Landmark Links October 25th – When Will The Empire Strike Back?

darth-vader

Retraction: Before we get to today’s post, Leonardo DiCaprio’s rep announced that he doesn’t support the anti-density initiative that I spoke about on Friday, despite his name being all over it’s literature. ¬†Maybe he is a regular Landmark Links reader and didn’t like getting called out ūüėČ

Lead Story….¬†Since I began writing this blog last year, one of my main areas of focus has been how the historical relationship between primary and secondary markets has broken down in this cycle, especially in CA. ¬†In the past, the inland production markets would heat up when prices rose¬†along the coast. ¬†This lead to a virtuous cycle where housing starts beget jobs which beget more employment, wage growth and ultimately more household creation and home buyers. ¬†This cycle has been different for several reasons:

  1. Difficulty of inland builders to develop affordable homes profitably due to low FHA caps and high impact fees
  2. Growth in preference for urban living among wealthier adults
  3. Declining home ownership percentage impacts the marginal entry level buyer more than the affluent one and historically, the marginal buyer is more likely to look inland for housing.

It’s become fairly common in our industry to look to increases in FHA limits¬†as the salvation of the secondary markets. ¬†However, for that to occur in any substantial magnitude (all indicators point to a small increase next year), ¬†Congress would have to¬†revise the statutory formulas that they set back in 2008 to govern FHA limits. ¬†As my colleague Larry Roberts wrote in OC Housing News, that is far easier said than done:

Through the lobbying efforts by the National Association of Homebuilders or the National Association of Realtors, Congress knows exactly how the conforming loan limit impacts home sales and new home development.I recently spoke with Scott Meyer and Michelle Hamecs of the NAHB. They provided me their NAHB Issues Update that detailed the FHA loan limit issue (click here for that document). It isn’t ignorance to the problems the prevents Congress from raising the limit.

The conforming loan limit demonstrates the tug-of-war between two conflicting desires of policymakers.  On one side, advocates for the housing industry and advocates for expanded housing opportunities to all Americans want to push the loan limit higher. On the other side, the more fiscally conservative lawmakers want to lower the limit to restore the prior mandate of insuring loans only for lower- and middle-income Americans. Further, they want to reduce the potential liability for the US taxpayer, who would currently cover all the losses if the market crashes again.

If the conforming loan limit were reduced, it would decrease the potential liability for taxpayers and reduce the size of the GSE operations and make it easier to someday dismantle them; however, the last time the conforming limit was dropped, Irvine, CA witnessed an 84% decline in sales volume in the price range no longer financeable with GSE loans. Ouch!

There is no doubt that increasing FHA limits would help. ¬†There is nothing particularly healthy about having a market that is 100% reliant on government-backed loans to function but unfortunately that’s the hand that we have been dealt. ¬†Raising FHA limits attacks the problem from the bottom of the prospective home owner pool by allowing buyers at lower price points to purchase homes with much lower down payments than what’s available using a conventional mortgage. ¬†Today, I want to look at a different scenario that could play out in the next few years. ¬†It’s more from the upper end of the pool¬†where coastal renters could find themselves once again looking inland if prices continue to rise. ¬†Today, I’m going to focus on Orange County and the Inland Empire but the demographic dynamics that I’m going to focus on could apply to many affluent coastal regions and their less-affluent inland neighbors.

On the surface, things look great in Orange County. ¬†Economic growth is strong as is employment¬†and home prices are now above their prior peak. ¬†Development is humming along and occupancy levels are extremely high in commercial and multi-family projects. ¬†In addition, OC has diversified it’s economy quite a bit as finance and tech have taken a large role as¬†the County has become less dependent on real estate. ¬†However, as the OC Register detailed last week, Orange County has a growing demographics problem and I think that the Inland Empire just might be the prime beneficiary. ¬†The problem isn’t that Orange County isn’t creating jobs. ¬†It is and we actually have the lowest unemployment rate in Southern California. ¬†It’s that the jobs being created often don’t come with wages that would allow someone to live here. ¬†Combine that with relatively few new housing units being built and the cost of existing units rising quicker than inflation and you have a recipe for what economists predict will be a¬†declining population of prime workforce age population (25-64 year olds) from 2010 – 2060. ¬†From the OC Register (emphasis mine):

‚ÄúThey say demographics are destiny,‚ÄĚ Wallace Walrod, the Orange County Business Council’s Chief Economist told the conference. ‚ÄúIt is imperative that everyone in this room understand the consequences of pending demographic shifts.‚ÄĚ

The national trend of aging baby boomers moving into retirement, he said, is ‚Äúmagnified and exacerbated‚ÄĚ in Orange County, where the over-65 population is on track to nearly double by 2060 to ‚Äúa staggering 26.2 percent.‚ÄĚ

Unlike California as a whole, every age cohort other than seniors is shrinking in Orange County, where the median age has risen from 33 to 38 since 2000.

Most worrying, the prime working-age population ‚Äď 25-to 64-year-olds ‚Äď is expected to dip by 1 percent by 2060, even as overall population grows by 15 percent.

By contrast, working-age groups in Riverside and San Bernardino counties are on track to grow by 61 percent and 47 percent, respectively.

‚ÄúWe are losing not only our 25 to 34 year-old workforce ‚Äď millennials ‚Äď but also losing K-12 and the college-age cohort as well,‚ÄĚ Walrod said.

The trend, he warned, ‚Äúcould devastate O.C.‚Äôs pool of workers, creating talent gaps as large swaths of the workforce retires, leaving open positions that will likely go unfilled.‚ÄĚ

The Register went of to identify the the obvious culprit: housing. ¬†I frequently¬†hear friends, neighbors and co-workers and neighbors who live in Orange County complain that the area is being over-developed. ¬†The stark reality of simple math shows¬†that view couldn’t be more wrong. ¬†Again, from The OC Register¬†(emphasis mine):

A severe housing shortage has turned Orange County into one of the most expensive markets in the nation, with median home prices exceeding $650,000 and average monthly rents at about $1,900. Higher-density developments that could alleviate the shortfall are often opposed by current homeowners.

Rising values are ‚Äúgood news for current homeowners, but bad news for those looking to afford to relocate to O.C. or to buy a house and stay here, especially millennials,‚ÄĚ Walrod said.

As a result, he added, ‚Äúdomestic outmigration has been accelerating.‚ÄĚ

The report projects that “new job creation will significantly outpace projected new housing units over the next two and half decades, resulting in a housing shortfall that will grow from a current reading of 50,000-62,000 units to a staggering 100,000 units by 2040.

‚ÄúMany workers are being forced into neighboring counties to find more affordable housing, increasing their commute and complicating their work-life balance.‚ÄĚ

……

According to the report, it takes an hourly wage of $32.15 to afford a two-bedroom apartment in Orange County, putting it out of reach for minimum-wage workers in the county’s fast-growing service sector, given the current California wage floor of $10 an hour.

The story goes into much more detail about a developing skill gap and low wage job boom. ¬†However, I want to keep the focus on housing for this post. ¬†Note the above projections about working age populations in Riverside and San Bernardino Counties (growth of 61% and 47% respectively¬†from today until 2060). ¬†Those are massive numbers that will create a strong demand for housing and not all of it will be entry level. ¬†If you take the median income required to buy and rent a median-priced home in Orange County today, it is around $100k (assuming you can put down 20%) and $70k, respectively, so there are a lot of people with well-paying jobs that fall below that amount. ¬†Given the fierce opposition to density in the OC, it is likely that those numbers will only increase. ¬†Also, keep in mind that the averages above are for the entire county. ¬†The most desirable areas with the best school districts can easily be double those amounts which is incredible when you consider that median income to afford an apartment in the neighboring IE is around $55k. ¬†At some point, something has to give. ¬†My guess is that it’s a move towards more relatively affordable¬†housing markets, in this case the Inland Empire.

I want to make an important caveat about what I wrote above: I haven’t a clue as to when this change will actually take place and more affluent workers will start to look inland to buy or rent. ¬†However, one thing that I’ve learned witnessing¬†our current market is that things¬†change incredibly quickly once they hit a critical mass. ¬†Just a few short years ago we were subject to an endless barrage of “renting is superior to buying” articles in the mainstream and business press. ¬†Just this week, Bloomberg ran a piece that argued that it’s almost always better to buy. ¬†Such an article would have never seen the light of day in 2011. ¬†Both types of articles are virtually assured to be wrong since they argue in absolutes. In reality¬†it’s sometimes better to buy and sometimes better to rent¬†but that level of nuance doesn’t¬†lead to¬†many page views.

My comment about how quickly things change goes for regional and local trends as well.  For example, 15 years ago, pretty much no one with a college education wanted to live anywhere near downtown LA.  Within the past 10 years that has changed rapidly and an area which was once in the grips of urban decay has become one of the most desirable locations for young, affluent home owners and renters in the US.  Some of the same conditions that created the LA gentrification/urban renewal boom have caused the Inland Empire to lag: delayed household formation by Millennials, preference for urbanization among high earners and a downward trend in the percentage of Americans who own a home.  However, I have serious doubts that these are permanent trends and there are other factors at play already that could begin to create more inland demand:

  1. Addition of urban elements and amenities to existing CBD and downtown regions. ¬†This is already happening in downtown Riverside as more density and foodie oriented retail are on their way. ¬†There are other urban areas out in the IE that could experience the same thing over time, downtown San Bernardino for example. ¬†It’s probably difficult to imagine right now but that’s ok. ¬†Downtown LA as it currently exists was¬†didn’t seem feasible back in 2001 either and I doubt that many of us foresaw luxury condos and apartments going up next to Skid Row.
  2. Self driving cars could help to ease commute stress in markets without mass transit infrastructure.  The technology is advancing rapidly and the Inland Empire will arguably be the region that will benefit the most in the US.
  3. Bank lenders are starting to compete with the FHA for low down-payment loans to entry level buyers. ¬†Bank of America has been so successful with their 3% down program that they are doubling it. ¬†These lending programs are still tiny by comparison but it wasn’t long ago that they didn’t exist at all.
  4. Millennials are getting older.  Many of the oldest Millennials are now entering their mid to late 30s which are the prime household creation years.  Once people start families, studies show that they are more likely to favor the stability of owning over the mobility of renting and the family-friendly single family home over an apartment.

The Inland Empire is down but I wouldn’t count it out over the long term. ¬†The current trends that have hurt the¬†housing market there aren’t likely to last forever and the region is adjacent to¬†too many incredibly expensive areas¬†to not experience some spillover as even relatively high earning families eventually get priced out of the coastal regions. Conventional wisdom is that only an increase in the FHA loan limit can revitalize the IE housing market. ¬†In the short term, that may very well be the case but a sustainable recovery just might come from higher earners moving into the region.

Economy

The Walking Dead: How bankrupt oil companies that are continuing to pump could keep a lid on oil prices.

Stay In:¬†It’s getting more expensive to eat out even as grocery prices are falling.

Commercial

The Spigot: Pension funds have been steadily increasing commercial real estate allocations¬†for the past few years and that isn’t likely to change in 2017 despite signs of a maturing market. ¬†See Also: REITS have become a¬†more attractive target for activist investors.

High Times: A San Diego based medical marijuana landlord just filed for an IPO.

Residential

Further Afield: High prices and low yields near the coast have investors looking for rental homes in cheaper locations through management and investment services like Home Union, Investability and Roofstock. ¬†However, a lack of local knowledge can lead to out of area investors paying the dumb tax by thinking that they are getting a good deal when they aren’t.

Profiles

Pull the Lever: How smart phones and app developers create digital addiction by mimicking slot machines.

Paradise: The Cubs paved the way for the Dodgers to come to LA by hosting their spring training on Catalina Island. See Also: For the Cubs oldest fans, this year could be their last chance. And: There are people trying to get 6 figure ticket prices for a single seat at World Series games at Wrigley Field.

Chart of the Day

WTF

Hard at Work: Meet the TV weatherman who got bored with his job after 23 years and decided to become a porn star.

Not a Detail Person: Russian oligarch has giant hideous boat built at a German port on the Baltic Sea. Ship draws too much to get out of the straits at the entrance to the Baltic. Epic FAIL ensues.

Lawsuit of the Year Nominee: A woman is suing KFC for $20MM because she felt that her bucket of chicken wasn’t full enough.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 25th – When Will The Empire Strike Back?

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 ‚Äď 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 ‚Äď 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 May 6th -Exodus?

Rush to the Exit

Lead Story…¬†We’ve been talking a lot about the Bay Area market over the past few weeks and there are a few signs that¬†some of the most egregiously expensive ones like San Francisco are nearing a breaking point where even well-paid employees can’t afford to live there anymore and may begin to leave. ¬†A survey by the Bay Area Council published earlier this week found that 34% of Bay Area residents are considering leaving due to high housing costs and traffic. ¬†I know that I’m starting to sound a bit like a broken record but….

“We can whine about this, or we can win by solving our traffic and housing problems,” Carl Guardino, president of the Silicon Valley Leadership Group, told The Mercury News. “The last time the Bay Area had seemingly solved its traffic problems was the worldwide recession of 2008. A recession is not how we want to solve our traffic and housing problems.”

I think it goes without saying that relying on massive global recessions to correct your cost of living and traffic issues is far from a viable long term solution. ¬†For years now, service workers, educators, policemen, firemen, etc have been priced out of these and similar markets. ¬†It should not come as a surprise that Bay Area school districts are facing a teacher retention crisis along with their housing crisis. ¬†Teachers haven’t been able to purchase homes in the area for years. ¬†Now they can’t afford to rent either. ¬†Their salaries aren’t adequate¬†to justify a long commute. ¬†Cities have been aggressively¬†increasing teacher¬†pay but they can’t keep up with cost of living increases:

For a teacher earning $73,000 — the average teacher salary in the nine-county Bay Area — a rent payment of $1,800 would eat up 30 percent of monthly income. And just finding a rental at that price would be very difficult in this economy. The average monthly price for studio apartments in the Bay Area is $2,137, according to RealFacts, and two-bedroom, two-bath apartments are going for $2,850 — and for much more in hot markets.

“Every year we have a problem. It’s always a challenge to make sure that the schools are staffed,” said Jody London, an Oakland Unified school board trustee. “But with the rapidly rising housing market, the fact is it’s crazy right now. And it’s getting harder for teachers to stay in Oakland.”

And that’s in Oakland, which, while expensive isn’t close to Silicon Valley or San Francisco. ¬†So how do you fix things? ¬†Beyond building more housing ¬†(which many younger residents are now in favor of much to the dismay of aging hippy NIMBYs), one idea is dramatically build out infrastructure to the outlying suburbs in order to fix the commuting issue and add more units where it is more affordable. ¬†¬† The BART is already being extended but this would require something far larger (and more efficient for that matter) in order to work. ¬†From the Bay Area Council survey mentioned above:

Rather than building more housing in the Bay Area, 60 percent of residents say it should be built outside the region, with 84 percent saying they support stronger transportation networks between the Bay Area, Sacramento and other areas in the Central Valley to take pressure off regional housing supply.

‚ÄúThis is an understandable reaction to decades of failing to keep pace even minimally with the Bay Area‚Äôs housing needs and the transportation to support it,‚ÄĚ said Jim Wunderman, President and CEO of the Bay Area Council. ‚ÄúThere‚Äôs now an entrenched misperception that our region doesn‚Äôt have the capacity to add the housing we need. What‚Äôs unfortunate is that pushing housing outside the region still doesn‚Äôt solve the problem of supply and affordability in the Bay Area. It simply means that fewer working families and workers in lower-income jobs can afford to live here. It hurts the diversity of our region and our economy. It also means workers are commuting longer and longer distances in their cars, which pushes up damaging carbon emissions.‚ÄĚ

The issue is that it would cost a fortune, take forever to build and would likely lead to environmentalist/NIMBY lawsuits. ¬†Think of this as¬†a Marshall Plan¬†to fix area¬†housing…assuming that it can actually get done which is, IMHO a stretch. ¬†What I can assure you won’t work is what the City of San Jose is currently doing. ¬†Silicon Valley’s largest city (and the nations 10th largest)¬†has a goal of building 35,000 new units between 2014 and 2023 with 60% of that total being affordable. ¬†Sounds like a great objective until you get into the details. ¬†Rather than incentivizing¬†developers¬†to build more units, ¬†the city is charging them an increased impact fee of $17/sf on all housing built by those evil “for-profit” developers which will then go into subsidized housing, which is apparently what San Jose means when they say “affordable” since it gets incredibly¬†difficult to build market rate housing that’s anything close to affordable when you start layering on fees. Naturally, developers are mostly staying away¬†and the city built only 426 units of affordable housing last year, around 20% of it’s lofty goal of 2,100/year.

Back¬†to my broken record: the only way to fix the affordability crisis is to build more units to satisfy the demand in the region. ¬†That won’t happen so long as cities continue to hike fees to the moon and make the entitlement process increasingly difficult.

Economy

Leading Indicator: The Wall Street Journal has seemingly cracked the code to the health the tech sector: sales of ping pong tables from a store in San Jose.  Lets just say that the tables have turned.  I bet you can find a great ping pong table on Craigslist though.

How Low Can You Go:¬†Earlier this year, the dollar was on a tear as the Federal Reserve indicated that they would raise rates at least 4 times in 2016. ¬†That likely isn’t happening as a sluggish economy plus mounting financial disasters abroad have made the Fed increasingly dovish, sending the greenback into a tailspin and leaving it at a 15-month low. ¬†Interest rates and mortgage rates have both stayed low now that sluggish growth appears here to stay for the foreseeable future. ¬†If dollar depreciation continues, one must wonder if a resurgence by foreign investors is in the cards.

Commercial

Market Update: Our friends at JCR Capital see market fundamentals disconnecting from tepid investor appetite, creating opportunity.  As always, their quarterly market commentary is a must read.  It goes hand in hand with our comments about the land market versus the home sale market that we made previously.  In a related story, fundraising for private equity real estate funds is slowing.

Don’t Call it a Comeback:¬†After starting the year off extremely poorly, CMBS loans for multi-family assets are making a comeback, albeit with tougher underwriting standards.

The Commercial Real Estate Market in Once Sentence: FOOP (Fear of over paying) is the new FOMO (fear of missing out).

Residential

Shots Fired:¬†Bill Pulte, the founder and largest shareholder of Pulte Homes had some very pointed criticism of his hand-picked CEO Richard Dugas before the company’s annual shareholder meeting this week. Basically, Pulte accused Dugas, a former protege of being incompetent when it came to¬†monetizing existing land positions, leading to poor company performance and demanded his resignation. ¬†Analysts don’t anticipate Dugas leaving anytime soon. ¬†In recent years, the company has focused on profitability over growth and was mostly sidelined from buying land positions in 2012-2013 when others were active. ¬†Much of this stems from the Centex merger in 2009 according to the Wall Street Journal. ¬†That transaction saddled the new company with a ton of land inventory that they had to write down effectively sidelining them from buying lots at a better basis when the market bottomed out. ¬†They are still sitting on some of those lots today even while out buying more.

Sluggish:¬†The previously-hot million-million-dollar-plus home sale market is slumping. See Also:¬†Some of America’s fastest moving housing markets are slowing down.

Profiles

Hero:¬†The next time that someone asks me why I like dogs more than people, I’m going to send them this:

A four-year-old white Labrador called Dayko¬†has been hailed as a hero after rescuing seven people from the aftermath¬†of the Ecuador earthquake –¬†before dying from¬†exhaustion.

RIP Dayko….and now I need a Kleenex.

Chart of the Day

I’m finding myself wishing that I was seeing more of this….

WTF

Finger Lickin’ Good:¬†A woman in Florida (naturally) reported to local police that a chicken sandwich that she ordered “contained semen.” ¬†Consider this a friendly reminder that fast food is disgusting. ¬†Also, if you absolutely must eat at a KFC, don’t ask for extra mayonnaise.

Mistaken Identity:¬†Villagers in Indonesia were disappointed to learn that an “angel” that fell from the skies is actually a sex toy. ¬†The quote from this article is to good not to post:

The tale begins in Bangaii, days after an auspicious solar eclipse appeared over the region. A 21-year-old fisherman was walking the beach when he spotted a beautiful, lonely angel on the sand. Naturally, he took her appearance as a sign from heaven and he gently bundled her up and took her home.

There, he attired her in a blouse and skirt, which his parents changed daily as a sign of respect. Intrigued by reports (or maybe just really bored), local police visited the house to see the angel for themselves.

There, they made the less-than-holy discovery.

“It was a sex toy,” police chief Heru Pramukarno told a local newspaper.

What was unclear¬†was whether that ruined or made the fisherman’s day.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links May 6th -Exodus?