Landmark Links November 18th – Hiding in Plain Sight

hiding

Lead Story….  There are two types of correct forecasts.  The first type is the broken clock forecast.  It consists of someone predicting the same thing over and over again, and being mostly wrong and occasionally correct.  Nobel laureate Paul Samuelson’s “The stock market has forecast nine of the last five recessions” quote comes to mind as do all of the folks that have been telling us that “interest rates have nowhere to go but up” since 2009. Taking advice from anyone who makes these types of predictions is useless at best and possibly detrimental.  The second type of prediction is data based and not subject to the author’s biases.  There are very few people who can pull this sort of clear minded analysis off.  Bill McBride of Calculated Risk comes to mind as does reigning bond king Jeff Gundlach of DoubleLine Capital.  Today I want to focus on Gundlach who has correctly predicted every presidential election result since 1972.  What made this year unique even by Gundlach’s standards is that he predicted that:

  1. Trump would win the election back in January BEFORE the presidential primaries even began.
  2. The 10-Year Treasury would yield over 2% by year end back in January when Treasuries yielded a paltry 1.35%.

Today, I want to focus on Gundlach and why he got both of these forecasts right when so many others were incorrect.  Robert Huebscher of Advisor Perspectives published a post earlier this week called How Gundlach Predicted Trump’s Victory  I’m going to post it in it’s entirety today since it contains a lot of terrific insight on Gundlach’s methodology as well as some valuable commentary about where we are headed next:

How Gundlach Predicted Trump’s Victory

Hillary Clinton was a uniquely bad candidate, he said, because of her failure to beat President Obama in 2008, followed by her problems with the email server and a “basic lack of honesty.”

Why did Trump win? Gundlach said that people felt abandoned by the economy, with the median worker having suffered low or negative wage growth since 1973. This came while the top 5% realized a 51% real increase in their purchasing power. He said that the corresponding increase for the top .01% was so large it would have “blown the scale” of his graph.

“The ownership of wealth has shifted,” Gundlach said. “But those trends are about to reverse.” Gundlach said that wealth inequality will decrease.

A big contributor to Clinton’s defeat was the release of the Obamacare data on November 1, Gundlach said, which showed a “massive” increase in premiums. He said that those responsible for scheduling that release must have expected a great piece of news, not the negative “shock” it actually delivered.

Gundlach commented on what the election result means for the markets and specifically how investors should position their bond portfolios.

The markets are confused

“The markets remain completely confused as to what will be the trend direction from the election,” he said.

As evidence of that confusion, he said he was struck by the many pundits who called for a crash and global depression following Trump’s victory; many of them, Gundlach said, now claim Trump is great for stocks.

Trump does not have a “magic wand” to offer instantaneous improvement for the economy, Gundlach said. Investors should expect a bumpy ride while Trump strives to deliver on his promises, he said.

Gundlach has been warning against a rise in interest rates. He turned negative in July, when the 10-year bond was yielding 1.35%; it is now just over 2%.

An interest rate rise will not be positive for the economy or the housing market, he said. Monthly mortgage payments are already up 15%, he said, and could go up 20-25% relative to their mid-year levels. Median rents have been “skyrocketing” and renters have had a “horrible decade,” Gundlach said; those benefits in the housing market have accrued to homeowners.

“That is not positive for the psyche of the middle class,” he said.

Nor will Trump’s victory be positive for consumer spending in the short term, according to Gundlach. Trump’s supporters are not economically in a position to spend.

Gundlach warned against overanalyzing the effects of Trump’s ascendency. Since 1988, the same institutions have been in place, he said, with politics dominated by the Bushes, Clintons and Obama. “The trends of the past 28 years cannot be relied upon,” he said.

Gundlach was emphatic about one group of stocks. He said to “avoid the FANGs in a big way” – Facebook, Amazon, Netflix and Google. “It is not a good idea to bet on ideas whose trends are correlated to things that won’t continue,” he said, especially since the market had priced a Clinton victory into the prices of those stocks. Instead, he said to overweight financials, materials and industrials “for the quarters to come.”

Silicon Valley put a lot of money behind Clinton, he said. The irony is that Trump would have lost if not for Twitter, according to Gundlach.

“The people who hate Trump the most were responsible for his winning the election,” he said.

The recession and inflation forecast

Gundlach said the probability of a recession has increased based on his indicator, which measures the unemployment rate relative to its historical moving average. But he did not say a recession is imminent.

He was more focused on the prospects for higher inflation.

Inflation measures, including hourly earnings, the core CPI and core PCE, have “bottomed out,” he said. They are all moving higher, as well as the internet-based Pricestats inflation gauge. In July, the market was predicting 1% inflation “forever,” Gundlach said; now it is saying that outcome is impossible, and inflation will likely be above 2.5% by April.

As a result, Gundlach said he has liked TIPS since September. In the Flexible fund, he said every Treasury bond was a nominal bond at mid-year; now 100% of its Treasury holdings are TIPS. Over the same time, he said, the Core fund went from having 0% to 30% of its Treasury holdings in TIPS.

Where rates are heading and will the EU will break up

Gundlach offered a number of forecasts across the asset-class spectrum, as well as a prediction for the future of the European Union.

Crude oil could find its way to $60/barrel, he said, and it will be hard for it to drop below $40. From oil’s low January at $26/barrel, it may have a 100% price increase.

Gundlach is “somewhat neutral” on gold over the short term and not as positive on it as he was at year end. He advocated “paring back” gold holdings.

He said he was positive on the dollar from 2011 until mid-2015. Now he is positive again, and said the dollar will “move to higher levels.” The dollar has been a leading indicator of Treasury rates, according to Gundlach. With the dollar at a high level, he advised against buying bonds until the 10-year Treasury reaches 2.30% or 2.35%.

But he said he has “relaxed” the “negative sentiment” he had on interest rates in July. He said he is less likely to forecast higher rates now, but is not predicting an instantaneous reversal of yields to the downside.

“The 10-year yield is higher than its average the past five years,” he said. “This is not my definition of a bull market.”

Has said that the 10-year yield could be 6% in five years, but this is not necessarily negative for bond funds. It depends, he said, on how those funds are positioned and the path that rates take to get to a higher level. Some funds, he said, will do fine reinvesting their coupons at progressively higher rates.

The cash flows from bonds go up when prices go down, he said, whereas when stocks drop in price it is because of unfavorable earnings or economic news, which can lead to dividend cuts.

“There are a lot of reasons to be less negative on Treasury bonds than we were four months ago,” he said.

Virtually all other sectors of the bond market are “on the rich side,” Gundlach said, including mortgages, CMBS, corporate bonds (including junk bonds), leveraged loans, emerging markets and municipals. He said the worst thing to own are 30-year corporate bonds.

If you want to own fixed income, he said to “play it in Treasury bonds.”

At the end of the question-and-answer period, he was asked whether he expects another Brexit event and whether the Eurozone would collapse.

There will be another exit, he said, but he doesn’t know which country it will be.

“There is never one cockroach,” Gundlach said.

Jeff Gundlach has proven time and again that he is not a broken clock.  Ignore at your own risk.

Economy

Overshoot?  Has the post election bond sell off that led to higher interest rates gone too far?

Blinded: Paul Krugman’s election night tweets and blog posts are just the latest example of why political bias & business cycle analysis NEVER  mix.

Welcome to the 21st Century: US Manufacturing is about to get more high tech but still has a ways to go.

Trouble: US consumers are increasingly defaulting on loans made online.  It seems that startups that aimed to revolutionize the banking industry underestimated the risks involved in consumer lending.  Color me shocked.

Commercial

Evolution: Co-working company WeWork which has soared to a $17 billion valuation by leasing space from landlords and then renting it out at a higher price.  However, newcomers in the space look a lot more like hotel operators where landlords pay co-working operators a fee and keep most of the profits, reducing the operators risk profile.

Residential

The Tax Man Cometh: Vancouver, BC seems hellbent on cratering their housing market.  Earlier this year they introduced a 15% surcharge on home purchases by foreign buyers that drove transactions off a cliff.  Apparently, that wasn’t enough because now they are adding a new tax of C$10,000 a year that will be charged to homeowners who let their homes sit vacant.  Those who lie about whether their property is occupied or not will be fined C$10,000 a day, or $7,425, U.S.  In related news, Seattle is looking really, really good to a lot of foreign buyers right about now.   See Also: Why the world’s largest real estate binge is coming to a city near you.  And: As markets waver, the rich are parking money in luxury homes.

Exodus: Data analysis firm CoreLogic found that for every new home buyer coming into California, another three are selling their homes and moving somewhere less expensive as we’ve effectively priced out the middle class through restricting development.

No Privacy: Bathrooms with a view (for both you and potentially your neighbors) are a  hot feature for luxury condo units.

Profiles

Flying High: Drones are evolving from military to business tools and the potential market could be massive.  FYI, the graphics in the linked report from Goldman Sachs are incredible.

Yuge Infographic of the Day

Millennial Home Buyers

WTF

Dirty Money: A Royal Canadian Mint employee (allegedly) smuggled $140k of gold and sumggled it out by shoving it where the sun don’t shine.

Ramen Rampage: An ex con was arrested for domestic battery after striking his live-in boyfriend with a cup of ramen noodles, because Florida.

Mug Shot Competition: Former Oregon football player arrested for theft and a man who was terrifying El Segundo with a turbo charged air horn are locked in a fierce battle for Mugshot of the Week.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links November 18th – Hiding in Plain Sight

Landmark Links September 27th – Unusual Trend

manliest photos on the internet, funny manly images, leather mullet midget

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

jbrec_housingcycle-marketbymarket_q32016_black3

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

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

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

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

Economy

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

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

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

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

Residential

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

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

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

 Profiles

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

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

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

Chart of the Day

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

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WTF

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

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

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

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 27th – Unusual Trend

Landmark Links 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 22nd – On the Sidelines

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Lead Story… CNBC posted a Bankrate.com study this week which found that more Americans prefer cash to stocks or real estate as a means of investment for money they don’t need for 10 years or more.  In other words, a somewhat shocking 54 million American’s are embracing a zero-risk, zero return mentality.  The most troubling finding was this (highlights are mine):

Younger millennials, or those at ages 18 to 25, overwhelmingly chose cash as their preferred investment for they money they would not need for at least 10 years. That was by more than a 2-to-1 margin over the next highest category, real estate. (Millennials are also less likely to own a home because they simply can’t afford one, according to a separate report from the U.K.’s office of National Statistics.)

Older generations were more likely to cite real estate as their top choice for a long-term investment.

What I find so disturbing is that the typical investment paradigm has been turned on it’s head – normally, young people in an asset growth stage should be investing long term assets more aggressively and becoming less aggressive as they age into a wealth preservation stage of life.  When people, young or old start holding long term investable assets in cash, it’s deflationary. This level of risk aversion is also frequently a characteristic of those who have experienced a dramatic financial crisis like the Great Recession or Great Depression.  I wrote about this back in April as it pertained to Millennials not buying homes due to experiences during the housing crash.  However, the bank rate study shows that the risk averse, deflationary mentality extends far beyond the housing sector when it comes to young people and investing.  This brings us to an article by Conor Sen, one of Bloomber View’s excellent new columnists that makes an interesting argument about Millennials and housing.  Sen makes a case that Millennials almost need a housing bubble to come off the sidelines and create demand for new housing, using oil production as an analogy:

To understand the slow-motion trends in single-family housing, start by looking at the oil market: It took years of oil priced around $100 a barrel to spur the investments that drove higher production, leading to the current supply-driven glut and prices closer to $50 a barrel. The levers of supply and demand worked, but they worked slowly — as is happening in the housing market.

Every year since 2009 we’ve been running a housing deficit: More housing for sale has been absorbed than built. With a glut of housing left over from the housing bubble and the great recession, it’s logical that construction of new supply was subdued for a few years. But vacant inventory for sale normalized in 2012, and currently stands at a 12-year low. So why aren’t builders building more? The pace of construction remains far below the rate of household creation.

IMO, it’s an imperfect analogy as it’s likely a bit easier to drill for oil in barren portions of  North Dakota or West Texas than it would be to build a large development with reasonably priced homes (the reasonably priced part is key) in places that they are needed like San Francisco or Los Angeles where discretionary entitlements, environmental regulations and NIMBY activists could tie approvals up for a decade or more.  That being said, a lot of Sen’s thesis is based around economic stagnation due to the lack of wage growth in the construction industry despite a near-record-low unemployment rate  coupled with incredibly low housing inventory:

In response to a nearly generational low in housing inventory and construction worker shortage, one might expect that there would be booming wage growth for construction workers, drawing labor away from other industries. Yet we don’t have conclusive signs of that. Year-over-year wage growth for construction workers is currently 2.7 percent, nearly a full point lower than it was at the same time in the year 2000.

The lack of growth in new construction jobs is sobering. Despite a need for more housing, and despite the labor shortage and the wage growth, construction industry employment fell 6,000 in April and 16,000 in May and showed no growth in June. This is the first time in more than five years that construction employment has shown no growth for three months.

This is all the more perplexing because the cyclical conditions for real estate have rarely been better. In addition to the low level of inventory and rising secular demand as millennials are ready to buy homes, the economy has rising wage growth and historically low levels of interest rates, as I wrote about last week.

Sen concludes that it might take substantial increase in both housing prices and construction wage growth in order to push housing starts to a level where construction adds substantially to GDP and adds enough supply to eventually meet the marketplace demand.  It’s an interesting thought but I doubt that it’s possible (or even desirable) under in our current situation for a few reasons:

  1. The construction needs to take place where it is actually needed and that is more restricted by zoning and local opposition than it is by a labor shortage.  In the oil market, it matters little where the oil comes from so long as there is a way to get it to a refinery and then the end user.  In housing, location is everything.  Unless real demand shifts into outlying suburbs, this will continue to be a problem.
  2. In order to work, substantial credit expansion both to develop/build units and also for purchase mortgages would be needed.  This seems unlikely given current economic conditions, political climate (anti-GSE sentiment) and diminishing affordability.
  3. As seen in the oil industry, there is a fine line between adding enough supply and creating a glut.  When oil prices go down, oil companies, employees, owner of land with reserves and providers of services lose money.  If the housing market were to become too oversupplied and tank again, millions of home owners lose a tremendous amount of equity.  In one case, the loss is felt by a (relative) few.  In the other  it’s impact adversely affects many.
  4. Any significant decrease in prices brought on by a large surge in housing production would typically hurt the people who Sen is saying need help the most: young people and first time buyers since housing credit availability typically contracts when prices fall and lender assets become impaired.  This means that those with stronger credit and more cash (often not entry level buyers) fare better in times when credit becomes restricted.

Again, the concept that housing and the construction industry can respond to surging prices in a similar manner to the oil industry is desirable from an economic perspective. However, I’m not sure how well it plays out in the real world when the regions where housing is needed most are those where it is least likely to be built.  I sincerely hope to be proven wrong in the next few years.

Economy

Interest Rate Roulette: Now that the Brexit vote happened we can revert to normal economic journalism where writers try to predict when/if the Federal Reserve will raise interest rates.  This week, there is disagreement between two of the most astute Fed watchers out there.  John Hilsenrath of the WSJ says that the Fed could raise rates as early as September.  Tim Duy says “no chance” so long as the yield curve continues to compress.

Commercial

Game Changer: Pokemon Go has accomplished something that brick and mortar retailers have dreamed about for years: turning location-aware smart phones into drivers of foot traffic.  The implications for commercial real estate and retail in particular are yuge as Nintendo plans to allow companies to pay up in order to be featured prominently on the game’s virtual map. (h/t Tad Springer)

Residential

Crystal Ball: The Terner Center for Innovative Housing at UC Berkley has come up with an app that allows a developer to input variables for sites and give an indication of whether or not a project will be approved and built. It’s still in beta but the concept is fascinating. (h/t Ingrid Vallon)

Profiles

QOTD: “‘I was collecting Pokémon’ is not a legal defense against a charge of trespass, so be sure that you have permission to enter an area or building.”   – Wyoming, MN police department Twitter account warning Pokémon Go players not to trespass onto others’ property.

Worker’s Paradise: Venezuela has become the poster child for “it can always get worse.” Hugo Chavez’s worker’s paradise has inflation set to top 1,600% next year as well as an epic food shortage crisis.

Success From Scratch: Dollar Shave Club, which just sold to Unilever for $1 billion in cash is the ultimate modern American success story.

Chart of the Day

WTF

A Monkey Walks Into a Bar: A new study found that monkeys are basically furry little drunks. First off I hope this wasn’t funded by tax dollars. Second, if someone wants to buy drinks for me, I can prove that I like to get drunk as well.

Money Well Spent: A woman got stuck in a tree in a NJ cemetery while trying to capture a Pokemon and had to call 911 to have the fire department get her out.  Your tax dollars at work. (h/t Ryland Weber)

Citizen of the Year: A woman in Tennessee witnessed a car crash outside her (likely trailer park) home where the 67-year old driver died on impact.  Rather than calling 911, the woman stole the man’s wallet and used his credit card to buy beer and cigarettes.  People are wonderful.

Video of the Week: Some hipster figured out a backpack that you can carry a cat around in complete with a round submarine window.  Then we wonder why studies say that cats hate their owners.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links -July 22nd – On the Sidelines

Landmark Links July 5th – Oh Baby

daddy-gasmask.jpg

Quick Programming Note: Expect a much shorter blog this week and possibly next as well. I’m about to drive to the hospital with Mrs. Links to do our part in contributing to the economic tailwind known as positive demographics.  This will be our second little girl and since the first one I’ve become acutely aware that my ability to write a semi-coherent sentence is inversely proportionate to the number of diapers I’ve changed and hours of sleep deprivation that I’ve experienced in a 24-hour period.

Lead Story: Last week I posted a demographics post from Calculated Risk about how we are in the early innings of a very positive demographic cycle that should be great for the home building industry as well as the US economy as a whole:

Ben Carlson of A Wealth of Common Sense wrote a follow-up blog post that summarized the impact of a demographic cycle where large numbers of people are entering their 3rd decade of life perfectly:

Based on personal experience and what I’ve seen from my peers, here’s what happens when most people start hitting their 30s these days:

  • You move out of the mega-city to the suburbs or a more affordable city so you can actually afford a house and have a normal standard of living.
  • You buy a house and you end up spending a ton of money on things you never would have expected to buy just a few years earlier — more furniture, decorations, tools, lawn care, property taxes, maintenance, stainless steel appliances, remodeling, countertops, cabinets and the list could go on forever. You can basically add $20,000-$30,000 to the estimated amount you think you’ll pay for a house $5,000-$10,000 to every estimate for renovations to your house. And houses these days are bigger and nicer than ever before.
  • Then you have kids and kids are not cheap. That means spending money on diapers, car seats, strollers, clothes, toys, daycare (basically a second monthly mortgage payment), classes, sports, camps, parties, etc. The latest estimates peg the amount to raise a child to age 18 at anywhere from $176,000 to $407,000. Maybe you end up spending a little less on yourself, but you have to expect to spend more money when you have children.
  • With kids come SUVs or minivans because you’re going to need a new car or two to carry all of that stuff that you’ve been buying for your kids everywhere. Good luck taking an Uber when you have to fill your trunk with baby supplies and use car seats for every trip you make out of the house.

Growing up is expensive. It’s like a rite of passage to spend money on these things.

Not every millennial will take this traditional route, but more will do so than most people now assume. As people get older they want different things. You can’t act or live like a 20 year old forever.

Please read the whole thing here as I think it’s well worth your while.  It’s easy to be pessimistic for a host of reasons.  However, despite current economic issues there are a lot of positive developments beginning to take shape…if you’re able to look to the long term.

Economy

Going Down: Brexit concerns have driven treasury yields towards new lows.

Upward Trajectory: College-educated workers now dominate the American workforce as never before.

Commercial

Takeover: How Amazon swallowed downtown Seattle.

High Vacancy: Take a tour inside China’s largest ghost town.

Residential

Bizarro World: Only in the perverse world of California NIMBYs could a new development with 11,000sf lots be considered “high density.”

Status Update: The US housing market in 9 charts.

Big Winners? US home owners could be the big winners in the Brexit drama due to falling mortgage rates.

Profiles

Groundhog Day: It’s the first week of July which means that the NY Mets just paid Bobby Bonilla, who hasn’t played since 2001 $1.9MM just as they will continue to do until 2033 because, Bernie Madoff.

Water, Water Everywhere…. New research finds that California actually has plenty of groundwater, it’s just really, really far below the surface and extremely difficult to get to.

Chart of the Day

Ummmmmm……

WTF

Drunkorexia: College kids are eating less and working out so that they can get wasted quicker.  These are the same people demanding safe spaces on campuses where they can be free from anything that might offend them.

Well Thought Out: A man tried to rob a Kentucky Chuck E Cheese while on a job interview.  No word if he used his real name on his application.  Let me use this as an opportunity to remind you that Chuck E Cheese is a veritable cesspool of crime and deviance.

Darwin Award Nominee: A German tourist at Peru’s historic Machu Picchu died last week when he fell off a cliff while taking a selfie (h/t Winn Galloway).

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 5th – Oh Baby

Landmark Links June 28th – Tank Commander

Byron-Scott-Driving-The-Lakers-Tank

Lead Story…  We spend a lot of time talking about the San Francisco housing markets and rightfully so: it’s a microcosm of all that is wrong with restrictive zoning in closed access US cities and the poster child for NIMBY obstructionism.  As such, San Francisco has managed to overshadow another North American market that is incredibly expensive and getting worse: Vancouver, BC  Year-over year, Vancouver’s benchmark housing index is up 30% to just under $900k while single family detached house prices increased a whopping 40% to $1.374MM (in US dollars) in a city where median household income is around $67k in US dollars – San Francisco is in the $82k range.  So how does an MSA with such a low median household income (one of the lowest of major Canadian cities) end up with a median home price that is among the highest? 1) Massive levels of housing demand from wealthy foreign investors, especially from China; and 2) Highly restrictive zoning that makes it difficult to add enough housing units to satisfy  that demand.  One critical distinction between SF and Vancouver is that much of Vancouver’s foreign purchases appear to be for investment purposes only while SF real estate has clearly benefited from the tech boom and it’s highly compensated workforce.  This, combined with the inability to build enough new units for residents, is leaving Vancouver with empty units that transact for nosebleed prices.  The increase in value was so extreme last year that at least one mathematician estimated that the rising land value of single family homes accounted for more than the entire employment income in the City of Vancouver and now over 90% of detached houses there are worth over $1MM.

Foreign buyers have come under increasing scrutiny of late for the impact that they are having on the worlds most expensive real estate markets.  Some of it is justified.  For example, the US Treasury department now requires that title insurance companies report the people behind shell companies on all-cash purchases over a certain level in NY and Miami in order to curtail money laundering.  Others like Great Britain, which increased the stamp duty on second home purchases by 3% and raised taxes on more expensive homes in an effort to drive down demand.  Few places though, have considered responding as harshly as Vancouver, which is considering a tax on vacant homes.    From the South China Morning Post:

Vancouver’s mayor Gregor Robertson says he is considering the introduction of a tax on empty homes, amid a roiling debate in the city about the role of Chinese money and offshore investors in North America’s most unaffordable real estate market.

In an interview with Bloomberg TV on Tuesday, Robertson said he was “looking at new regulation and a carrot-and-stick approach to making sure that houses aren’t empty in Vancouver,” including a tax on vacant homes. “If you’re not using your property – either living in it or renting it out – then you have to pay more tax. Because effectively it’s a business holding, and should be taxed accordingly.”

There is a very substantial difference between adding to transaction costs or requiring ownership disclosures, as the US and Britain are doing and what Vancouver’s mayor proposed here.  The steps taken by the US and Britain either increase transaction costs or regulatory paperwork in an effort to slow demand from a certain buying segment.  The Vancouver proposal takes a very different approach: it would actually increase the holding cost of foreign-owned (but unoccupied) real estate by imposing a different tax structure.  This isn’t limited to the purchase transaction, instead its a recurring annual cost.  More from the South China Morning Post:

A tax targeting vacant properties was proposed by dozens of economists in January.The BC Housing Affordability Fund, which has been pitched to both the City and British Columbia provincial government, would impose a 1.5 per cent annual tax (based on home price) on owners who either left homes vacant or had “limited economic or social ties to Canada”.

BCHAF proponent Tom Davidoff, an economist at the University of British Columbia, said it was unclear if Robertson’s remarks on Tuesday referred to his group’s proposal. “We talked to the city and they gave us a good listen,” he said.

“I would hope that any vacancy tax would cover the bigger issue here which is not paying taxes here and not being a landlord [either],” said Davidoff, whose group’s proposal would also tax people who under-utilised properties as a “pied-a-terre”, and those whose primary breadwinner paid little or no income tax in Canada – so-called “astronaut families”.

This strikes me as the quickest way to cause an exodus of foreign capital from a given real estate market because, unlike the US and British solutions, it would not just apply to new purchases.  It is also rife with the potential for unintended consequences.  For example, who is to say if a property is under-utilized?  Who actually gets to make that distinction and is there a hard and fast rule that could be applied.  If you were a foreign (or domestic for that matter) investor or homeowner who had a house there and you knew that costs were about to go up a proposed 1.5% a year based on home price (not unsubstantial on a million dollar home) would you hang around to see how it was implemented?  This type of tax could send foreign investors rushing towards the exit before a glut of supply hits the market as investors seek friendlier locales in which to invest.  At least it appears as if cooler heads are prevailing at the provincial and national level.  Again from the South China Morning Post:

Both Canadian Prime Minister Justin Trudeau and BC Premier Christy Clark have said they worry that taking steps to curtail foreign ownership in Vancouver could imperil the equity of existing owners.

I hope that Prime Minister Trudeau and Premier Clark’s logic prevails as this would be an incredibly dumb way to tank a real estate market and the collateral economic damage done to existing homeowners would be all too real.  In all of the talk about how to bring Vancover’s prices under control, it seems as if no one (or at least very few people) are proposing a real solution: relaxing restrictive zoning codes so that more units could be built to meet demand.  Ultimately, that’s the only way to avoid what some are now calling a bubble.  Rather, we get more of the same convoluted restrictions, subsidies and taxes that don’t solve the actual problem and often do more harm than good.  The Vancouver mayor’s proposal is a tanking strategy that would make even the shittiest NBA team blush. Let’s that American cities with a large number of foreign investors don’t follow the example.

Economy

Tailwind: Per Calculated Risk, the largest population cohorts in the US are now 20-24 and 25-29 which is positive for the economy in general and housing in particular as young people begin to form households.

Brexit Breakdown: By now you probably know that UK residents voted to leave the EU, sending stock prices down the toilet around the globe and spurring demand for safe haven assets like treasuries and gold.  The betting markets got this one dead wrong as did pollsters and most government officials.  Despite the crazy market response, nothing will really change from a trade standpoint in the near-term and there is already a movement underway to try to reverse the referendum.  Either way, nothing is going to happen until this fall when British PM David Cameron resigns.  Here’s a quick roundup of what people far more knowledgeable than I are saying:

Tyler Cowen on why the Brexit happened and what it means.

George Soros on the future of Europe and why it might have more issues than Britain.

Gabriel Roth on why the actual Brexit might not ever actually happen

The BBC on the high likelihood of another Scottish independence vote as a result of the Brexit outcome.

See Also: S&P and Fitch downgrade UK credit rating.

Best House on a Bad Block: The US economy looks likely to weather the Brexit storm even if it puts the Fed on hold for a while longer.

Commercial

 

Winner, Winner, Chicken Dinner: How US REITs could benefit from the Brexit.

Residential

Scraping the Bottom: Brexit panic has pushed interest rates to record lows and mortgage rates are following and they could be headed even lower.

Profiles

Trade of the Century: The story of how George Soros’ Quantum Fund made trade of the century by breaking the British pound is especially fascinating today in light of recent world events.

Green Monsters: Avocado theft is on the rise.

Please Make it Stop: Enough with the stupid Millennial surveys already.

Chart of the Day

The US Demographic Tailwind

Population: Largest 5-Year Cohorts by Year
Largest
Cohorts
2010 2015 2020 2030
1 45 to 49 years 20 to 24 years 25 to 29 years 35 to 39 years
2 50 to 54 years 25 to 29 years 30 to 34 years 40 to 44 years
3 15 to 19 years 50 to 54 years 35 to 39 years 30 to 34 years
4 20 to 24 years 55 to 59 years Under 5 years 25 to 29 years
5 25 to 29 years 30 to 34 years 55 to 59 years 5 to 9 years
6 40 to 44 years 15 to 19 years 20 to 24 years 10 to 14 years
7 10 to 14 years 45 to 49 years 5 to 9 years Under 5 years
8 5 to 9 years 10 to 14 years 60 to 64 years 15 to 19 years
9 Under 5 years 5 to 9 years 15 to 19 years 20 to 24 years
10 35 to 39 years 35 to 39 years 10 to 14 years 45 to 49 years
11 30 to 34 years 40 to 44 years 50 to 54 years 50 to 54 years

Source: Calculated Risk

WTF

Video of the Day / Attempted Darwin Award:  It’s exceedingly rare that an attempted Darwin Award gets caught on video.  This past weekend, two morons attempted to surf a 20 + foot swell at The Wedge in Newport Beach on a rental jet ski despite being warned repeatedly by lifeguards to stay away.  It went horribly wrong with the jet ski ending up on top of the Newport Jetty before nearly sinking while getting swept out to sea as Newport’s lifeguards and local Wedge veterans saved the riders from their own epic stupidity.  No word on whether or not they got their deposit back.  Looks like it’s time to add some more chlorine to the gene pool.

Can You Spot the Irony? A man named Ronald McDonald was shot outside a Sonic in New York.

I’d Rather Eat My Shoe: Burger King recently introduced something called Mac N’ Cheetos.  The race to the bottom for the American fast food industry continues with no end in sight.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links June 28th – Tank Commander

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