Landmark Links October 18th – On Point

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Lead Story…. A bit short on time this week so I’m going to outsource the lead story.  Joe Bosquin of Builder Magazine wrote a wonderful summary about how California priced itself out of the market for entry-level home buyers titled The Unintended Consequences of Law. Spoiler: it has everything to do with Prop 13 and CEQA.  Bosquin’s piece as good as an explanation for our absurd housing prices in the Golden State as you will find.  Yours truly gets a bit more than a quick mention and they included an article  that I had written for Builder (and Landmark Links) back in May about why our impact fees are so high compared to the rest of the country.  By the way, the non-partisan Legislative Analyst Office published a piece in September in which they confirmed my thesis about the relationship between Prop 13 and impact fees.

Here’s an excerpt from Builder but you should really check out the entire article.  It’s a quick and easy read even if you aren’t a housing and development nerd:

According to a widely referenced 2015 report from the California Legislative Analyst’s Office (LAO), the Legislature’s nonpartisan fiscal and policy analysis arm, since 1980, California has built half of the housing units it needed—about 100,000 per year—to keep up with demand. And that’s just in aggregate. In high-demand locales like the San Francisco Bay Area and Los Angeles, the housing deficit is even greater. “Most of California’s coastal counties needed to build three times as much (or more) housing as they did,” the report claims.

Stated differently, during the past 36 years, California did not build the additional 3.6 million homes that it needed to keep its skyrocketing prices in check. To put that number in perspective, it would take the collective efforts of every home builder in the country, building nonstop at 2016’s projected pace of 1.26 million housing starts, three years to put a dent in the state’s problem.

The report concludes that NIMBYism, local communities’ lack of financial incentives to approve more housing, and anti-growth proponents who go to daunting lengths to block development have contributed to the problem, as well as more inveterate challenges such as a scarcity of suitable land along the coast and an ever-increasing population.

The LAO report found that the average cost of homes in California is two-and-a-half times higher than the rest of the country, and rents are 50% higher. It also points to evidence that high housing costs were making it difficult for companies to recruit employees, even in Silicon Valley, and threatened the state’s jobs base. Other reports that came out in its wake highlighted a net migration of 625,000 people out of the state from 2007 to 2014, primarily among lower income earners, attributed to housing costs.

All of which leads to the question, how did California get to a place where it tacks $75,000 onto the cost of a new home in the midst of a housing crisis that’s eroding its jobs base and pushing the country’s most populous state into an unwinnable war of the haves and have nots?

First off, major thanks to Joe Bosquin for writing this.  Also, a big shout out to Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association for calling the rest of us who cited facts in the article “morons” after he apparently couldn’t counter the points that we had made on factual grounds.  I’ll wear that one as a badge of honor.

Economy

Glass Half Empty: The downside of our technology revolution is a lack of job creation.

Warming Up: Wage growth is now at the highest level that it’s been in a year but the stock market might not be thrilled.

Visual Representation: 27 fascinating charts that will change how you think about the American economy.

Useless: The WSJ surveyed economists and found that 59% believe that there will be a recession in the next 4 years.  For those not familiar with this sort of methodology, 4 years is an incredibly long horizon in which to forecast such things.  The incredibly-accurate Bill McBride thinks that we are in the clear for 2017 and likely 2018 as well (although he cautions that even 2 years out is too far to accurately forecast).

Commercial

Bucking the Trend: While most benchmarks have remained low this year, LIBOR has climbed substantially mostly due to new money-market rules which could lead to an uptick in financing costs for commercial real estate.

Supply Exceeds Demand: Rents in Manhattan are falling as listings surge 35%.

Residential

Selection Bias: All of the Urban revival stories that you read these days are really about the amount of money flowing into urban centers than the number of people.

Viva Mexico: A condo boom in Tijuana, coupled with easier border crossing rules for regular commuters could help ease a housing shortage in San Diego….but is not without it’s risks to American buyers.

The First Step: The Federal Reserve has now acknowledged that we have a housing affordability crisis.  Admitting that you have a problem is the first step to recovery.

Profiles

Prime Time: Nearly 60% of US households and 75% of those that make over $112k per year are now Amazon Prime members.  Let. That. Sink. In.

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Pay For Play: For-profit college Devry University has finally agreed to stop using the bullshit claim that 90% of it’s graduates seeking employment found jobs in their field within 6-months of graduation.  The action came as part of a settlement with the Department of Education over misleading advertising.  That claim would be impressive (and improbable) if it was made by Harvard, let alone a lowly for-profit school that may or may not be a diploma mill depending on who you ask.

Foot in the Door: How Uber plans to conquer the suburbs by partnering with cities to ease parking congestion.

But First, Let Me Take a Selfie: Companies are starting to use facial-recognition apps that utilize smartphone snapshots to verify identity.

Chart of the Day

Things that we want are getting cheaper.  Things that we need are getting more expensive.

WTF

Hero: Regular readers know that I’m a sucker for a great headline.  Man ‘High on LSD’ Saves Dog From Imaginary House Fire is among the best that I’ve seen.

The Softer Side: That Russia is a bizarre place is pretty much self evident.  This new Vladamir Putin calendar featuring the Russian leader cuddling with kittens won’t do anything the change that perception.

Parent of the Year: A Pennsylvania woman has been charged with child endangerment after refusing to feed her 11-month old son anything other than fruit and nuts.  I’ve said it before and will say it again: veganism is a mental disorder.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 18th – On Point

Landmark Links October 11th – Put Your Money Where Your Mouth Is

USP NFL: CLEVELAND BROWNS AT BUFFALO BILLS S FBN USA NY

Lead Story… As I wrote a couple of weeks ago, the Obama Administration took the unprecedented action of calling on cities and counties to re-think their zoning laws.   This was a concerted effort to increase affordability and fight back against NIMBY’s who have successfully stopped development in some of America’s most productive cities.  The proposal is bold in that governors don’t often involve themselves in land use issues, let alone a sitting president.  However, the toolkit presented by the Administration is somewhat toothless because cities are ultimately still ultimately free to do as they please and they ultimately have control over local land use policy.

An additional way to achieve more density is actually quite straight forward: cash.  If the Federal Government really wants denser, more walkable mixed use development then they need to incentivize it by amending FHA rules that currently make it very difficult to build product that fits that description.  From The Washington Post (emphasis mine):

Main Street-style development — the “storefront on the first floor, apartments rented out above” style that forms the core of any older town’s historic center — is a residential building form that uses first-floor commercial space to serve community members and enliven a neighborhood. This low-rise density helps prop up the balance sheets of towns responsible for running utilities all the way out to suburban developments, as former city planner and engineer Charles Marohn has repeatedly demonstrated. It also keeps a constant set of the “eyes on the street” that Jane Jacobs identified as necessary for safe streets; renters keep an ear out for burglars after business hours and shopkeepers keep the same at bay during the day. It is, in other words, the core of any successful town-building.

Yet for 80 years, Main Street development has been effectively driven from the market by the growth of federal housing policy hostile to mixed use. Ever since Herbert Hoover’s Commerce Department helped promote the spread of model zoning codes that physically separated people and their community institutions, the federal government has poured its energy and resources into encouraging the growth of widely dispersed single-family homes and large, centralized tower blocks. To this day, FHA standards for loans, which set the market for the entire private banking sector, prohibit any but the most minimal commercial property from being included in residential development. As a groundbreaking report by New York City’s Regional Plan Association found, these standards are “effectively disallowing most buildings with six stories or less.” And depending on the program, a building could have to reach to 17 stories before it is eligible for participation in the normal housing markets. Without the FHA’s blessing, projects are granted the “nonconforming” kiss of death unless their developers can persuade a local bank to write an entirely customized loan for them, one whose risk the bank would have to keep entirely on its own books.

These caps on commercial space and income should be raised to level the playing field for housing development and let small developers invest as much in their home towns as huge corporations will in big cities. Caps currently limited to 15 and 25 percent should be raised to more than 35 percent to legalize even just three- and four-story buildings. As small towns and secondary cities across the country seek to revitalize their downtowns to become more competitive job markets, unreformed financing restrictions act as an invisible barrier, suffocating local efforts to invest in smaller communities. And while the housing affordability crisis has reached the most acute levels in a handful of coastal cities like New York, San Francisco and Washington, the White House admits that “this problem is now being felt in smaller cities and non-coastal locations.”

The current financing restrictions make it so that the tail frequently wags the dog in mixed use residential construction.  Cities often want ground floor retail to be included to add to their tax base and  increase walkability but it’s incredibly difficult to finance.  Instead what happens, is the developer gets stuck trying to thread the needle between building just enough retail to appease the city but keeping it at a low enough percentage of the total project square footage to avoid the dreaded non-conforming label.  The end result is that functional retail space is sacrificed in order to comply with FHA rules.  So, rather than having a well-designed retail concept, you end up with small, non-functional retail components in all but the largest projects.  The space has little actual economic value except as a means to obtain financing.  By way of example, a project one block from our office was recently denied by Newport Beach’s city council due to a lack of ground floor retail.  No doubt that the developer was designing to the financing constraints but didn’t include enough retail to get the City on board.  The federal government took a step in the right direction earlier in the year by making it easier to finance condos.  This is the next logical step if they are serious about increasing density and making housing more affordable.  Time to put your money where your mouth is.

Economy

Meh: The September Jobs Report was sort of a dud.

Here to Stay?  I love this explanation from Bloomberg’s Noah Smith on why low interest rates don’t necessarily cause excessive risk taking:

What is it that allows rates to hover around zero indefinitely without causing investors to do bad things with cheap money? It depends on why rates are low in the first place. If money is cheap because central banks are using their powers to keep rates lower than what the market would bear on its own, it stands to reason that investors will take cheap money and invest it in riskier things than they otherwise would. But if rates are low because of natural forces in the economy, and central banks actually have little to do with it, then there’s no reason business people would be taking extra risk.

Crude Math: An agreed OPEC production cut has oil back above $50/barrel but large, recently discovered reserves are likely to create yet another glut in the not-too-distant future.

Commercial

Over the Hump?  Apartment rents fell for the first time in a very long time in the 3rd quarter.

Dumpster Fire: Bottom tier retailers Kmart and Sears are technically still in business but both stores are utter disasters.  Rating agencies just put Sears Holdings, the company that owns both on death watch and the only way that it’s keeping the lights on is by selling the best assets that it owns.  Part of the problem is that Sears Holdings still own or lease approximately 2,500 properties so this mess will be very difficult and time consuming to wind down.

Sears-map

Residential

Beneficiaries: Vancouver’s home sales are down 33% after they introduced a foreign buyer tax.  Seattle is likely to benefit.  See Also: New York is overtaking London as the #1 destination for international property investment thanks to Brexit.

White Knight?  Tech firms, often considered villains when it comes to housing issues in the Bay Area are now throwing their weight behind pro-development groups to push for more housing construction.  See Also: The housing shortage is going to start negatively impacting economic growth in California more seriously if something isn’t done.

NIMBY Awards: The Bay Area Metropolitan Observer put together a list of their top 10 Bay Area NIMBY moments of 2016.  It would be funnier if it wasn’t so sad.

Profiles

Payday: Everyone’s favorite sexting app, also known as Snapchat is working on an IPO rumored to value the tech firm at $25 billion.

GTL is Cancelled: Tougher regulations and taxes are hitting tanning salons hard and there are 30% less of them than there were in 2008.

Chart of the Day

NIMBYs gone wild: LA Edition

Greg Morrow Capacity Graph

Source: Greg Morrow of UCLA

WTF

Best Excuse Ever: A Canadian pole vaulter who tested positive for cocaine just days before the Rio Olympics and nearly didn’t get to attend claimed that it happened because he made out with a girl that he met on Craigslist.

Wings (and Heads), Beer, Sports: Green Bay Packers tight end Jared Cook ordered some food at Buffalo Wild Wings and received a deep fried chicken head on his plate.

People of Walmart: Walmart was selling a shirt on it’s website that said: “I’d Rather Be Snorting Cocaine off a Hooker’s Ass.”  Sadly, it was taken down once management realized what was going on.

Bad Idea: Entering a Florida Walmart is a bad idea in the best of times.  Doing it before a major hurricane when people are stocking up is just asking for trouble as you’ll see in the video of the day.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 11th – Put Your Money Where Your Mouth Is

Landmark Links September 27th – Unusual Trend

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Lead Story… “When Orange County catches a cold, the Inland Empire gets the flu.”  If you’ve spent any time in the real estate industry in Southern California, you’ve probably heard some variation of this truism.  The relationship has held up over the years because the two regions are closely linked in terms of geography and economy: OC has white collar jobs and executive housing, whereas the IE traditionally has more blue collar jobs and more plentiful affordable housing.  In a typical cycle, OC home prices rise first, followed by IE prices.  When the cycle turns, the IE pricing and volume typically falls off first when entry level financing disappears and blue-collar employment falls off.  The price movements in the Inland Empire are typically greater in percentage terms (although substantially less in nominal dollar terms) to both the upside and the downside since values there are lower.  This cycle, that historical relationship has broken down, as I detailed in a blog post titled Mind the Gap back in May.  Last week, JBREC’s Rick Palacios JR posted a research piece about the disjointed nature of the recovery across housing markets in the US, summed up neatly in the chart below:

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The first thing that I noted on the chart is that, aside from Houston, every market on here is still on the positive side of the slope.  Larry Roberts at OC Housing News wrote a follow-up post that helps put the above chart in context about how Dodd Frank’s crackdown on so-called affordability products will dampen volatility in future housing cycles.

The second thing that I noticed is more local and that is that JBREC classifies both OC and LA as late Phase 2 to early Phase 3 while the Inland Empire has barely made it out of Phase 1 and is plagued by relatively low levels of housing construction.  Orange County prices exceed the prior cycle peak while Inland Empire prices are still 20% – 30% below.  IMO, there are several reasons for this:

  1. While development impact fees are very high in both Orange County and the Inland Empire, they are far higher as a percentage of new home price in the Inland Empire.  Housing prices crashed in the late aughts but impact fees didn’t, making it very difficult to build homes profitably in further out locations that haven’t experienced the coastal recovery.
  2. The Inland Empire is a less diverse economy than Orange County and is more reliant on real estate development to power it’s economy, which has struggled in light of the low number of housing starts the region is experiencing from what we would typically see at this point of the cycle.
  3. There was a far higher level of distress in the Inland Empire markets during the housing crash which took longer to work off than it did in Orange County.
  4. Perhaps most importantly, the Inland Empire is an affordability-driven market.  Orange County is not.  Riverside and San Bernardino Counties are both highly reliant on FHA financing that allows for much lower down-payments than conventional financing options.  San Bernardino and Riverside Counties are constrained by the FHA limit of $356,500 which is absurd given the massive geography of these two counties – if they were their own state it would be the 11th largest in the US by land mass.  At or below this loan amount a borrower can put up a down-payment as low as 3%. That down-payment goes up substantially for loan amounts above $356,500.  That is a huge problem for builders in the IE since they are essentially sandwiched between rising impact fees / regulatory costs and an FHA price ceiling.  If a builder wants to sell homes priced at or below FHA, he has to find cheap land and it’s still tough to make a profit.  Price above it and his absorption dries up due to a lack of a buyer pool with substantial down payment capacity.  Orange County has an FHA limit of $625,500.  Even still, Orange County just isn’t that beholden to FHA limits because home prices are so high here.  Perhaps the only silver lining is that it’s highly unlikely that the FHA will reduce loan limits for Riverside and San Bernardino Counties next year and increasingly likely that they will raise it a bit.  Still, being constrained by a completely arbitrary government loan cap on a huge and diverse area is hardly a healthy situation, even if you can get some relief when that cap increases.

Perhaps I’m incorrect and the historical relationship will remain in tact when the market eventually turns.  However, it seems unlikely given that the Inland Empire really hasn’t experienced much of a real estate recovery while Orange County has.  It’s a lot more painful to fall off of a ladder than off of a curb.

Economy

Happy Losers: So much of what’s wrong with the US economy is summed up in this paragraph from the Washington Post:

Most of the blame for the struggle of male workers has been attributed to lingering weakness in the economy, particularly in male-dominated industries such as manufacturing. Yet in the new research, economists from Princeton, the University of Rochester and the University of Chicago say that an additional reason many young men are rejecting work is that they have a better alternative: living at home and enjoying video games. The decision may not even be completely conscious, but surveys suggest that young men are happier for it.

Quick to Jump Ship: Why decreasing employee tenure could be a positive sign for the economy.

Paycheck to Paycheck: Small businesses are now surviving but still not thriving. A new JP Morgan study found that the average small business has less than a month of cash operating reserves.

Residential

Movin’ Out: KB Homes is seeing more young people entering the first time home buyer market.  Apparently, there are a few more vacancies in mom’s basement now.

Slim Pickin: Home sales fell in August as inventory fell over 10% from this time last year.

Super Sized Incentives: Builders are constructing super sized homes because they are highly economically incentivized to do so.

 Profiles

Acquisition Target: Suitors are beginning to line up to acquire beleaguered Twitter. Google and Salesforce are the among the latest rumored to be interested as is Disney.  See Also: Why is Salesforce interested in Twitter?  It’s all about the data.

Fashion Statement: Snapchat is entering the hardware business with a line of camera-equipped sunglasses.  This is great news as is it will instantly ID people who deserve to get punched in the face.

Gross: Hampton Creek is a San Francisco startup that wanted to become “the first sustainable-food unicorn” in part by selling a vegan concoction called “Just Mayo.”  The problem was that it apparently tasted like crap and the company was busted buying gallons of their own disgusting concoction from Whole Foods and other stores in an effort to boost it’s sales. (h/t Mike Deermount)

Chart of the Day

REITs get their own sector in major S&P 500 makeover

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WTF

No Regrets: A 27 year old man from Boston attempted to create something he called a “scuba bong” by filling a scuba tank with marijuana smoke. He failed miserably and lost both of his testicles when the tank exploded. The gene pool has been chlorinated once again.

Stupid Is As Stupid Does: As many of you probably know, Apple got rid of headphone jacks on the iPhone 7 leading to angst among many loyal Apple users. A prankster posted a video purporting to show owners of the new phone how to “add” the headphone jack by drilling a hole in the phone. The video went viral and idiots are now breaking their phones by drilling them out. Imagine a person of average intelligence. Now consider that half of the world’s population is dumber than that person.

Florida Has Jumped the Shark: A tweaker on a 5-day methamphetamine binge cut off a certain part of his anatomy and fed it to an alligator because, Florida.  A friend first sent me this story and I thought it was a fake.  It appears to be legit.  When it comes to Florida weirdos, reality is often stranger than fiction. (h/t Andrew Shugart)

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 27th – Unusual Trend

Landmark Links September 13th – Falling Behind

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Lead Story…. It’s incredible how quickly things change.  Just a few short years ago, conventional wisdom was that it would take an eternity to work through all of the excess inventory created by the housing bust and foreclosure crisis.  However, in reality banks were incredibly adept at managing their REO inventory, effectively preventing the massive  glut that so many expected.  In the meantime, very little in the way of new housing was built as financing dried up and builders pulled back in fear of competing with the looming bank REO inventory liquidation that never really materialized.  Fast forward to 2016 and the stark reality of a new sort of housing crisis: there simply aren’t enough residential units being built to satisfy household creation.  The pivot has been as pronounced as it has been swift and it doesn’t look like things are about to change anytime soon.  The Federal Government’s bi-annual report on housing inventory provides a rather bleak outlook, especially for entry level buyers and renters.  From ULI (emphasis mine):

Newly released data and analysis from several sources illustrate a major obstacle to a fully healthy housing market in the United States: the nation is not building nearly enough new residential units. The serious shortage of new supply is bottling up housing demand and pushing home prices and apartment rents well beyond what a growing number of households can afford.

A biennial report from the federal government titled The Components of Inventory Change found that the nation’s housing stock increased by a net 270,000 units between 2011 and 2013—the slowest growth measured by the survey over the past decade, which included the worst years of the Great Recession. The report concluded: “Despite the gradually improving economy, there were large declines in both new construction and net additions to the housing stock during the 2011–2013 period compared to the 2007–2009 period.”

A recent Freddie Mac market commentary noted that the total number of housing starts (single family plus multifamily) in 2015 was 30 percent below the historical average between 1970 and 2007. The National Association of Realtors estimates that the country’s supply of for-sale and rental units combined is 3 million units short of current demand.

The most substantial issue here isn’t even the massive shortfall in raw numbers, it’s the distribution of where what limited construction that we do have is occurring: at the high end.  Not only are we not producing enough units across the board but nearly nothing is being produced at the entry level in either for-sale or for-rent properties where units are most in need.  Again, from ULI (emphasis mine):

Not surprisingly, millions of Americans cannot find an affordable home to buy or an apartment to rent. A survey conducted by the National Association of Home Builders (NAHB) found that 59 percent of respondents said they could and would spend no more than $249,000 on a new home, but only 35 percent of new homes started in 2015 were at or below that limit. The online real estate service Trulia recently reported that the number of starter and trade-up homes available in the 100 largest U.S. metropolitan areas has plunged by more than 40 percent since 2012.

Yes, apartment development has experienced a historic boom: multifamily construction volume nearly doubled in 2012 compared with that seen in 2010, and increased another one-third from 2012 to 2014, according to a new study by the Research Institute for Housing America. New multifamily completions topped 310,000 units last year, the most in at least 25 years, according to the National Multifamily Housing Council. And 1 million more apartments could come on line in the United States in the next three years, according to projections by the market research firm Axiometrics.

But most new apartments and single-family homes are aimed at the top of the market. The median asking rent for a new apartment today exceeds $1,300, which is unaffordable for roughly half the renter households in the United States (based on a rent standard of affordability of 30 percent of income). The average price of new homes for sale in 2015 was $351,000—a 40 percent increase from 2009.

What is driving the trend towards builders constructing a smaller number of higher priced units versus a larger number of lower priced ones?  A few factors to consider:

  1. Post financial crisis, there wasn’t much of any mortgage financing available at the lower end of the market.  It doesn’t make sense to build homes for people who can’t obtain financing so builders focused on more expensive price points where buyers were willing and able to obtain financing or buy with cash.  Combine this with the higher margins often achieved on luxury units and you have a recipe for builders gravitating towards more expensive units.  Availability of financing is improving but it has left certain markets 100% beholden to FHA limits.
  2. Regulatory burden is soaring.  A study that the NAHB released earlier this year found that regulatory fees for new construction jumped nearly 30% (80k per home) over the past 5 years.  It’s incredibly difficult to make any profit on lower priced product in that type of environment meaning that builders need more expensive product to absorb the regulatory burden.
  3. People are staying put longer in their entry level homes since less move up houses are being constructed.  The result is less infill inventory which drives up prices.  Yesterday’s entry level home becomes too expensive to be classified as entry level if supply does not materialize to meet demand.
  4. While the development financing market has shown some marginal signs of improvement, it still pretty much sucks for all but the most credit worthy of developers in the best locations.
  5. Land owners aren’t selling, at least not when it comes to their best lots.  One would think that rising home prices would make this a great time to be a land seller.  However, that isn’t currently the case as Bloomberg detailed last week.  When asked for investment advice, Mark Twain once said: “Buy land, they’re not making it anymore.”  Right now, owners of well-located property are taking a similar stance in expectation (or, in some cases hope) of higher prices: don’t sell your well located land because you can’t sell it a second time and it’s likely to be more valuable in the near future.  In other words, there is substantial gap between what builders are willing to pay and what landowners are willing to sell for, particularly in the best markets.  Landowners will sell today but only if builders are willing to pay them for possible future inflation that may or may not happen.  To complicate matters further, a lot of landowners bought during a brief run-up in 2013 thinking that the market was about to take off.  It didn’t and now they are holding out in hope of larger profits down the road.

At some point, the laws of economics pretty much dictate that this has to change.  We aren’t going to stop creating households and people can’t continue to pay an ever-larger percentage of their incomes towards housing costs without the result being major adverse economic consequences.  In reality, demographics are actually improving for household creation through at least 2024, meaning that the housing shortage will get worse as the deficit continues to widen unless we ramp up production in short order.  Unfortunately, as you can see it’s not a problem that’s easily solved.

Economy

Christmas is Cancelled: The bankruptcy of South Korea’s largest shipper has a lot of cargo stranded at sea just as retailers are stocking up for the holidays. See Also: The shipping industry has a major problem – there are simply far too many ships for current demand.

Tougher Road Ahead: Economists are predicting a tougher road ahead for the labor market. But See: Short term optimism as wages expected to rise amidst the scramble for seasonal holiday workers.

Commercial

Yogi Bear, Architect: Brokers are having a difficult time selling a seven story office building in Columbus, Ohio designed to exactly resemble a picnic basket. 

Back Up the Truck: investors are bidding up REIT shares prior to real estate getting its own sector in the S&P500.

Residential

Good Riddance: Gaudy Mediterranean style McMansions that were all the rage in the 1990s have fallen out of favor and are not rising as quickly in value as other types of houses.

Sound Familiar? Norway’s economy is historically based on oil, which has had a rough go of it lately.  Norwegian interest rates have plunged along with the price of oil, leading to soaring housing prices and housing sector investment.  This sounds eerily similar to the post-tech bust era in the US to me.

Don’t Call it a Comeback: Cities in California’s Central Valley that were largely left for dead in the wake of the housing crash are making a comeback.

Profiles

Those Who Fail to Learn From the 90’s Are Doomed to Repeat Them: People are buying minivans again and trying desperately to convince themselves that the soccer mom mobiles are somehow “cool.” Newsflash: minivans will NEVER be cool

Viva Socialism: Venezuelians are turning to black magic and animal sacrifices to heal their sick due to a lack of basic medical services.

You Should Already Know This: Cheese triggers the same parts of the brain as hard drugs.

Chart of the Day

Super Size Me, urban home edition.

Us home sizes_map_final

WTF

FAIL: There are still 4 months left in 2016.  However, I think that we can safely call this year’s Darwin Award for a Florida man (of course) who found an old bulletproof vest in his garage.  He wanted to know if it still worked so he put the vest on and had his cousin shoot him.  It didn’t work and now he’s dead and the cousin is in jail.

Cultural Literacy 101: Apple’s iPhone 7 launch slogan: “This is Seven” translates to something sort of vulgar in Cantonese.

When You Gotta Go: How NFL players hide it when they have to pee during a game. Spoiler: there’s often more going on in the huddle than you think.

Sort of Impressive: A man was arrested for stealing $3,000….. in pennies.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 13th – Falling Behind

Landmark Links September 2nd – Clueless

golden retriever

Lead Story… On Tuesday, I posted a piece about how construction unions actively undermined a measure that CA Governor Jerry Brown had presented to help solve California’s affordable housing crisis by making it easier to gain approval for residential projects that would provide a certain number of affordable units.  I have limited time to write today’s blog post but I want to revisit that story, which the WSJ reported on (they wrote about a similar proposal in NY as well that was nuked by the unions) because the utter absurdity of it is so mind boggling (highlights are mine):

For both measures, construction unions were key to the defeat, as they won over key allies with their argument that the government shouldn’t be aiding apartment development without also guaranteeing union-level wages. Unions, particularly in New York, have been facing a gradual erosion of their market share on residential developments, and now developers that a generation ago would have been union shops are able to fill jobs with nonunion workers, which can lower construction costs by an estimated 20%, according to New York-based Citizens Housing and Planning Council, a low-income housing group.

Robbie Hunter, president of the State Building and Construction Trades Council of California, said policies like the one pushed by Mr. Brown should allow construction workers to make a decent living “rather than drive those workers into the need of affordable housing itself.”

Allow me to clarify: the reason that the unions killed both deals was that NY and CA wouldn’t stipulate that all projects that fell under the proposals be built by union workers at a so called “prevailing wage” which is really just a fancy way of saying overpaying.  Notice in the passage highlighted above that the unions have lost market share in recent years.  I wonder why.  Could it possibly be that residential projects (especially in CA with it’s high impact fees) typically aren’t viable at “prevailing wage” standards?  Often, in residential developments, the only time that you see union labor being used are when a union pension fund provides the equity behind the project.  Otherwise we just don’t see it that often because numbers simply don’t work.  By the way, when a union pension fund provides the equity, they almost always have to take a substantially lower return in order to subsidize the above market “prevailing” wages paid for construction.

The real story here should be that unions are facing declining market share because they refuse to adapt.  Governor Brown’s proposal would have undoubtedly created more construction jobs in California, leading to more demand for labor and higher wages.  If construction labor unions were at all flexible in their compensation demands, many of those jobs could have gone to union  workers.  However, rather than trying to expand their ranks, which ironically would lead to more power, not less, construction unions have dug in their heels in an effort to preserve the unsustainable wage structure of existing members.  The rest of us pay the price since a proposal that would have provided a starting point for dealing with CA’s growing housing crisis is now toast.  Looks like the status quo of runaway housing cost wins again.

Economy

Looking Up: Federal income tax withholding data indicates that both wages and economic growth are on the rise.

(Skilled) Help Wanted: As skill requirements increase, more and more manufacturing jobs are going unfilled.

Commercial

Rise of the Machines: How CoStar is using spy planes to get an edge in tracking new development for rent projections.

Evolving: Some malls are starting to look a bit like theme parks as landlords try to cope with high vacancy from traditional tenants.

Residential

Closed for Business: Message to tech firms from Palo Alto’s anti-jobs mayor: go away.  See Also: Formerly middle class Palo Alto has gotten so expensive that not even techies can afford to live there anymore.  For example, someone is listing a 790sf studio for $1.3MM.  Turns out that the housing bubble of the aughts really didn’t mean much at all in Palo Alto:

Proof is in the Pudding: The next time someone tells you that adding units, including luxury ones to the housing stock doesn’t help affordability, direct them to these:

Exhibit A: Manhattan condo developers are offering discounts, concessions and perks in an effort to keep sales robust in the midst of a glut.

Exhibit B: How Brooklyn’s luxury apartment boom is turning into a rental glut.

Profiles

Hero: 40 years ago John Bogle of Vanguard was sick of Wall Street overcharging for shitty performance.  He did something about it and started the first index funds despite ridicule from his peers.  Today, index funds hold nearly $5 trillion in low fee assets while much higher fee investments languish. 

Hot Item: How the premium Yeti Cooler, also known as a “Redneck Rolex” became a prime target for thieves.

Get Off My Lawn: Baseball’s fan demographics keep getting older, raising the question: can a game with a 19th-century tempo survive in the age of instant gratification?

Chart of the Day

WTF

Funny, In a Sad Sort of Way: Rapper Tyga got his leased Ferrari repossessed while he was at the dealership shopping for a new Bentley.

In Soviet Russia… Vladimir Putin was arrested at a Florida grocery store on trespassing charges, because Florida. 

Seems Like a Reasonable Response: A Pennsylvania woman was arrested for biting her husband and stabbing him with scissors after she caught him drinking her beer.

Again, Seems Reasonable: Meet the father who destroyed his daughter’s car with heavy construction equipment after catching her in it with a boy.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 2nd – Clueless

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 9th – Flipper Does Seattle

Dolphin horny

Lead Story…  I came across a story from the Seattle Times this weekend that reminded me of perhaps the most obvious sign that a real estate market has overheated: Flipping.  First off, not all flipping is created equally and there are two primary categories of flippers:

  1. Fix and Flippers: This type of real estate investor looks for bargain properties that need some work, completes improvements – cosmetic or otherwise and sells…hopefully at a profit.  The flipper calculates what they can likely re-sell the house for, how much money they will need to spend on upgrades and repairs and what profit margin they need to make and bids on the subject property accordingly. It’s a legitimate business that is highly reliant on execution rather than purely market direction.
  2. Speculators: As the name implies, this type of flipper is extremely reliant on the direction of the market.  Speculative flipping is a pure risk play with little to no skill required other than filling out a contract (and possibly a loan application) which is often done with the help of a realtor anyway.  A speculator puts a new home or condo under contract before it is complete, waits for the market to go up and sells at a higher price.  Builders often offer lower prices in the early phases of a project in order to generate sales momentum and raise them incrementally in later phases.  Speculative flippers hope to capitalize on that momentum as well as an upward-trending market.  This type of flipping was made popular during the housing bubble, and returns were often juiced with a BS subprime loan that had a low teaser payment, the potential for negative amortization, and little to no documentation.  There isn’t any real business plan here as the speculative flipper isn’t adding any value whatsoever to a brand new property.  There are only three outcomes here.  When the market goes up, you make money.  If the market doesn’t move, you lose a little bit of money (after sales and closing costs are accounted for) assuming that you can sell in a timely manner.  If the market goes down, you lose your ass, especially if other flippers in your condo development or subdivision are present and flood the market with inventory as conditions are softening.

This brings us to Seattle and it’s white hot market.  It’s been well-noted that Seattle is one of the top-performing housing markets in the US.  Back in May Curbed posted a story about how the average Seattle listing sells in a mere 8 days.  News outlets in the Pacific Northwest have also run stories about people camping out to reserve downtown condos. All that considered, the story from the Seattle Times about how flippers in a downtown condo called Insignia were making flip profits on homes that had never been occupied was somewhat surprising as I can’t recall seeing this sort of thing since the mid-aughts:

Just how hot is the Seattle real-estate market? People are now reserving condos under construction and then flipping them for a six-figure profit before they even open.

Matt Goyer, a local real-estate broker and blogger, combed through some recent sales at the new Insignia high-rises in the Denny Triangle. He found several brand-new condos that their owners reserved during construction over the last couple of years and just sold again before ever living in them.

The condos fetched an average of $637,000, up from their original purchase price of about $526,000 — a profit of 21 percent.

That’s pretty good money for a speculative play with no value add component whatsoever even after sales commissions and closing costs are taken into account.  I have to admit that I was somewhat relieved when I went to Matt Goyer’s blog referenced above to find out a few more details.  The good news is that this isn’t rampant.  There were only a hand full of speculative flips out of the 348 units in the project:

The North Tower of Insignia has now closed 207 of 348 units with 130 left to close and only 11 left to sell. We’ve seen a handful of resales come up in the North Tower were people are flipping their units, having never occupied them. Curious about this we decided to dig in more and found only four flips so far which feels like a low percentage overall.

North Tower

402N – Pending. Listed for $629,500. Originally bought for $516,000.
503N – Sold for $629,950. Originally bought for $530,000.
808N – Pending. Listed for $649,950. Originally bought for $534,000.
905N – Pending. Listed for $639,000. Originally bought for $525,000.

And here’s a look at the South Tower, though some of these are legit resales where folks lived there and then decided to sell.

South Tower

209S – Sold 4/19/2016 for $680,000. Originally bought for $587,600.
405S – Sold 2/22/2016 for $730,000. Originally bought for $646,500.
511S – Sold 5/21/2016 for $794,000. Originally bought for $705,000.
1601S – Sold 3/21/2016 for $795,000. Originally bought for $695,200
1706S – Pending. Listed for $1,119,800. Originally bought for $1,032,900.
1802S – Sold 3/19/2016 for $915,000. Originally bought for $844,000.
1907S – Pending. Listed for $1,415,000. Originally bought for $1,291,290.
2107S – Sold 2/27/2016 for $1,350,000. Originally bought for $1,249,800.
2207S – Sold 2/23/2016 for $1,358,000. Originally bought for $1,259,800.
3806S – Sold 4/18/2016 for $1,750,000. Originally bought for $1,611,540.

Still, this is the type of activity that can spread quickly when word of flipping success gets out and people start talking about it at cocktail parties.  As stated earlier, speculative flipping takes requires little-to-no skill set, only enough cash for a down-payment and some large huevos.  So, is this a big issue?  Of course not, at least currently.  Fortunately, we are not seeing much evidence that this sort of thing is rampant and a small hand-full of units in a high-end Seattle condo project are not much reason for concern.  It does bear monitoring though if speculative juices start flowing more broadly again…..

Economy

Momentum: A second straight month of strong job gains has re-framed the economic outlook as the Federal Reserve continues to ponder what to do next.

Catch Me If You Can: Roughly 16% of the 43MM Americans who have student loan debt are in long term default.  The federal government is locked in a battle to get them to pay with taxpayers are on the hook for the $125 billion that they owe.

Anything That Isn’t Nailed Down: Central Banks are now starting to buy corporate bonds as they search for ever-more unconventional ways to spur growth.

Commercial 

Going Hungry: Farmland just experienced it’s first decrease in valuation since 2009 as corn and soybean prices extend their slumps.

Residential

Haves and Have Nots: Downtowns throughout the rust belt and parts of the northeast are increasingly becoming a center of economic growth at the expense of close-in suburbs.

Hitting a Different Target: DR Horton designed it’s entry level Express line to appeal to Millennial first time home buyers.  However, downsizing Baby Boomers seem to like it a lot as well.

Profiles

Solar System: Can Tesla go from a luxury car company to a one-stop-shop clean energy empire?

The Science of Speed: What’s behind Usain Bolt’s record setting runs?  It’s not that he goes faster than other runners but rather that he doesn’t slow down as quickly once he reaches peak speed.

To the Moon: Seattle is becoming the Silicon Valley of space start-ups.

Chart of the Day

WTF

Verified: A new study based on Facebook profiles just confirmed every cat person stereotype you can imagine:

After analyzing the aggregate, anonymized data of about 160,000 U.S. users who’ve posted photos of dogs and/or cats, Facebook found that dog-posters tend to be more extroverted, more upbeat and luckier in love than their feline-photographing friends. Meanwhile, cat people tend to be single, to express a “wider range of emotions” (including, chiefly, exhaustion and annoyance), and to harbor an unusually strong interest in fantasy, anime and science fiction.

High Voter Turnout: Because what wealthy town wouldn’t want their mayor involved in a meth-for-sex bust?

Dumpster Diving: Philadelphia has a problem with residents renting dumpsters to use as neighborhood swimming pools in it’s streets, causing the city to issue a statement telling them to knock it off.  If you have ever known any Philadelphia Eagles fans, this will make perfect sense.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 9th – Flipper Does Seattle