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 1st – East Coast Edition

909er

Happy 4th of July!  First off, Jason Pierre-Paul of my beloved Giants and his disturbingly-mangled hand has a public service announcement for you: don’t light fireworks off in your hands as doing so can leave you disfigured and also cost you tens of millions of dollars in the NFL free agent market.  To paraphrase Apu from the Simpsons: “Celebrate the independence of your nation by blowing up a small part of it….just make sure that it doesn’t include your hand.”

Lead Story… The Panama Canal will be opening up a new lane for larger ships in the coming weeks.  One of the economic winners will be owners of industrial buildings in a quaint area of South Carolina 200 miles from the sea where a construction boom is underway to accommodate goods coming into the Port of Charleston, which is currently undergoing dredging that will make it the deepest harbor on the east coast.  Consider it the new Inland Empire of the South.  From the Wall Street Journal:

In the past few years, the rolling hills and farmland surrounding Greenville and Spartanburg have given way to massive warehouses and industrial parks. Restaurants in Greenville, S.C.’s formerly neglected downtown cater to corporate managers and engineers from Germany and Japan. Trucks clog the two main interstates, carrying engine parts and finished goods to and from the region’s growing number of manufacturing plants.

More development is on the way: over six million square feet of warehouse space is under construction in the Greenville-Spartanburg region, a scale typically seen in major cities like Philadelphia and St. Louis, according to CBRE Inc., a real-estate brokerage.

The construction frenzy is being fueled by developments at the Panama Canal, nearly 2,000 miles away. The new, wider ship channel will allow bigger ships to pass through, lowering the cost of bringing Asian-made goods directly to the East Coast.

Industrial boom

Sound familiar?  It should if you’eve ever spent time in the former cow pastures west of I-15 in San Bernardino and Riverside Counties that now have millions of square feet of class-A warehouses that serve as a massive distribution hub for the ports of LA and Long Beach.  Some are arguing that the canal widening will allow Asian exporters to hedge against the labor issues that have boiled over in LA and Long Beach in recent years, grinding commerce to a halt even at the expense of a few extra shipping days to get to market.  The counter argument is that days to market will still rule and there isn’t likely to be much of any drop off in LA and Long Beach.  Either way, the net volume of traffic going to east coast ports is likely going up to some extent and that is what industrial developers are anticipating.  This could potentially be a massive economic stimulus for an area that was formerly a textile hub and lately had best been know for automotive manufacturing. More from the Journal:

The expanded Panama Canal “is going to drive industry and create even more businesses there,” said Joel Sutherland, director of the Supply Chain Management Institute at the University of San Diego. “Having a regular flow of containers…will attract major manufacturing, then their suppliers, then their suppliers’ suppliers, and ultimately more people.”

From the Port of Charleston—which is dredging its harbor to be the deepest on the East Coast—container cargo makes the quick trip by rail to a freight hub in Greer, S.C., known as the Upstate’s “inland port.”

Trucks pick up those containers of component parts and retail goods bound for nearby factories and distribution centers. And from there, truckers can reach Atlanta or Charlotte, N.C., in two or three hours, and most of the rest of the Eastern U.S. within a day’s drive.

“The Panama Canal is not even completed, the port dredging has not been completed, but we’re already attracting major distribution and manufacturing companies,” said Trey Pennington, an industrial real-estate broker with CBRE in Greenville. “The Panama Canal will fundamentally change the market dynamics of South Carolina in the coming years.”

It’s also a given that more economic growth and well-paying jobs will lead to more residential and retail development which leads to…..you guessed it – NIMBYs who, as always are coming out of the woodwork to protest anything new being built:

In downtown Greenville, higher-end residential and retail development—a Brooks Brothers clothing shop opened on Main Street in 2013—is forcing out some longtime residents. Across Greenville and Spartanburg counties, residents say traffic congestion has never been worse.

The Upstate’s main roads are lined with razed fields where warehouse structures rise in various states of construction. Conservationists say the region’s natural landscape in the foothills of the Blue Ridge Mountains—which draws outdoor enthusiasts and an especially large number of professional and amateur cyclists—is under threat as housing and industrial construction push further out from the cities and transportation corridors.

“The Upstate needs to balance this development with protecting valuable green spaces and water quality,” said Andrea Cooper, director of Upstate Forever, an environmental advocacy group.

In a strange way, I’m relieved to see that the “If You Build It They Will Whine (and most likely sue you)” crowd doesn’t confine itself to coastal California.  If the Panama Canal expansion ends up resulting in a 10% – 20% increase in goods going through Charleston as some predict, the Upstate could be in for a prolonged economic boom that will likely keep the anti-growth NIMBY crowd busy for the foreseeable future.  If that scenario does play out, look for the region to become a prime growth corridor with all of the positives (and yes, some negatives) that go with economic expansion.  South Carolina may be getting it’s own version of the 909 so be on the lookout for the flat brimmed hats, barbed wire tattoos and lifted pickup trucks.

Economy

Stick a Fork in It: The futures markets are now saying that the Fed won’t raise interest rates until 2018 post-Brexit.  See Also: Government bonds from developed economies have been this year’s jackpot investment.

News Flash: It’s really, really expensive to raise a child in the US.  Per the US department of agriculture, the average cost to raise a child born in 2013 from birth to 18-years old is $245,340, ranging from $176,550 for low-income families to $407,820 for high-income families.   This only covers a kid to age 18 so it DOESN’T include college.  It’s truly a wonder that young people are delaying household formation coming out of the Great Recession…..

Commercial

Scarcity: 1031 exchange buyers are having a difficult time finding enough deals to trade into, leading them into unfamiliar markets and product types and helping to bid up already-high commercial real estate prices.

Residential

Unintended Consequences: There has been no group of people more wrong over the past 7 years than the “interest rates have nowhere to go but up” crowd.  The Brexit is just the latest example of why this line of thinking has been incorrect. There is also a credible argument that Brexit could set off a chain of events that would result in mortgage rates in the 2s.  I’m not saying that it will happen or even that it’s likely but the possibility shouldn’t be ignored based on the deflationary forces that we are seeing in the world economy.

Not in the Ballpark: US housing supply continues to lag far behind demand just as it has been doing since 2009.

Unsustainable: Inflation-adjusted rents rose 64% from 1960-2014 while real household incomes increased only 18%, resulting in the share of cost-burdened renters nationwide exploding from 24% in 1960 to 49% in 2014.  If you want to know why so many people struggle to save for a down payment, this is a good place to start:

Profiles

Hero: Meet the world’s first robot lawyer, a free online chatbot who has managed to overturn 160,000 parking tickets in London and New York, saving users nearly $3.9MM in fines since it was launched 21 months ago.  The 19 year old British coder who invented this should win a Nobel Prize.

Predictable: There is one industry that is about to make a fortune on the Brexit regardless of what happens with regards to markets and the economy: lawyers.

Stressed: The Federal Reserve’s annual bank stress tests have spawned a multibillion-dollar industry where banks hire consultants to manage other consultants  in order to help them pass, fueling a never-ending feedback loop of red tape and bureaucracy.

Chart of the Day.

Supply and Demand for Housing

Supply = Blue, Demand = Gold

Difference Between Housing Supply and Demand

WTF

Breast in the World: Just in time for July 4th, the Journal of Female Health Sciences recently released a new study that found the US rules the world in a very important category: American women have the world’s largest boobs.  The study excluded surgical enhancements, which of course naturally meant that only two women in Orange County – which qualifies as a very different type of Silicon Valley – were eligible to participate.  Yes, this is blatant click-bait but I’m going to milk it for all it’s worth as I feel it’s my duty to augment your base of knowledge by keeping you abreast of important news.

Video of the Day: In a development that will likely alter the path of human history, some genius figured out that beer pong is more fun and challenging if the cups are placed on top of a Roomba vacuum cleaner which is then placed on top of the beer pong table.  Bring a Roomba to your 4th of July BBQ and you will be the most popular person there.  Guaranteed.

Vegan News Roundup: Vegans are now forcing their bat-shit-crazy religion on their dogs (which, by the way are carnivores) because vegans are mostly insane.  Side note: this definitely qualifies as animal abuse.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 1st – East Coast Edition

Landmark Links June 14th – Underexposed

underexposed

Lead Story…. REITs are the best performing asset class in the market over the past 15 years, yet, according a Goldman Sachs, 40% of large-cap core mutual funds still don’t own any and the ones that do often have a very small percentage of their funds allocated to real estate.  I don’t think its a stretch to say that this goes a long way towards explaining why most fund managers under-perform the market.  Not only have REITs outperformed the rest of the market, it actually hasn’t even been that close.  From the WSJ:

Since 2000, REITs have returned an average of 12% a year, according to J.P. Morgan Asset Management. That crushed the No. 2 finisher, high-yield bonds, which returned 7.9%. Large-cap U.S. stocks returned 4.1%.
Despite the performance, nearly 40% of large-cap core mutual funds, which largely invest in S&P 500 stocks, don’t own any REITs, according to Goldman Sachs. Overall, funds with no REIT exposure have a total of $528 billion in assets, Goldman says.

Funds that do own REITs hold about 2% of their assets in the stocks, less than two-thirds of the sector’s weight in the market, Goldman says. Turning REITs into its own sector will make it clear which managers are avoiding real estate. Of course index funds have always had a full weighting in REITs.

This is going to become increasingly important because, as we mentioned earlier this month, real estate is about to get it’s own sector in the S&P 500 which will make it even more obvious who is underexposed.  If tech, finance, manufacturing, emerging market, utility or natural resource stocks were hot you can bet that fund managers would be piling in as quick as possible.  So why are REITs the proverbial red-headed stepchild despite outperforming?  According to the WSJ:

REITs aren’t like other stocks because they are essentially conduits to take rent and pass it on to investors. Analyzing a REIT is different than trying to figure out a company that produces products or delivers services.

For stock pickers, REITs are frustrating because they tend to rise and fall based on what’s happening in the economy, making it hard for a fund to stand out. The stocks perform well when the economy is humming along at a modest pace, just like now when rents are rising and occupancy is high. But when the economy tanks, they can get hit hard. In 2007 and 2008, REITs lost 15.7% and 37.7%, respectively.

And when the economy runs too fast and interest rates rise, they lag. Many managers see REITs as bonds masquerading as stocks. There is truth to that. REITs tend to lag behind the market when interest rates are rising, just like bonds. REITs also are compared with stodgy utilities, which also throw off lots of dividends but do little else.

Ultimately, many fund managers didn’t buy REITs because they didn’t have the time or staff to figure out the industry.

Shorter version of that: REITs are boring and hard to understand so fund managers don’t bother spending the time to figure them out.  Also, I don’t by the “not good when the economy tanks” rationalization because the ’07-’08 train-wreck is included the 15-year period of out performance.  Also, you could say the same thing about tech stocks after 2001 or emerging markets over several time periods but clearly the funds have not stayed away from those sectors.  As an aside, the performance data for listed REITs should be enough to kill off the seedy and perpetually under-performing non-traded REIT industry.  However, one should never underestimate the determination of a broker stands to earn a commission exceeding 10% by selling to a less-than-sophisticated mark.  Ironically, the sector split happening this summer is going to force fund many managers to allocate more to REITs at a time when out-performance is unlikely to continue.  Again, from the WSJ:

Sadly for investors who now have to take the sector more seriously, the big gains recorded by REITs over the past 15 years aren’t likely to continue. REITs have been the best-performing asset class in five of the last six years, a record that’s unlikely to repeat itself even though valuations are in line with history.

Trees don’t grow to the sky, after all.  Either way, I’d expect that it’s going to be a busy few months for Green Street Advisors.

Economy

Loud and Clear: The still-flattening yield curve is telling the Fed everything it needs to know about the economy.  Whether or not the Fed listens is another matter.  See Also: Economists surveyed by the WSJ have sharply lowered their growth estimates for next year.

In the Rear View Mirror: Remember the US manufacturing renaissance after the Great Recession ended?  Recent jobs data suggest that it could be coming to an end.

Ticking Time Bomb: Bill Gross likens negative interest rates to a “supernova that will exlpode.”  But See: Denmark has had negative interest rates longer than any other country and hasn’t exploded yet.

Commercial

Extended Stay: Despite concern about new supply in the capital markets, hotels are still on pace for another great year.

Residential

Party Like it’s 2005: Some prospective buyers in Seattle are camping out overnight to put a deposit on a downtown condo.

Head Above Water: According to CoreLogic, 268,000 US homeowners regained equity in their homes in the 1st quarter of 2016.

Lonely at the Top: Calculated Risk on Merrill Lynch’s report showing some signs of slowing at the high end of the market.  See Also: Rent hikes are slowing but mostly at the high end where almost all of the new construction has been happening.

Profiles

Taking Stock – Silicon Valley is sick of dealing with Wall Street and looking to create it’s own stock exchange.

Hipster Darwinism: Fertility experts are telling men to ditch the skinny jeans if they want to have kids.  Also because they look ridiculous.

Stacked: As if online lenders didn’t have enough problems….new reports show that their quick underwriting often doesn’t pick up loan stacking – the act of multiple lenders making loans to the same borrowers, often within a short period of time, meaning that borrowers are far riskier than advertised.  This is not going to help win back investor confidence

Chart of the Day

WTF

Leave the Driving to Us: An allegedly possessed woman went apeshit on a bus in Argentina and fortunately someone video taped it.

Pet of the Week: Can someone out there please help find Pinky the cat a new home?  He’d make a great pet.  He’s also a Warriors fan and Draymond Green is his favorite player

Frivolous: A woman is suing a spin instructor in LA for bullying because she hurt herself in class.  When the world ends, there will be nothing left to inhabit the earth but insects and lawyers.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links June 14th – Underexposed