t Scott Ramser)

Residential

On the Move: The non-NIMBY argument for restrictive zoning in big coastal cities.  Not sure how this plays out in the real world but it’s sort of fascinating.  See Also: Bay Area startups find low cost outposts in Arizona.

Expensive Affordability: For the first time ever, Seattle is mandating that apartment and condo developers include affordable units in their projects or pay an in-lieu fee to develop affordable units elsewhere after a unanamous City Council vote. (h/t Scott Cameron)

Profiles

Dual Threat: Say what you will about Kobe Bryant’s final few crappy seasons with the Lakers but the guy seems to have an eye for good VC investments.

Swipe Right: Single people are starting to use Linked as a dating site.

Maverick: The story of how Mark Cuban went from a broke 20-something nicknamed “Slobbins” who knew nothing about computers and lived in a 2 bedroom apartment with 5 other guys to a billionaire is inspiring.

Chart of the Day

Things you need are getting more expensive while things that you want are getting cheaper.

prices2-1

WTF

Striptease: Two Mongolian wrestling coaches protested the outcome of an Olympic bronze medal match by stripping down to their underwear in a packed arena.

Hell NO: KFC is now selling a sunblock that makes you smell like a basket of fried chicken. They sold out right away because no one ever went broke betting against the taste of the American public.

Side Effects: You can’t overdose on marijuana but it might make you call your cat a bitch (and land you in the paper if your wife calls 911 and it’s a particularly slow news day).  (h/t Trevor Albrecht)

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 23rd – Blind Sided

Landmark Links August 12th – Why We Can’t Have Nice Things

kids making a mess

Lead Story… In a profoundly disappointing but not remotely surprising story, labor, environmental and tenant advocacy groups have effectively nuked CA Governor Jerry Brown’s plan to streamline approvals for housing developments, imperiling it’s chances of passing through the legislature this year.  Brown’s plan essentially would have allowed development “as of right” so long as it conformed with underlying zoning and allowed for a certain number of affordable units.  This would have effectively subverted the veritable maze of discretionary approvals currently required in some municipalities.  First, construction union leaders threw a hissy fit because the plan didn’t include enough goodies and hand outs for union labor to buy – I mean win – their support.  Next, environmental groups (Side Note: in California, the term “environmental group” is nothing more than a euphemism for  NIMBY) opposed the plan because they don’t want anything built under any circumstances ever if it’s anywhere near the expensive – and often developer-hostile neighborhoods where they reside and Brown’s plan would effectively take away a major lever of control – discretionary approval – that they have held in the development approval process.  Third, some renter advocacy groups joined in with the construction unions and environmentalists because they apparently aren’t all that sharp and don’t realize that they are being bamboozled into opposing something that would ultimately lead to lower rents which would benefit them the most.  i guess that no good deed goes unpunished.  From the LA Times:

Labor and environmental groups say they are done negotiating over Gov. Jerry Brown’s housing plan – LA Times

“After several meetings without an agreement on a variety of requested changes, we believe it is time to focus on real affordable housing solutions that don’t directly undermine local voices and place communities and our environment at risk,” said a statement from the State Building and Construction Trades Council, Sierra Club and Tenants Together, who are among a coalition of more than 60 groups who joined to oppose the governor’s housing proposal.

Cesar Diaz, the legislative director for the State Building and Construction Trades Council, confirmed that the coalition would not participate in further discussions over the plan.

“This needs much more time and a policy-vetting process,” Diaz said.

Yes, this is depressing but it isn’t at all surprising to anyone who has spent any time in a field related to development in CA.  Any time that someone makes a proposal that attempts to fix out badly broken housing system, existing stake holders dig in their heels and do anything in their power to stop it.  This, as today’s headline suggests is why we can’t have nice things in California – namely an affordable and moderately functional housing market.

Today I’d like to present a counter example to illustrate what a functional housing market looks like.  There is a major global city that is fully built out with a population of over 13 million (far larger than any city in CA).  This city is a major global finance and trade hub.  It is land constrained and effectively fully built out, yet housing prices haven’t budged in nearly 20 years.  The city that I’m referring to is Tokyo and Robin Harding of the Finacial Times published a very important story about how regulation impacts housing cost called Why Tokyo is the land of rising home construction but not prices last week.  First off, I want make something clear.  The Japanese respect property rights to a level that’s almost inconceivable in California.  According to Takahiko Noguchi, a regional planning head in Tokyo:

“There is no legal restraint on demolishing a building.  People have the right to use their land so basically neighbouring people have no right to stop development.”

In other words, Tokyo has become the anti-coastal California where housing supply is created to meet demand without mountains of red tape and shrieking NIMBY obstructionists.  The outcome has been so dramatic that it’s a bit shocking to those that don’t live there.  From the FT (highlights are mine):

Here is a startling fact: in 2014 there were 142,417 housing starts in the city of Tokyo (population 13.3m, no empty land), more than the 83,657 housing permits issued in the state of California (population 38.7m), or the 137,010 houses started in the entire country of England (population 54.3m).

Tokyo’s steady construction is linked to a still more startling fact. In contrast to the enormous house price booms that have distorted western cities — setting young against old, redistributing wealth to the already wealthy, and denying others the chance to move to where the good jobs are — the cost of property in Japan’s capital has hardly budged.

This is not the result of a falling population. Japan has experienced the same “return to the city” wave as other nations. In Minato ward — a desirable 20 sq km slice of central Tokyo — the population is up 66 per cent over the past 20 years, from 145,000 to 241,000, an increase of about 100,000 residents.

In the 121 sq km of San Francisco, the population grew by about the same number over 20 years, from 746,000 to 865,000 — a rise of 16 per cent. Yet whereas the price of a home in San Francisco and London has increased 231 per cent and 441 per cent respectively, Minato ward has absorbed its population boom with price rises of just 45 per cent, much of which came after the Bank of Japan launched its big monetary stimulus in 2013.

In Tokyo there are no boring conversations about house prices because they have not changed much. Whether to buy or rent is not a life-changing decision. Rather, Japan delivers to its people a steadily improving standard, location and volume of house.

Japan
So how, exactly did this come about?  Some of us remember tales of the runaway Tokyo real estate market and subsequent crash in the 80s during the great Japanese boom and subsequent bust.  It may seem odd that a place that produced such an epic real estate boom and subsequent bust would be home to a stable, efficient real estate market.  Again, from the FT:
“During the 1980s Japan had a spectacular speculative house price bubble that was even worse than in London and New York during the same period, and various Japanese economists were decrying the planning and zoning systems as having been a major contributor by reducing supply,” says André Sorensen, a geography professor at the University of Toronto, who has written extensively on planning in Japan.
But, indirectly, it was the bubble that laid foundations for future housing across the centre of Tokyo, says Hiro Ichikawa, who advises developer Mori Building. When it burst, developers were left with expensively assembled office sites for which there was no longer any demand.
As bad loans to developers brought Japan’s financial system to the brink of collapse in the 1990s, the government relaxed development rules, culminating in the Urban Renaissance Law of 2002, which made it easier to rezone land. Office sites were repurposed for new housing. “To help the economy recover from the bubble, the country eased regulation on urban development,” says Ichikawa. “If it hadn’t been for the bubble, Tokyo would be in the same situation as London or San Francisco.”
Hallways and public areas were excluded from the calculated size of apartment buildings, letting them grow much higher within existing zoning, while a proposal now under debate would allow owners to rebuild bigger if they knock down blocks built to old earthquake standards.
All of this law flows from the national government, and freedom to demolish and rebuild means landowners can quickly take advantage. “The city planning law and the building law are set nationally — even small details are written in national law,” says Okata. “Local government has almost no power over development.”
Note that this is not all that dissimilar from the proposal that Gov Brown made where the State of CA would set policy from the top down since cities have shown absolutely no inclination to get their shit together when it comes to housing policy.  When the Japanese crisis hit, policy makers did something that those in the US have been unable and unwilling to do: liberalize development regulation to spur economic growth – which also led to a subsequent dramatic slowing in housing costs due to a pickup in efficiency.  Remember the Tokyo example next time someone makes an economically illiterate statement that building more market rate won’t make housing more affordable.  Albert Einstein once said that the definition of insanity is doing the same thing over and over again and expecting different results.  Japanese policy makers understand this, Californians apparently don’t.  The simple fact is that coastal CA cities will not get housing costs under control until they start doing things differently, much like Japan did in the midst of their economic crisis.

Economy

Debt Decision: Plunging interest rates have lowered the cost of borrowing over long time periods, making it appealing for the government to roll short term debt into longer term maturities.  See Also: It’s never been cheaper for cities and states to borrow money so why are they so reluctant?

Opposite Result: There is early evidence that negative interest rates are actually encouraging savings, rather than discouraging it as central bankers had hoped.

Pendulum Swing: In the never-ending tug of war between labor and capital, labor is gaining an upper hand as the job market tightens.

Residential

Landmark in the News: Landmark’s own Tom Farrell had a prominent quote in a feature Wall Street Journal article entitled  Lopsided Housing Rebound Leaves Millions of People Out in the Cold.  : The whole piece is well worth a read:

Tom Farrell, director of business development for Landmark Capital Advisors, which counsels investors on real-estate projects, said risk appetite is low, particularly outside core markets.

“We’re often saying ’You all want to be in the same spot, and you’re tripping over each other,” he said. “It’s just difficult to get people out to those secondary markets.”

Profiles

Early Exit: Startups are opting to sell rather than IPO as investors look to cash out early.

The Rise and Fall: How Yahoo went from tech powerhouse to also-ran and why Verizon bought it.

Chart of the Day

WTF

Headline of the Week: It’s hard to beat Subway rider smokes crack and strips naked before shocked witnesses on No. 3 train when it comes to news headlines.  Especially when said headline includes pictures (before the guy took his clothes off, thankfully).

Swipe Right: Judging by usage numbers and the 450,000 condoms provided to athletes, Tinder and the Olympic Village are a perfect match.

FAIL: Man tries to light house on fire in broad daylight but lights self on fire instead.  To make matters worse, the whole thing was caught on a security camera including the hysterical part where he tries to put it out.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 12th – Why We Can’t Have Nice Things

Landmark Links July 26th – Nip and Tuck

michael-jackson-before_and_after

Lead Story… Home renovations, which are already near record highs, are projected to accelerate over the coming year according to a new report by the Harvard Joint Center For Housing titled Above Average Gains in Home Renovation and Repair Spending Expected to Continue.  The study estimates that growth in the home improvement and repair space will reach 8.0% by the beginning of 2017, well in excess of it’s 4.9% historical average.  From the Joint Center’s press release:

“A healthier housing market, with rising house prices and increased sales activity, should translate into bigger gains for remodeling this year and next,” says Chris Herbert, Managing Director of the Joint Center. “As more homeowners are enticed to list their properties, we can expect increased remodeling and repair in preparation for sales, coupled with spending by the new owners who are looking to customize their homes to fit their needs.”

“By the middle of next year, the national remodeling market should be very close to a full recovery from its worst downturn on record,” says Abbe Will, Research Analyst in the Remodeling Futures Program at the Joint Center. “Annual spending is set to reach $321 billion by then, which after adjusting for inflation is just shy of the previous peak set in 2006 before the housing crash.”

Housing sales do indeed spur renovation activity, but there is something else at play here not referenced in the study that we seem to be witnessing a lot of lately: a market with increasing prices, little move-up inventory and low sales will lead to renovations as well.  It’s been well documented that the number of move-up homes on the market has been shrinking, meaning that those who wish to trade up out of an entry-level home have few options that are often bid up to high sale prices.  Calculated Risk’s Distressing Gap chart helps to explain this: new home sales are still extremely subdued (although recovering lately) and existing home sales are still well off their prior peak despite a growing population.

In most markets, if you are an owner of an older, entry level home and you want to upgrade, there are currently few options despite the fact that you may be sitting on a large amount of equity as prices have appreciated.  At the same time, debt yields have plummeted, sending mortgage rates plunging to record lows.  So what do you do?  Tap into some of that home equity to fix up your existing home (and, for Californians maintain a low property tax basis).  This is a potentially-self-perpetuating cycle where starter homes get upgraded and people stay put longer, meaning that new construction is being relied upon for an ever-higher percentage of entry level supply.  However, it becomes particularly daunting to build new homes at an entry level price point when approximately 24.3% of the final sale price of a new home is attributable to regulation.  “We could see percentage growth rates in the remodeling and home- improvement sector that exceed those for new home construction in the next few years,” according to Brad Hunter, chief economist with HomeAdvisor, an online home services marketplace.  Great news if you own stock in Home Depot, Lowe’s, Masco, etc or own a home in an aging neighborhood where this is going on but I’m not as convinced as the Joint Center authors are that it will necessarily lead to higher sale volume.

Economy

Still Bright: Despite all of the noise and bold print headlines, Bill McBride of Calculated Risk still doesn’t see an impending recession.

Yellow Light: JBREC sees Baby Boomer retirement keeping a lid on US economic growth through 2025.

Flattening: Renters (at least those at the high end), are starting to get some relief from ever-rising rents as inventory grows.  This could lead to lower inflation, making it more difficult for the Fed to hike rates.  See Also: Yellen still waiting for overwhelming evidence to warrant a rate hike.

Commercial

Feeding Frenzy: Restaurants, not shops, are  increasingly becoming the driving force behind retail centers in the US. See Also: As e-commerce continues to hit retailer margins, the mall of the future will offer dinner, movies….and a colonoscopy.

Crowding Out: Vancouver’s port is facing a potential crisis as the local housing boom continues to encroach onto former industrial sites leaving operators with few options for warehouse space.

Residential

Telecommuting: The boom in co-working space, combined with insane home prices and rents in the Bay Area has made telecommuting from low-priced rust belt cities a reality for some former Bay Area tech workers.

Roadblock: Construction labor unions are  throwing a hissy fit and fighting Governor Jerry Brown’s plan to make it easier to build more housing in California because he has thus far refused to make a massive union handout part of the deal.

Sale of the Century: It’s apparently a great time to buy a mansion in the Hamptons as the market has cooled with sales down around 60% from last year……if you have around $10MM or so to burn.

Profiles

Dinosaurs: Believe it or not, VCR’s are still being produced in Japan but won’t be after this month.

The Juice is Loose: David Ortiz aka Big Papi of the Red Sox who was washed up a couple of years ago, hit a home run so hard that it got stuck in Pesky’s Pole, because steroids.

Chart of the Day

High Building Costs Make it Tough to Construct Affordable Homes

WTF

Lazy Shit: For those of you who don’t like to lift a finger to do much of anything, there is now an app called Pooper that allows you to summon someone to pick your dog’s poop up off the sidewalk or your neighbor’s lawn.  Don’t laugh, it was valued at $850MM in it’s latest funding round.

That Escalated Quickly: In-store video footage captured a man attempting to build a chemical weapon in a California Walmart.  See Also: Five weird crimes that could only happen in a Walmart.

Tenement: Members of Australia’s Olympic team refused to move into Rio De Janeiro’s Athlete’s Olympic Village over safety concerns and issues with plumbing.  Rio’s mayor responded by offering to get them a kangaroo in order to help them feel more at home to which an Aussie team spokesperson replied: “we do not need kangaroos, we need plumbers to account for the many puddles found in the apartments.”  This has the potential to be a huge mess.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 26th – Nip and Tuck