Landmark Links September 20th – Young Man’s Best Friend

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Lead Story… If you follow the news even casually, you probably know that Millennials are less likely to own cars and homes or be parents than prior generations.  However, there is one area where Millennials are out ahead: Pets.  The Washington Post published the results of a study of pet ownership among young people and the results were somewhat stunning (emphasis mine):

Three-fourths of Americans in their 30s have dogs, while 51 percent have cats, according to a survey released by research firm Mintel. That compares to 50 percent of the overall population with dogs, and 35 percent with cats.

The findings come at a time when millennials, roughly defined as the generation born between 1980 and 2000, are half as likely to be married or living with a partner than they were 50 years ago. They are also delaying parenthood and demanding flexible work arrangements — all of which, researchers say, has translated to higher rates of pet ownership.

“Pets are becoming a replacement for children,” said Jean Twenge, a psychology professor at San Diego State University and author of “Generation Me.” “They’re less expensive. You can get one even if you’re not ready to live with someone or get married, and they can still provide companionship.”

You read that correctly, 75% of American’s in their 30s have dogs!  That is a yuge percentage and makes this self-proclaimed crazy dog person quite happy.  As with most publications though, WAPO seems to be implying that Millennials’ penchant for animal companionship makes them somehow different from the rest of “us.”  Indeed, if Millennials were going to forego family life permanently in favor of living with only dogs or cats it would have dire demographic implications.  Instead, I would suggest the pet ownership trend fits nicely with my theory about Millennials: they aren’t any different from prior generations, they are just taking longer to hit certain milestones than previous generations did.  Human beings need companionship and pets fill that gap before young people are ready to start families.  The increase in pet ownership is a good thing.  There are a ton of healthy benefits to having a pet as a family member, not the least of which is reducing stress.

Why am I so certain that dramatically increasing pet ownership among young people isn’t a harbinger of demographic doom? Well, for one, I’ve lived it.  I was born in 1979 so I’m not technically a Millennial but I didn’t get married until later in life.  I rescued a Black Labrador named Shadow when I was 24 who was my best friend for 10 years.  Despite my attachment to my dog, I ended up getting married in my mid-30s and had kids soon after. Shadow passed away several years ago and Pepper, a 2 year old Golden Retriever is now an important member of our family.  Also, I can’t imagine a scenario under-which we wouldn’t have a dog.

All that being said, there was one segment of the article that really frightened me (emphasis mine):

Millenials were also twice as likely than Baby Boomers to buy clothing for their pets, a phenomenon Richter chalks up to the prevalence of social media.

“The clothing is, for them, an opportunity for performance — they put it on their dog or cat, take them for a walk, post a picture on Facebook,” Richter said. “It’s increasingly about getting a digital stamp of approval.”

On second thought, I take back everything that I just wrote.  Maybe Millennials are the hipster weirdos that the press makes them out to be after all.

Economy

Nada: The reason why the stimulus from low oil prices never boosted the economy – it was 100% offset by the reduction in energy investment.  Mea Culpa on this one.  I was dead wrong.

Crossroads: The Fed is basically in the dark when it comes to the relationship between “full employment” and inflation in today’s economy.  As we approach what was traditionally considered “full employment,” they have a decision to make.

Commercial

Out of the Shadows: Shadow lenders are stepping up to fund development deals as regulators force banks to pull back on commercial real estate exposure.

See Ya: Mall owners are totally over department stores and not sad to see them go as retail tenant mix remains in flux.  But See: Nervous bond investors are hedging their exposure to malls with mortgage derivatives.

Residential

Building Up or Building Out: Awesome time-lapse graphics from the Washington Post this past weekend on density in major urban areas over time and the conundrum that cities face when it comes to keeping housing affordable: do you build up or do you build out?  See Also: Some suburbs are trying to add urban-style development projects to attract young workers and the employers who covet them.

Profiles

Always Be Closing: How Wells Fargo’s high pressure sales culture spiraled out of control and led to a massive checking account scandal.

Fleeced: Back in 1999 former recalled CA governor Gray Davis gave away the farm to public employee unions that had supported his election bid in the form of increased pension benefits based on the bullshit assumption that  CalPERS’ annual returns would average 8.5% forever. Davis sold benefits increase to taxpayers by claiming it would cost them nothing since all of the increase would be borne by CalPERS’ return on investment.  Needless to say, things didn’t go as planned.  Today the unfunded liabilities total $241 billion.

Battle of the Buzz: How the alcohol and pharmaceutical industries are bankrolling the fight against marijuana legalization.  See Also: There is a land rush going on in some of California’s worst real estate markets and commercial pot is the reason.

Chart of the Day

Europeans are not as happy with big-city living as commonly believed.

WTF

Florida Grudge Match: Nothing says Florida quite like an octogenarian brawl on the shuffleboard courts. (h/t Steve Sims)

Buy Gold: A notorious runaway Russian robot that has escaped it’s lab twice has been was arrested by police at a political rally.  And so it begins…

Somebody Walks in LA: Meet LA’s first “People Walker,” a bearded hipster and wannabe actor who will go on a walk with you for $7/mile. (h/t Ingrid Vallon)

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 20th – Young Man’s Best Friend

Landmark Links September 2nd – Clueless

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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 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 – 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 July 12th – We Know Nothing

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Lead Story….  There is an old investment joke about Albert Einstein going to heaven that goes like this:

Einstein dies and goes to heaven only to be informed that his room is not yet ready. “I hope you will not mind waiting in a dormitory. We are very sorry, but it’s the best we can do and you will have to share the room with others” he is told by the doorman.

Einstein says that this is no problem at all and that there is no need to make such a great fuss. So the doorman leads him to the dorm. They enter and Albert is introduced to all of the present inhabitants. “See, Here is your first room mate. He has an IQ of 180!”
“Why that’s wonderful!” Says Albert. “We can discuss mathematics!”

“And here is your second room mate. His IQ is 150!”
“Why that’s wonderful!” Says Albert. “We can discuss physics!”

“And here is your third room mate. His IQ is 100!”
“That Wonderful! We can discuss the latest plays at the theater!”

Just then another man moves out to capture Albert’s hand and shake it. “I’m your last room mate and I’m sorry, but my IQ is only 80.”
Albert smiles back at him and says, “So, where do you think interest rates are headed?”

Believe it or not, there was a time that it was considered foolish to speculate as to the future direction of interest rates.  For better or worse, that time has clearly passed.  On a personal level I try to avoid interest rate projections whenever possible and nothing loses my attention quicker than a one sided statement like “interest rates have nowhere to go but up,”  which we’ve been inundated with for several years.  Why?  Simple: I HAVE NO IDEA WHERE INTEREST RATES ARE HEADED AND NEITHER DO YOU, so let’s not waste time on  something that’s complex to the level of being unknowable.  My preference is to look at interest rates (especially at the long end of the yield curve) as an indicator that tells us about the economy as opposed to something that fluctuates based on the whims of where economists, consultants, finance bloggers or even the Federal Reserve think that they ought to go.

Two weeks ago, I read a post on John Burns Real Estate Consulting’s typically-excellent Building Market Intelligence blog that suggested that finished lots could be substantially overvalued – as much as 26%!  The post is relatively short so I’ll post the entire thing here:

In 2013, finished lot values (shown in navy blue below) spiked back to mid-2005 values. Since then they have climbed modestly. Today’s low mortgage rates support the high lot values, but lots are 26% overpriced if rates were to rise back to a long-term norm of 6.0%.

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Methodology

To help our clients assess housing cycle risk, we calculate intrinsic finished lot values in 24 markets around the country and intrinsic home values in approximately 100 additional markets. Intrinsic values are those one would expect over a very long period. We assume that 6% is the normal mortgage rate over a long period like this. (6.45% is the median rate over the last 25 years.)

Valuation

Today’s finished lot values make sense in the current 4% mortgage rate environment (red line above) but won’t make sense if rates rise to 6% (green line above). Most home buyers are highly sensitive to mortgage rates, which is why the difference is so dramatic. The intrinsic valuations vary widely by market, too, with Dallas’s finished lots the most overvalued market in the country and Charlotte’s the most undervalued.

Conclusions

Our analysis, which includes interviewing brokers and running cash flows, concludes that finished lots are 3% underpriced nationally as long as rates remain where they are. If rates rise to 6%, finished lots would be overpriced by 26%. Our research subscribers get the detail for each market and the methodology.

Any regular reader of this blog knows that I have nothing but the utmost respect for the JBREC team and link to their posts regularly but I have some real issues with this analysis, not because they chose to apply a higher interest rate to stress land values but rather because I believe the methodology that they used to be flawed for several reasons:

  1. Flawed Scenario Analysis: I have absolutely no issue with scenario analysis and actually favor it as a means of establishing a range of values where variables can not be pinpointed.  We use it in almost every underwriting that we do.  However, they only ran one scenario here: rates rising.  What if rates fall?  Brexit, anyone?  Then what happens?  I would assume that finish lots would be undervalued if they did fall?
  2. Counterfactual: The Burns Intrinsic Finished Lot Value Index is based on a conterfactual.  In that regard, they are trying to take a condition that currently doesn’t exist in the market, change one variable and reach a conclusion based solely on that variable.  This may work great in a laboratory environment but doesn’t work so well when interest rates are completely intertwined with all other facets of the economy.  When it comes to finance, counterfacutals are challenging because they are garbage-in-garbage-out and you can make them say almost anything.  Want to make something look overpriced?  Just change an input and voila, you’ve just come up with a bear thesis.  Same thing goes for showing that an asset is undervalued.  In this case, the index is using a historic average that isn’t applicable to today’s economic conditions and then applying it across the board. Which leads us to my biggest beef:
  3. Oversimplification: The entire analysis is an exercise in oversimplification.  In their index, JBREC is implying that, since rates have averaged 6%+ over the past 25 years that they will return to that level.  At the time that the JBREC post was written, the 30-year mortgage rate was 3.56% (it’s substantially lower today).  That means that mortgage rates would need to rise 69% to get back to 6%, which, while steep is clearly not outside the realm of possibility – IF we have substantial economic growth. The problem that I have is that the index doesn’t take into account the economic conditions over the past 25 years that allowed for mortgage interest rates to average 6%.  The economy drives long-term rates, not the other way around.  Income and GDP growth would both need to be substantially higher as would the labor force participation rate (which is largely driven by demographics).  If these conditions were present, it would lead to the long end of the yield curve (upon which mortgages are typically priced) to rise – which could lead to 6% (or greater) mortgage rates due to inflation, which is currently nowhere to be found.  However, rising incomes would help to blunt the impact of rising interest rates when it comes to home, and by extension land affordability.  In other words, it’s fine to increase the assumed mortgage rate but only if you adjust the other complex economic variables necessary to achieve that rate, which constitute a far more complex analysis.  Otherwise you end up with a scenario that won’t happen because it can’t happen: interest rates do not function in a vacuum.  They don’t typically rise 69% without a substantial increase in inflation, meaning that 6% mortgage rates would not result in lots that are 26% overpriced because incomes would be rising as well.  It doesn’t appear from the JBREC post that they took income growth commensurate with that type of increase in long term rates into account.

Are lots overpriced today?  Perhaps they are but it has more to do with increased regulatory and development/construction costs and fees outpacing the rate of home price inflation than it does about mortgages being hypothetically 69% higher.  The reality of the current world economy is that deflation is everywhere, a VERY different dynamic from previous periods of economic expansion.  Negative interest rates are no longer a text book hypothetical and are becoming more prevalent around the world. For example, Switzerland’s bonds now yield negative all of the way out to 50-years. Former Treasury Secretary Larry Summers wrote an excellent op-ed in the Washington Post last week outlining four take-aways from today’s incredibly low interest rates that provide a bit more background as to why I have issues with JBREC’s index (highlights are mine):

First, with differences between countries, neutral real interest rates are likely close to zero going forward. Think about the U.S., where growth has been relatively robust by recent standards. Growth has averaged little more than potential for the last one, three or five years while the real Federal funds rate has been about -1 percent.  There is no good reason to think given sluggish investment expectations that the neutral rate will rise to be significantly positive in the foreseeable future. The situation is worse in other countries with more structural issues and slower labor-force growth. Substantial continued reductions in Fed estimates of the real neutral rate lie ahead.

Second, as counterintuitive as it is to central bankers who came of age when the inflation of the 1970s defined the central banking challenge, our problem today is insufficient inflation. In the U.S., Europe and Japan, markets are now expecting inflation that is below target even with full employment over the next 10 years. This is despite a 70 percent rise in the price of oil. Evidence from markets and some surveys suggests that inflation expectations are becoming unhinged to the downside. The policy challenge with respect to credibility is exactly the opposite of what it has been historically — it is to convince people that prices will rise at target rates in the future.  This is likely to require some combination of very tight markets and mechanisms that give confidence that during the best times, inflation will be allowed to exceed target levels so that over the long term, they can average target levels.

Third, in a world where interest rates over horizons of more than a generation are far lower than even pessimistic projections of growth, traditional thinking about debt sustainability needs to be discarded.  In the U.S., the U.K., the Euro area and Japan, the real cost of even 30-year debt will be negative or negligible if inflation targets are achieved. Indeed, the conditions Brad DeLong and I setout in 2012 for expansionary fiscal policy to pay for itself are much more easily satisfied today than they were at that time.

Fourth, the traditional suite of structural policies to promote flexibility are not especially likely to be successful in the current environment, though some structural policy approaches such as removal of restrictions on investment are still desirable.  Indeed, in the presence of chronic excess supply, structural reform has the risk of spurring disinflation rather than contributing to a necessary increase in inflation.  There is, in fact, a case for strengthening entitlement benefits so as to promote current demand. The key point is that the traditional OECD-type recommendations cannot be right as both a response to inflationary pressures and deflationary pressures. They were more right historically than they are today.

What I like about the Summers analysis is that it looks as interest rates as a barometer of the economy and inflation (or disinflation in this case) rather than try to predict their future trajectory.  So when will we see inflation (leading to an increase in long-term rates)?  At risk of sounding like I’m making a projection – after trashing the practice for several paragraphs – it will be when we stop hearing the constant refrain of investors “searching for yield.”  In an environment where there is strong real economic growth, fixed income investments are less attractive because inflation eats away at returns and investors turn to growth strategies as a way to benefit from said inflation.  I have no clue when/if this will occur but you can be certain that it will coincide with robust real economic growth that could make the JBREC index assumption of 6% mortgage rates a reality once again.

Economy: Recent non-farm payroll reports have looked as if they were pulled from a random number generator. Barry Ritholtz of The Big Picture is spot on in explaining why no one individual NFP report should be taken too seriously (but the trend should be):

The month’s data for June 2016 was a very robust 287,000 following last month’s very punk 38,000 for May 2016. The unemployment rate ticked up 0.2 to 4.9 percent in June — offsetting the drop last month by the same amount. The phrase “Assume its noise” should be foremost in your thoughts as you read the BLS release.

Also, those 35,000 striking Verizon workers muddied the water both months, but if you have the a PhD. in applied mathematics, you might be able to perform the arithmetic functions of ADD 35,000 to MAY and SUBTRACT 35,000 to June — it should not throw you too much.

Let me remind readers (again) that the monthly employment situation report has a margin of error of 100,000 jobs. So last month could very likely have been as high as 173k (38 + 35 + 100) and this months could very likely be as low as 152k (287 – 35 – 100). If you understand this simple math, you should be able to understand why I insist on noting the actual BLS official monthly number ain’t all that.

Everything Old is New Again: Forget about the Brexit.  Graphic Detail, The Economist’s excellent infographic blog gives us a closer look at the Amexit (h/t Elizabeth DeWitt):

Commercial 

Ejected: Mall owners are pushing out department stores in favor of specialty retailers.  See Also: How malls can survive in the age of Amazon.

Profiles

Fad: Hipsters with nothing better to do are obsessed with new “augmented reality” game Pokemon Go where they search for Pokemon characters in the real  world. Nintendo, which created the game saw it’s stock surge nearly 25% on Monday adding a cool $7.5 BILLION to it’s market capitalization on a day when there was virtually no other news that would have moved the stock.  However criminals are taking advantage of players as easy marks and one player in Wyoming found a human corpse while searching for a Pokemon.  IMO, this is the lamest thing since adults were collecting Beanie Babies for hundreds of dollars.  That being said, anything that led to this meme can’t be all that bad:

Chart of the Day

WTF

Assault with Extra Pepperoni : A North Carolina couple is facing charges after assaulting each other with pizza rolls.  Whoever said a picture is worth a thousand words clearly had the two mug shots in this article in mind (h/t Bhavani Vajrakarur).

Walk of Shame: An intoxicated thief in Tennessee was caught in bed with a scantily clad mannequin that he stole from a Hustler store.  He claimed that he thought it was a Pokemon.

LOL: Women are using Tinder to con desperate men into doing chores because guys are complete suckers if we think there is even a slight chance of getting laid.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 12th – We Know Nothing

Landmark Links April 29th – The Fix is (Maybe) In

pete-rose-as-envisoned-by-someone-with-no-eyes-and-no-soul

Lead Story…. Earlier this month we linked to a story about how the already-reeling CMBS market was about to take another hit via a “risk retention” provision due to take effect later this year that would take a big chunk out of issuer profitability.  The House Financial Services Committee voted on a bill dubbed the Preserving Access to CRE Capital Act which would lessen the potentially devastating impact on CMBS.  It passed with bi-partisan support:

The bill would exempt single-asset or single-borrower CMBS from the risk retention rule. It would also make it far easier for CMBS pooled together from different borrowers to get an exemption, for example by scrapping term requirements.

Pretty much every commercial real estate trade group in the US supports this bill for good reason according to Konrad Putzier from The Real Deal:

In February, turmoil in global bond markets and the prospect of risk retention rules combined to drive mid-sized CMBS lender Redwood out of business and led to broader concerns over the health of the CMBS market. “We have concluded that the challenging market conditions our CMBS conduit has faced over the past few quarters are worsening and are not likely to improve for the foreseeable future,” the firm’s CEO Marty Hughes said in a statement on Feb. 9.

Bond markets have since calmed. The spread between 10-year Treasury swaps and most types of CMBS bonds fell between February and April, according to Trepp.

But the onset of risk retention could drive spreads up again at the worst possible time. A staggering $99.47 billion in U.S. CMBS loans are set to mature in 2017 – up from $52.42 billion this year – according to a recent report by Morningstar Credit Ratings. 46.9 percent of those loans have a loan-to-value ratio of 80 percent or more (see chart above), and Morningstar reckons “successfully refinancing many of these loans will be very difficult without sharp improvement in cash flow through 2017.”

It still needs to be voted on by the full House but this is a step in the right direction.  If lawmakers decide that they want to crack down now to lessen future risk of this sort, it could lead to some very rough times for the industry with the mountain of maturities in 2017.  Stay tuned…. (h/t Ethan Schelin)

Economy

Casino is Open for Business:  For those of you who haven’t noticed, commodities from oil to metals have rallied hard over the past few weeks, leading in part to the Federal Reserve openly pondering whether or not to raise rates in June.  However, fundamentals haven’t really changed.  Commodity markets are still oversupplied and economic data from both China and the United State is still soft at best.  Rupert Hargreaves over at Value Walk explains what has changed: Chinese investors are pouring money into the commodity future casino betting on more infrastructure stimulus:

It has since been touted that the tidal wave of money hitting commodity futures could be from the legions of private investors in China who are looking for somewhere to park their excess cash or gamble with.

This new market phenomenon coming out of China is something Bank of America Merrill Lynch’s China equity strategy research team looked at last week in a report titled, Commodity futures, Game of Thrones?….

….As China’s economic outlook is still extremely uncertain and investors are reluctant to invest in any real businesses, they have been shifting money around to invest/speculate in various assets that they believe have a good chance of increasing in price. China’s A-share rally, corporate bond rally and most recently the spike in demand for properties is possibly all the evidence you need to support this view.  Add loose credit conditions, margin trading and a small market that’s relatively easy to manipulate into the mix and you get all the right conditions for an asset bubble.

The BAML report sited above used this chart to illustrate the point of just how much money is pouring into the Chinese commodity futures markets:

Commodity BoA chart one

 

 

 

 

 

 

 

 

 

The reason that I’m posting this is twofold: 1) Sometimes fund flows between asset classes or rank speculation is more important than fundamentals in the short or even medium term; and 2) This sort of thing could have a very real impact on the US economy if it persists and the Federal Reserve starts to see the impact of higher commodity prices in real inflation data.  In other words, don’t believe everything that you see.  See Also: In (not at all) coincidental news, commodity hedge funds are hot again.

Avoid at All Costs: In a sign of just how much tech companies are shunning the public markets, there could be more tech de-listings than IPOs in 2016.  See Also: Tech companies are raising money under “dirty” structured deals with toxic terms in order to maintain sky-high valuations and avoid going public as VC investment continues to wane.

Commercial

On the Ropes: Suburban malls are hot garbage right now as anchor tenant department stores are closing up in droves, often causing a reduction in foot traffic that kills off other smaller retailers and results in virtual retail ghost towns.  This may not be an issue for high end retail centers but I can’t imagine a worse landlord situation than a mall anchored by Sears, JC Penny, KMart, etc.

Residential

Last One In: I’m generally a huge fan of the OC Housing News site.  This has to be one of Larry Roberts’ (Irvine Renter) best posts ever:

Whenever a family buys a new house, the builder constructed that house only because no local opposition group was strong enough to prevent its construction; however, once new homeowners move in, many of them immediately adopt the belief that traffic congestion is out of control and any new development will ruin the character of their neighborhood, so these nimbys band together to prevent others from obtaining the same benefit they enjoy. Through willful ignorance, these new homeowners fail to comprehend the hypocrisy of this attitude and behavior.

Undue Risk: Believe it or not, Turkey has the world’s best performing housing market right now despite social unrest and the myriad of problems associated with sharing a border with Syria.  Generally speaking, Turkish borrowers are lightly leveraged and have an extremely low rate of default.  However, the Turkish home building market is beginning to show some serious signs of distress with sales slowing, incentives increasing non-performing development loans on the rise.  Why, you ask?  For one, developers are getting way, way over their skis in terms of leverage.  From Bloomberg earlier this week:

The share of Turkey’s borrowing represented by developers is higher than at any time in the last decade, and represents almost a fifth of all corporate loans, according to the nation’s banking association. An increasing portion of those debts is going bad, with the industry’s portion of non-performing loans nearly doubling in the past five years.

“Mortgages are not the problem,” said Ercan Uysal, a banking analyst at Istanbul-based research firm Integras. “Developer leverage is.”

That sounds bad but it gets much, much worse.  It seems as if Turkish developers are also taking currency risk on top of the risk inherent in development in an effort to prop the market up and have now exposed their balance sheets to the whims of the US Federal Reserve.  Turkish developers are taking on debt and then offering below-market financing to home buyers as a loss leader:

To keep sales brisk, builders are helping buyers defray their costs. For instance, at Istanbul’s $1.5 billion Maslak 1453 development, whose name recalls the Ottoman conquest of Constantinople, the developer is offering to secure below-market interest rates and accept a 10 percent deposit — below the 25 percent minimum required for a bank mortgage…..

The dangers of a weakening currency are exacerbated for builders, because they account for a disproportionate share of Turkey’s foreign-exchange borrowing, Narain said. That creates a risk when their income is mostly in lira, a currency whose value eroded 20 percent over the course of last year.

Developers made up a fifth of the companies gaining bankruptcy protection from creditors in the first three months of this year, the most of any industry, Uysal said, citing figures from sirketnews.com, which compiles the data.

You read that correctly, they are borrowing in foreign currency (mostly dollars) when their revenues are in lira.  This would be very profitable if the dollar fell in value vs. the lira. That hasn’t been the case lately as Federal Reserve moves and rhetoric have driven the dollar higher, hitting Turkish developers hard.  I have never been involved in a real estate deal in Turkey but I can assure you that this doesn’t end well.  The developers are essentially taking foreign exchange risk in order to offer below market financing to buyers to boost absorption.  Development is risky enough without trying to take a currency bet to boost sales.

Not What it Used to Be: The wealth effect from rising home prices has been cut in half:

But See: Why the wealth effect is bunk.

Profiles

A Whale of a Problem: A 60,000-pound grey whale washed up on the beach at Lower Trestles San Onofre State Beach last weekend (it died of natural causes), drawing tourists and locals to pay their respects and take pictures.  Now comes the hard part for the California State Park System: exactly how do you get rid of a 30-ton rotting whale carcass that’s attracting sharks and stinking up the beach?  According to one resident: “It’s like the worst garbage smell you can think of,” he said, his eyes watering. “I almost threw up. It’s like death.”  Exactly what you want on your beach as we head into summer.  Apparently, the beach isn’t wide enough to bury the whale and it can’t simply be pushed into the ocean because the currents will likely push it back on the beach again.  The solution that officials have come up with is to chop it into pieces and take it to a landfill. As disgusting as that sounds, there aren’t many options and the situation is only going to get worse the longer that the whale stays on the beach decomposing. On the bright side, at least officials appear to have learned from past failures.  Back in the late 1970s, Oregon state highway officials strapped dynamite onto a dead rotting whale and attempted to dispose of it demolition style. That ensuing disaster that crushed a car 1/4 mile away lives on in what I still consider to be the most un-intentionally funny news segment ever aired.

Chart of the Day

Submitted from Visual Capitalist

Visualizing Data: How the Media Blows Things Out of Proportion

WTF

Employee of the Month: Watch a disgruntled airport employee destroy a jet with a backhoe.  I’m guessing this happened in Russia  mainly because this seems like something that would happen in Russia.

That Wasn’t on the Menu: Customer found a deep fried chicken head, beak and all in their meal at a fast food restaurant in France.  Let this be a reminder to all of you that fast food is disgusting.

Well Paid: Meet the Minnesota auto body shot owner who (allegedly) compensated his employees with meth bonuses.

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Landmark Links April 29th – The Fix is (Maybe) In