Landmark Links August 30th – Size Matters

Eggplant

Lead Story…  New homes have been getting larger for quite some time, since the end of the Great Recession to be exact.  Conventional wisdom had held that the size of homes would shrink after the Great Recession due to more focus on affordability and reduced financial capacity of buyers.  However, except for a brief blip in 2009 where new homes shrunk, it didn’t happen.  Instead, mortgage credit shut off for all but the most qualified buyers (read: wealthier) which pushed builders to focus on higher-end, larger homes where mortgage financing was available rather than smaller, entry level homes where mortgage financing was scarce.  This led to much hand wringing among urbanists and others that McMansions, which, in addition to being ugly are often bad investments would continue to be a dominant feature of the suburban American landscape.  The starter home market has been slow at best (McMansions make crappy starter homes for a whole bunch of reasons) and many astute housing market observers have noted that we need to see decreasing new home sizes in order for that market to emerge from it’s slump.  Fast forward to 2016 and it might finally be happening.  From CNBC:

For the first time since the recession, home size is shrinking. Median single-family square floor area fell from the first to the second quarter of this year by 73 feet, according to the National Association of Home Builders (NAHB) and U.S. Census data. That may not sound like a lot, but it is a clear reversal in the trend of builders focusing on the higher-end buyer.

An increase in home size post-recession is normal, historically, as credit tightens and more wealthy buyers with more cash and better credit, rule the market. As with everything else in this unique housing cycle, however, the trend this time is more profound.

“This pattern was exacerbated during the current business cycle due to market weakness among first-time homebuyers,” wrote Robert Dietz, NAHB’s chief economist. “But the recent small declines in size indicate that this part of the cycle has ended and size should trend lower as builders add more entry-level homes into inventory.”

Sales of newly built homes jumped more than 12 percent in July compared to June, according to the Census, and the biggest increase was in homes priced in the mid to just below midrange. The median price of a new home sold in July fell 1 percent compared to July a year ago. Again, not a huge drop, but a reversal from the recent gains in new home prices.

“The majority of it is a question of affordability,” said Bob Youngentob, president of Maryland-based EYA, a builder concentrating largely in urban townhomes. “People want to stay in closer-in locations, at least from our experience, and closer-in locations tend to be more expensive from a land and development standpoint and so, the desire to be able to keep people in those locations is translating into smaller square footages and more efficient designs.”

This is undoubtedly a positive development in the market so long as the trend holds.  What makes it even more significant is that the internals or the numbers behind the size reduction are also very positive.  First off, new homes are getting smaller at a time when new home sales have risen to a level not seen since 2007, confirming that this isn’t a trend based on weak sales volume or diminished starts in select geographies that favor smaller units.  Second, home prices fell, albeit only by 1%.  Often times, falling prices are viewed as a negative.  However, in this case, they should be viewed positively since, along with shrinking new home size and increased new home sales, they imply that product mix is moving in a more affordable direction.  Size matters and the shrinkage that new homes are experiencing could be the best news for the US housing market in quite some time.

Economy

Much Ado About Nothing: This far, experts’ dire claims about economic calamity following the Brexit haven’t amounted to much at all in the real world.

Bottom Rising: Low paying industries are seeing the fastest wage growth in the US which has positive implications for everything from consumer spending to housing.  See Also: Laid off American workers are having a better go of it than they had been over the past few years.

Staying Away: The Fed’s dislike of negative interest rates is likely to make them an observer of the controversial monetary policy rather than an implementer.

Commercial

Cookie Cutter: How over regulation led to the ugliest feature of most American cities and towns – the strip mall.

LA’s New Skyline: How Chinese developers are transforming downtown LA, just as they did in cities in China.

Residential

Alternate Universe: Only in the bizarro-world of California land use politics would construction labor unions undermine a bill that would have created substantially more construction employment opportunities.

Dumbfounded: Suburban NIMBYs oppose any and all development then act puzzled about why Millennials don’t want to move to their communities.

Profiles

Consider The Source: How Jose Canseco went from baseball’s steroids king/whistle blower to Twitter’s favorite financial analyst.

There Goes the Neighborhood: There is a new startup in Silicon Valley called Legalist that relies on an algorithm to predict court cases and will fund your business-tort lawsuit in exchange for a portion of the judgement.

Worth Every Penny: In honor of National Dog Day last week, here is a breakdown of just how much we spend on our four-legged best friends.

Chart of the Day

Mom’s basement is a really popular address in New Jersey

Source: Curbed

WTF

No I Will Not Make Out With You: A Mexican teen died from a blood clot that resulted from a hickey that his girlfriend gave him.

Bad News: A new study finds that reading on the toilet is bad for you.  Just like that, my reading location for much of Landmark Links’ content became an occupational hazard.

Priorities: An 18 year old girl who escaped from an Australian correctional facility messaged police via Facebook to ask them to use a better picture of her than the mug shot that they posted.  She even provided a picture that she wanted them to use.  Of course, police were then able to track her phone and arrested her soon after.

Video of the Day: A video taped melee on a NY subway that resulted from a crazy woman getting on a packed subway with a bucket full of hundreds of crickets and worms that she was trying to sell made me laugh so hard that I cried. And yes, I’m aware that this probably makes me a terrible person.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 30th – Size Matters

Landmark Links July 26th – Nip and Tuck

michael-jackson-before_and_after

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

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

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

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

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

Economy

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

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

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

Commercial

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

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

Residential

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

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

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

Profiles

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

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

Chart of the Day

High Building Costs Make it Tough to Construct Affordable Homes

WTF

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

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

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

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 26th – Nip and Tuck