Landmark Links October 4th – I Guarantee It

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Lead Story… When home owners take out a mortgages and can’t afford to put down 20% or more of the purchase price, the lender makes them get something called Private Mortgage Insurance or PMI which protects the lender in the event of borrower default in exchange for a monthly premium.  It’s a well established insurance product that has been widely used for years.  Traditionally, rental landlords have not had a comparable form of insurance to rely on should a tenant default.  Typically, a landlord requires that a prospective tenant make an annual income of greater than 40 times the monthly rent with a credit score of no lower than 700.  If a prospective tenant can’t meet that requirement, they must find a guarantor who earns 80 times the monthly rent in order to qualify.  As you can imagine, this is not easy in markets where rent is high and vacancy is tight, especially for someone who is recently entering the workforce and has neither a substantial credit or income history.  Enter a relatively new business plan – payment insurance for apartment hunters from a startup called TheGuarantors.  From the Wall Street Journal:

TheGuarantors, launched in New York in 2014, sells payment insurance to tenants, providing landlords with a guarantee they will be made whole if the tenant becomes delinquent.

The offering is a symptom of a pricey market in which rents have risen faster than incomes and landlords can be picky about the qualifications they demand. Rents have climbed about 20% nationwide over the past five years while incomes have only recently started to rise.

The insurance, similar to the private mortgage insurance many lenders require of borrowers who have small down payments, provides a new level of protection for developers putting up new buildings in pricey markets where the applicant pool might be thin.

It could be a boon to landlords in places like San Francisco and New York in particular because rent growth has far outstripped income gains in recent years. Cliff Finn,executive vice president of new development at Douglas Elliman in New York, said 10% to 30% of the tenants in buildings he is leasing are now insured through TheGuarantors.

The premiums work out to somewhere between 2 weeks and 1 month’s worth of pay a year depending on the degree of risk and the program allows for borrowers with as little income as 27 times monthly rent and as low as a 630 credit score.  The balance sheet capital that TheGuarantors uses is from Hanover Insurance Group, a $5 billion dollar insurance company based in Massachusetts.  Another company, called Insurent is the largest in the industry, having issued over 13,000 guarantors since 2008.  A few of thoughts on this:

  1. If widely adopted, this type of insurance is likely to result in higher rents since it increases demand by creating more eligible renters without increasing unit count.
  2. Even considering point 1 above and the increase cost of living for a renter through the insurance premium, I would tend to think it’s a net positive for the economy since it allows for more household creation at the margin.  In other words, the kid who is living in his or her mom’s basement is likely able to qualify for their own apartment sooner.  That being said, the slippery slope here is that landlords make their qualification criteria more difficult and start effectively forcing the product on those who don’t really need it.
  3. This could be highly lucrative for the insurer assuming that renters are underwritten correctly and they are selective about markets.  It’s also not clear if the insurer is able to sublet the unit in the event of default during the period that they are on the hook for the guarantee.  If they are, it would be much easier to mitigate risk, especially in a market with low vacancy.

Overall, this seems like a fascinating business plan and definitely something that we will be keeping a close eye on to see how it plays out through the economic cycle.

Economy

Dropping Like a Rock: Grocery prices are plunging at rates not seen since 2009.  Great news for consumers, not so much for stores and suppliers.

The Haunting: The ghost of the Lehman Brothers failure haunts troubled Deutsche Bank, however the some of the parallels are a bit misleading.

Commercial

Running on Full: Despite somewhat of a construction boom, America is running out of apartments as occupancy hits a near-record  96.5%.

Residential

Reversal: Banks are starting to hold onto loans again and growing loan profitability is the reason why.  Data that was published by the Urban Institute last week showed that portfolio loans or loans that portfolio loans, or loans that banks make to keep on their books grew to 34%, the highest level since 2002.

Rise of the Machines: New technologies like self driving cars, ride sharing apps and drones could be a catalyst for suburban growth.

Profiles

The Prodigy: Theo Epstein became a hero in Boston after he put together the blueprint for the Red Sox to win two World Series championships after 86 years of frustration.  He’s now the general manager of the Cubs and has the team poised to end a 107 year World Series drought.  If they pull it off, he’ll become a legend.

Assholes: Emirates Air is going to start charging families for the privilege of sitting together on a plane.

Chart of the Day

Banks are actually holding loans on their books again.

WTF

Slow News Day: The Washington Post actually published an article last week posing the question of whether or not dog Halloween costumes are sexist.  I give up.

Cultured Idiots: Unwitting attendees at the NY Symphony Orchestra gave a rousing standing ovation for a North Korean propaganda song that is an ode to dictator Kim Jong Un because they didn’t know any better.

When Nature Calls: A woman from Memphis came home one day to find her front door open.  She walked inside to find that, not had her house been robbed, but the two burglars were having sex on her couch.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 4th – I Guarantee It

Landmark Links August 5th – Suicide Pact

Niagra Falls

Lead Story… Vancouver is about to tank it’s residential real estate market after they instituted an astronomical 15% tax on real estate purchases by foreigners.  The worst part may be that existing contracts were not grandfathered in to the new law.  This led to a near-shutdown of the BC land registration system as realtors worked overtime to close before the tax took effect.  Going forward, many of the escrows that didn’t close are likely to fall out as the tax proceeds will exceed released deposits by a substantial amount in some cases.  The impact of such a tax will have massive and chaotic impact as it reverberates through the greater Vancouver market and could become a text book example of the old saying: “be careful what you ask for because you just might get it.” (h/t Darren Fancher) See Also: How Chinese billionaires fueled the epic Vancouver real estate boom.  As a point of reference for just how hot the Vancouver real estate market has been, this picture is worth more than 1,000 words:

Vancouver housing prices

Economy

Aging in Place: Americans over 65 (and increasingly over 75 as well) are staying in the work force well into their retirement years and it’s often about more than just cash flow.  Contra: Aging  US population is hurting both productivity and workforce growth as baby boomers retire.

Bass Ackwards: The best paid CEOs run some of the worst performing companies.

Commercial

Bad Optics: At it’s best, the EB-5 Visa Program, which allows qualified, wealthy foreigners to obtain a green card in exchange for investing $500k or more in a job creating enterprise is a win-win for both investors and developers.  However, the program hasn’t been without controversy and new allegations of developers defrauding foreign investors are not going to help.

Taking Matters Into Their Own Hands: Facebook pledged to build at least 1,500 apartment units for the general public (not including housing for FB employees) in Silicon Valley.  The social media giant is becoming an apartment developer in an attempt to generate support for it’s expansion plans, which call for an adding 6,500 new employees in an already dramatically under-supplied Bay Area market.

Let’s Make a Deal: As new apartments flood the downtown LA market, landlords are increasingly offering rent concessions that were nowhere to be found up to recently.

Residential

Chilled: The Manhattan luxury condo glut has led to an ice-cold land market on the formerly red-hot island.

Water, Water Everywhere…: It’s a seller’s housing market but almost no one is selling primarily because it’s hard to find a replacement house, leading to tight inventory.  See Also: Home ownership is now at a 5-decade low.

Profiles

Crash Proof: How driverless cars could threaten insurers’ earnings.

Lurking in the Shadows: Auction house Sothebys is becoming a player in the shadow banking space.

Podcast of the Day: Malcolm Gladwell’s latest Revisionist History podcast is about the true story behind uncontrolled acceleration accusations leveled against Toyota in 2009 that led to a 10 million car recall and $1 billion fine.  The real story is fascinating – Toyota was a scapegoat – and should be a must-listen for anyone who gets behind the wheel.

Chart of the Day

WTF

Roaming Charges: Japanese Olympic gymnast Kohei Uchimura, the defending gold medalist in the men’s all-around competition got hit with a $5,000 phone bill (which his carrier later agreed to reduce substantially) due to the fact that he: 1) Apparently has a Pokemon Go addiction and 2) Didn’t bother to disable the roaming feature on his cell phone while in Brazil. To make matters worse, he had a 0% chance of actually capturing a Pokemon as the game has not yet been released in Brazil.  That’s a painful hit to the wallet but this also feels like a great endorsement opportunity.

Getting Kids Involved in the Political Process: Mayor Anthony Silva of Stockton, CA was recently arrested and charged with providing alcohol to minors at a youth camp that he runs because, well, Stockton.

You Gonna Smoke That? A man from Orlando Florida was recently arrested when police mistook his Krispy Kreme doughnut for meth.  There’s a great cops and doughnuts joke in there somewhere (h/t Chris Gomez-Ortigoza).

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 5th – Suicide Pact