Landmark Links August 19th – Ramparts!!!

Lightening_Caddyshack2

Lead Story…  In the all-time classic 1980 comedy Caddyshack, obnoxious condo developer Al Czervik, played by Rodney Dangerfield opines that:

“…golf courses and cemeteries are the biggest wastes of prime real estate.”

He was onto something.  It’s been well documented in the years since the Great Recession that golf courses are, by and large a terrible investment that almost never make money – often losing a lot instead.  In fact over 800 courses have closed over the past decade as a result of no longer being financially viable.  So, imagine my surprise when I saw a feature article in Bloomberg earlier this week about how shuttered golf course clubhouses have developed the strange behavior of spontaneously catching on fire:

The dark clouds rolled in over Phoenix’s Ahwatukee Lakes Golf Course in 2013, when its owner declared that the costs of keeping it open had outstripped what he was collecting in green fees.

Wilson Gee, a California businessman, shuttered the golf course, erected barbed-wire fences, and began looking for a buyer, telling reporters the land would never be a working golf course again. Homeowners, complaining he was turning the course into an eyesore in order to win approval to redevelop it into single-family homes, sued to reopen it. Gee shanked his first attempt to sell it in 2014, when one homebuilder walked away from a deal, but last year found a buyer in a Denver-based developer.

Then one night in February, the dark clouds turned to smoke, and a fire caved in the clubhouse roof.

It’s a local story, defined by conditions peculiar to Ahwatukee, a community of about 80,000 separated from downtown Phoenix by a collection of 2,500-foot peaks known as South Mountain. But the dynamics that bred the deadlock between the struggling golf course’s owner and its aggrieved neighbors are mirrored in communities across the country.

More than 800 golf courses have closed nationwide in the last decade, as operators grapple with declining interest in the sport and a glut of competition. Many of those shuttered courses were built on land proscribed from redevelopment by local zoning codes seeking to preserve open space—or, as with Ahwatukee, by deed restrictions intended to protect homeowners who had paid a premium to live near a golf course.

That leaves some golf course owners with the real estate equivalent of an unplayable lie: They can’t make money running the course, and they can’t recoup their investment by selling it.

“If you open a restaurant in a strip mall and you fail, you close shop and move on,” said Jay Karen, chief executive officer of the National Golf Course Owners Association. But for golf course owners, it’s much harder to pull the plug on a failing business; as courses fall into disuse, they become suburban zombies—not quite dead, yet far from alive.

“Nobody’s tracking what’s happening to the land,” Karen said.

Therein lies the problem: developers went on a golf course building spree back in the 1990s and early 2000s.  Back then, Tiger Woods was bursting onto the scene and golf was seen as a potentially lucrative investment as millions of Baby Boomers approached retirement which would undoubtedly be filled with more time spent on the links than ever.  When master planned communities were built, developers sold course-fronting homes for large premiums.  Fast forward to 2016 and the golf industry is dying a slow death.  Millennials, by and large have neither the time nor the money to play the game, causing a dramatic decline in club revenues and Nike has dropped out of the golf business as a whole as has Dicks Sporting Goods. In fact, participation is down a whopping 20% since 2003.  More from Bloomberg:

In April, fire ripped through the clubhouse at a shuttered western Kentucky golf course that had been the center of a lawsuit, burning through the afternoon until the roof collapsed over smoldering beams. On New Year’s Day, a former volunteer firefighter lit a small fire outside the vacant clubhouse of a closed 9-hole course outside Orlando, then returned three days later to spark a larger blaze, with the help of a can of paint thinner he had found there. And in September 2015, a fire reduced the 10,000-square-foot clubhouse at an abandoned golf course in Bakersfield, Calif., to only a few charred beams.

For John Rhoads, a homeowner in Sparks, Nev., a clubhouse fire at his local course, D’Andrea Golf Club, was both insult and injury. In 2012, its owner had asked members of the local homeowner association to pay an additional $28 a month for course upkeep, Rhoads said. The homeowners demurred, the course was shuttered, and the clubhouse became a magnet for vandals, who posted graffiti on its stucco walls and eventually burned it down. Now Rhoads worries that the owner is making an end run around the homeowner association to convert half of the course into new homes and a winery.

“This used to be one of the nicest golf courses in Reno-Sparks,” he said. Now? “Our property values are already down $25,000 a home.”

So what do you do with a shuttered golf course that has become blighted and attracts vandals and crime?  Developers would love to buy up courses and develop housing on them while dedicating a portion of the site for community agricultural use or park space as the sites are often prime develop-able parcels.  There’s just one problem: homeowners, especially those fronting the course want none of it being that they paid premiums for golf course frontage homes.  The last thing they want is a new neighbor in place of an old fairway.  This leads to an impasse between homeowners and course owners and almost no one is blinking.  Again from Bloomberg (emphasis is mine):

In the face of declining interest and competition driven by oversupply, course owners have gone searching for ways out. Some have donated golf course land to nature trusts and local parks, taking a tax break in return for preserving the open space. Others have inked deals with homebuilders—though those deals are often contingent on winning approval from homeowner associations or local governments.

“I’m hard-pressed to think of many cases where there isn’t a higher or better use than a golf course for the site,” said Jeff Woolson, managing director of the golf and resort group at CBRE Group. “The only clear exception would be Augusta, Ga.”—the hallowed, Bobby Jones-designed course that hosts the Masters tournament each year.

Whatever happens to the shuttered courses, two things are for certain:

  1. We aren’t going to see many golf courses get developed any time soon
  2. The biggest winners will be lawyers who handle the inevitable litigation between desperate course owners and irate homeowners

By the way, does that last quote from Jeff Woolson from CBRE sound a bit familiar?  While I can’t speak to cemeteries, it turns out that Rodney/Al was a visionary after all.

Economy

Rise of the Machines: How China’s factories are increasingly reliant on robots as their workforce shrinks.

Bursting Bubbles: Sorry, John Oliver but subprime auto loans, while likely predatory in some cases, are not the second coming of the U.S. mortgage crisis.

Commercial

They’re Baaaack: After a brief respite earlier this year, Apartment REITs are buying properties again which is a sign of health for the sector.

Residential

Blame Game: The City of Vancouver is blaming foreign buyers for the crazy run-up in it’s housing market and has even gone so far as to enact a 15% tax on foreign purchases in a effort to keep foreign buyers away.  However, a new report by Paul Ashworth of UK based research firm Capital Economics says that foreigners aren’t the primary issue and rather blames irresponsible lending.

Imagine That: Only 13% of households in San Francisco can afford to buy a median priced home.  Ironically, that’s actually substantially better than 9 years ago when only 8% could afford to purchase a house.

Profiles

People of Walmart: Walmart has a major crime problem and it’s driving police crazy.  This story has it all: shootings, stabbings, kidnappings and hostage situations.  However, my favorite episode is the one where police found a meth lab in a large drain pipe under a Walmart parking lot in upstate NY.

Hero: Meet the 102 year old woman who credits her longevity to drinking.

Pants on Fire: Ryan Lochte may be a great athlete but he is also a massive, massive douchebag.

Chart of the Day

WTF

Monkey Business: Video of the day twofer:

  1. Watch a monkey wearing a diaper get in a fight with a Walmart employee in a parking lot.
  2. Watch a baboon in a zoo goes berserk when a little girl taunts it and flings it’s poop at her face.

How to Avoid the Gulag: Shockingly, North Korea is the most efficient country at winning medals at the Rio Olympics.  Let that sink in.

Must Be the Pleats: Meet the Olympic pole vaulter who missed out on a medal because of his…..um pole.  He now claims it was a wardrobe malfunction.  Let me just go on the record to say that I would have handled this ENTIRELY differently had I been in his position.

Ohio = Florida of the Rust Belt: A man from Ohio was arrested for having sex with a red van on Tuesday on the side of a public road.  Sentences like this are what make The Smoking Gun the finest news site in the world: “The victim was parked at the time, cops say.”

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 19th – Ramparts!!!

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