Landmark Links September 23rd – What’s the Point?

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Lead Story… Former Federal Reserve Chairman Paul Volker once said that the only useful modern financial innovation was the ATM.  While that’s a rather harsh assessment, there is a bit of truth to it.  Too often, financial products ranging from subprime loans, to derivatives to leveraged ETFs are created more as profit and marketing opportunities for those selling them than they are to fill an actual need of the people that they are being sold to.  That being said, I’m still somewhat fascinated by the FinTech industry because there are segments of the market that are not covered by traditional sources where FinTech companies can provide real value to consumers.  There have been several such products from online mortgage lenders to crowd funding platforms for real estate deals that fill a need.  I’m especially interested when a FinTech startup is aimed at our beleaguered national housing market.  Last week, top tier Venture Capital investor Andreessen Horowitz announced a new venture called Point which was created to invest in a portion of the equity in a home in exchange for a portion of the return when you sell or refinance.  Point lowers a homeowner’s monthly payment because you don’t pay current on Point’s equity investment and that all of their profit is realized upon sale or refinance of the home. Although this reduces a homeowner’s current pay, it could cost a lot more in the long term depending on whether your house appreciates and by how much.  When Point was announced via press release, the financial blogosphere when into a bit of a tizzy which was somewhat predictable given that: 1) The concept of offloading equity in a home, typically a family’s largest asset, has been around for some time but this seems to be the first time someone has attempted to do it in scale; and 2) Andreessen Horowitz is known for making smart investments – so people naturally assume that their involvement validates Point’s business plan.  I wanted to hold off on offering my opinion until I had time to do a bit of reading and research on the product.  There is still  a lot of information that hasn’t been released on how the product works but I’ve been able to piece together enough to get a decent ideal.

First off, let’s explain how the product works.  The best way to do that is probably the example from their own website:

 

Check if you qualify

Enter your address and answer a few questions. The process is free and takes less than 5 minutes.

5 minutes

  • You provide us with basic information about your home and your household finances.
  • To be eligible for Point, you’ll need to retain at least 20% of the equity in your home after Point’s investment.
  • We can instantly give you pre-approval or denial based on the information you provide.

Point Makes you an offer

Point makes a provisional offer to purchase a fraction of your home. We will provide you with an offer based on the value of your home today.

1-3 days

  • If pre-approved, we provide a provisional offer based on the data you provide.
  • The offer is typically for between 5% and 10% of your home’s current value.
  • We’ll ask you to complete a full application and provide documentation for our underwriting team.
  • If possible, we will improve on our pre-approval offer.

Schedule an in-person home visit

Pick a time for a licensed appraiser to visit you. We want to ensure the price is correct by checking the place out — no cleaning necessary 🙂

5-8 days

  • We will schedule time for a home valuation visit.
  • You will be charged for the cost of the appraisal, which is typically between $500 – $700.
  • The appraiser will visit and inspect your home.
  • We will share the appraiser’s report with you once it’s complete. The appraiser’s value is an important component of the final offer.

Point pays you

We usually send the money within 4 business days of closing.

3-5 days

  • We finalize the offer following the appraisal and receipt of all supporting application documents.
  • You will meet with a notary to sign the Point Homeowner Agreement.
  • Point files a Deed of Trust and Memorandum of Option on your property in your county recorder’s office.
  • Once the filings have been confirmed, we transfer the offer funds (less Point’s processing fee of 3% and the escrow fee) electronically to your bank account.

Sell the home or buy back from Point when the time is right for you

Point is paid when you i) sell your home, or ii) at the end of the term, or iii) during the term, when you choose to buy back. Regardless of the timing, there’s no early buyback penalty.

1 to 10 years

  • If you sell your home within the term then Point is automatically paid from escrow.
  • If you don’t sell, you can buy back Point’s stake at any time during the term at the then current appraised property value.
  • Point is paid a fraction of the home’s value. If the home has declined significantly in value, Point may be due less than its original investment.
 Sounds simple enough but as usual, the devil is in the details.  A few caveats:
  1. Point collects a processing fee of 3% upfront in addition to appraisal and escrow fees
  2. You need at least 20% equity in your home to qualify
  3. You are guaranteeing repayment in 10 years
  4. Point is in a preferred position, meaning that they get paid first in the event that your home loses value
  5. When Point first went live last week, they gave an example of their pricing on their website (they have since taken it down for some reason).  In this example, Point put up 10% of the value of the home and received 20% of the appreciation (net of any improvements done by the home buyer in return.
One of the primary issue holding back the market is a lack of capacity for down payments by first time home buyers.  Low interest rates may be great for monthly payment affordability but they do nothing when it comes to a buyer’s ability to save a 20% down payment for a conforming loan.  There is a real need for investors in this space and some platforms have tried to tackle it.  For example, FirstRex which was profiled by Bloomberg back in 2013 will put down up to 50% of a homebuyer’s downpayment in exchange for a portion of the profit.  However, I am not aware of there being a substantial need for people who already have a large amount of equity in their homes to be able to extract that equity, especially when cheap HELOCs or reverse mortgages ( for seniors) are readily available.  Both HELOCs and reverse mortgages allow an owner to extract their equity WITHOUT giving up 20% of the upside in their home.  In order to illustrate this I ran a scenario outlined in Point’s press release.  For the sake of simplicity, I didn’t include property taxes, insurance or maintenance as these would be the same with or without Point.  I also didn’t include any loan fees in an effort to keep things simple.  This analysis has 2 scenarios:
Scenario 1: Borrower buys a home for $500k.  Borrower takes out a $400k with a down payment of $100k.  The mortgage has a 4% coupon.
Scenario 2: Borrower sells $50k in equity (10% of the total value of the home to Point, reducing the loan size to $350k, again with a 4% coupon.  Under this scenario, Point gets 20% of the home price appreciation.
  fullsizerender
As you can see, it’s substantially less expensive to use a traditional mortgage if you experience any home price inflation – and Point’s website and press release both imply that it will be targeting higher priced markets that will likely experience more inflation.  If a borrower lives in a market that experiences home price inflation of less than 2%, Point makes some sense.  Above that, it doesn’t appear to.
So what’s the Point (Pun fully intended)?  IMO, this would be a great investment program if it were structured as some form of down payment assistance (like the FirstRex example above) – I’m even willing to bet that they could get more aggressive splits if it were designed to fill that substantial need in the market.  However, as currently offered, it’s an expensive preferred position that sits in front of a substantial amount of equity (again, assuming that there is any home price inflation).  I’m just not sure that there is much of a need for a product that allows people with a lot of equity to extract it from their homes when HELOCs are available, cheap and flexible and reverse mortgages are an option for seniors.  Borrowers that need something like this (and would be willing to pay for it) to defray their down payment can’t qualify and those who would qualify have better options if they want to extract equity from their homes or finance a purchase.  As such, I just can’t see how this is something that will be very scalable in it’s current form.

Economy

Surprise, Surprise: The Fed chose not to raise rates at their meeting this week but signaled that 2016 rate increases are still likely.  For those keeping track at home, they did exactly the same thing that they’ve done at pretty much ever meeting this year.

You Want Cream or Sugar with That? Yes, there is a Millennial underemployment crisis but it only extends to those with liberal arts degrees.

Commercial

Bottom of the Barrel: The ongoing dumpster fire that is K-Mart announced that it’s closing 64 stores and laying off thousands of employees.  I honestly had no idea that there were 64 K-Marts still open to begin with.

Going Long: Blackstone jumped back into the logistics business after selling IndCor Properties in 2015 by purchasing a $1.5 billion mostly-west-coast portfolio from Irvine-based LBA.  See Also: How Amazon is eating the department store, one department at a time.

Residential

Flipper’s Back: Home flipping continues to make a comeback and is now at it’s highest level since 2010.  A lot of the activity has been taking place in secondary markets like Fresno which could be a good sign that things are getting better.

Soaring: According to the Federal Reserve Bank of St. Louis, urban rents in US cities are rising quicker than they have in any time in recorded history.

Kicked to the Curb: Cities are starting to follow New York’s example by allowing developers to eliminate or reduce parking requirements for condos and apartments in order to provide more density and cheaper prices.  However, there is a lot of concern over the impact of this move with regards to on-street parking in cities where mass transit infrastructure hasn’t kept up.

Profiles

Talking Your Book: One of Lyft’s co-founders believes that private car ownership will go the way of Johnny Manziel’s NFL career by 2025.

Grudge Match: Tesla’s battle with car dealers has the potential to reshape the way that cars are sold in the US.

The Paradox of Leisure: The rich were meant to have the most leisure time. The working poor were meant to have the least. The opposite is happening.  Here’s why.

Chart of the Day

Rise of the regional banks

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WTF

Terrifying: A crazy woman from New Zealand made a handbag out of a dead cat and is trying to sell it for $1,400.

Broken Clocks: Brangelina broke up this week, meaning that those tabloid headlines that you’ve seen every time that you go to the grocery store for the last 10 years were finally correct.  If you believe Us Weekly, they broke up at least 31 times in the last decade.

Hero: Meet the 110 year old British woman who attributes her longevity to drinking whiskey on a daily basis.  See Also: New study suggests that people who don’t drink alcohol are more likely to die young.

Hell NO: South Carolina residents warned about clown trying to lure children into woods.

Video of the Day: Watch a diver catch video of great white shark attack on his GoPro off the coast of Santa Barbara (don’t worry, no blood).

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 23rd – What’s the Point?

Landmark Links August 12th – Why We Can’t Have Nice Things

kids making a mess

Lead Story… In a profoundly disappointing but not remotely surprising story, labor, environmental and tenant advocacy groups have effectively nuked CA Governor Jerry Brown’s plan to streamline approvals for housing developments, imperiling it’s chances of passing through the legislature this year.  Brown’s plan essentially would have allowed development “as of right” so long as it conformed with underlying zoning and allowed for a certain number of affordable units.  This would have effectively subverted the veritable maze of discretionary approvals currently required in some municipalities.  First, construction union leaders threw a hissy fit because the plan didn’t include enough goodies and hand outs for union labor to buy – I mean win – their support.  Next, environmental groups (Side Note: in California, the term “environmental group” is nothing more than a euphemism for  NIMBY) opposed the plan because they don’t want anything built under any circumstances ever if it’s anywhere near the expensive – and often developer-hostile neighborhoods where they reside and Brown’s plan would effectively take away a major lever of control – discretionary approval – that they have held in the development approval process.  Third, some renter advocacy groups joined in with the construction unions and environmentalists because they apparently aren’t all that sharp and don’t realize that they are being bamboozled into opposing something that would ultimately lead to lower rents which would benefit them the most.  i guess that no good deed goes unpunished.  From the LA Times:

Labor and environmental groups say they are done negotiating over Gov. Jerry Brown’s housing plan – LA Times

“After several meetings without an agreement on a variety of requested changes, we believe it is time to focus on real affordable housing solutions that don’t directly undermine local voices and place communities and our environment at risk,” said a statement from the State Building and Construction Trades Council, Sierra Club and Tenants Together, who are among a coalition of more than 60 groups who joined to oppose the governor’s housing proposal.

Cesar Diaz, the legislative director for the State Building and Construction Trades Council, confirmed that the coalition would not participate in further discussions over the plan.

“This needs much more time and a policy-vetting process,” Diaz said.

Yes, this is depressing but it isn’t at all surprising to anyone who has spent any time in a field related to development in CA.  Any time that someone makes a proposal that attempts to fix out badly broken housing system, existing stake holders dig in their heels and do anything in their power to stop it.  This, as today’s headline suggests is why we can’t have nice things in California – namely an affordable and moderately functional housing market.

Today I’d like to present a counter example to illustrate what a functional housing market looks like.  There is a major global city that is fully built out with a population of over 13 million (far larger than any city in CA).  This city is a major global finance and trade hub.  It is land constrained and effectively fully built out, yet housing prices haven’t budged in nearly 20 years.  The city that I’m referring to is Tokyo and Robin Harding of the Finacial Times published a very important story about how regulation impacts housing cost called Why Tokyo is the land of rising home construction but not prices last week.  First off, I want make something clear.  The Japanese respect property rights to a level that’s almost inconceivable in California.  According to Takahiko Noguchi, a regional planning head in Tokyo:

“There is no legal restraint on demolishing a building.  People have the right to use their land so basically neighbouring people have no right to stop development.”

In other words, Tokyo has become the anti-coastal California where housing supply is created to meet demand without mountains of red tape and shrieking NIMBY obstructionists.  The outcome has been so dramatic that it’s a bit shocking to those that don’t live there.  From the FT (highlights are mine):

Here is a startling fact: in 2014 there were 142,417 housing starts in the city of Tokyo (population 13.3m, no empty land), more than the 83,657 housing permits issued in the state of California (population 38.7m), or the 137,010 houses started in the entire country of England (population 54.3m).

Tokyo’s steady construction is linked to a still more startling fact. In contrast to the enormous house price booms that have distorted western cities — setting young against old, redistributing wealth to the already wealthy, and denying others the chance to move to where the good jobs are — the cost of property in Japan’s capital has hardly budged.

This is not the result of a falling population. Japan has experienced the same “return to the city” wave as other nations. In Minato ward — a desirable 20 sq km slice of central Tokyo — the population is up 66 per cent over the past 20 years, from 145,000 to 241,000, an increase of about 100,000 residents.

In the 121 sq km of San Francisco, the population grew by about the same number over 20 years, from 746,000 to 865,000 — a rise of 16 per cent. Yet whereas the price of a home in San Francisco and London has increased 231 per cent and 441 per cent respectively, Minato ward has absorbed its population boom with price rises of just 45 per cent, much of which came after the Bank of Japan launched its big monetary stimulus in 2013.

In Tokyo there are no boring conversations about house prices because they have not changed much. Whether to buy or rent is not a life-changing decision. Rather, Japan delivers to its people a steadily improving standard, location and volume of house.

Japan
So how, exactly did this come about?  Some of us remember tales of the runaway Tokyo real estate market and subsequent crash in the 80s during the great Japanese boom and subsequent bust.  It may seem odd that a place that produced such an epic real estate boom and subsequent bust would be home to a stable, efficient real estate market.  Again, from the FT:
“During the 1980s Japan had a spectacular speculative house price bubble that was even worse than in London and New York during the same period, and various Japanese economists were decrying the planning and zoning systems as having been a major contributor by reducing supply,” says André Sorensen, a geography professor at the University of Toronto, who has written extensively on planning in Japan.
But, indirectly, it was the bubble that laid foundations for future housing across the centre of Tokyo, says Hiro Ichikawa, who advises developer Mori Building. When it burst, developers were left with expensively assembled office sites for which there was no longer any demand.
As bad loans to developers brought Japan’s financial system to the brink of collapse in the 1990s, the government relaxed development rules, culminating in the Urban Renaissance Law of 2002, which made it easier to rezone land. Office sites were repurposed for new housing. “To help the economy recover from the bubble, the country eased regulation on urban development,” says Ichikawa. “If it hadn’t been for the bubble, Tokyo would be in the same situation as London or San Francisco.”
Hallways and public areas were excluded from the calculated size of apartment buildings, letting them grow much higher within existing zoning, while a proposal now under debate would allow owners to rebuild bigger if they knock down blocks built to old earthquake standards.
All of this law flows from the national government, and freedom to demolish and rebuild means landowners can quickly take advantage. “The city planning law and the building law are set nationally — even small details are written in national law,” says Okata. “Local government has almost no power over development.”
Note that this is not all that dissimilar from the proposal that Gov Brown made where the State of CA would set policy from the top down since cities have shown absolutely no inclination to get their shit together when it comes to housing policy.  When the Japanese crisis hit, policy makers did something that those in the US have been unable and unwilling to do: liberalize development regulation to spur economic growth – which also led to a subsequent dramatic slowing in housing costs due to a pickup in efficiency.  Remember the Tokyo example next time someone makes an economically illiterate statement that building more market rate won’t make housing more affordable.  Albert Einstein once said that the definition of insanity is doing the same thing over and over again and expecting different results.  Japanese policy makers understand this, Californians apparently don’t.  The simple fact is that coastal CA cities will not get housing costs under control until they start doing things differently, much like Japan did in the midst of their economic crisis.

Economy

Debt Decision: Plunging interest rates have lowered the cost of borrowing over long time periods, making it appealing for the government to roll short term debt into longer term maturities.  See Also: It’s never been cheaper for cities and states to borrow money so why are they so reluctant?

Opposite Result: There is early evidence that negative interest rates are actually encouraging savings, rather than discouraging it as central bankers had hoped.

Pendulum Swing: In the never-ending tug of war between labor and capital, labor is gaining an upper hand as the job market tightens.

Residential

Landmark in the News: Landmark’s own Tom Farrell had a prominent quote in a feature Wall Street Journal article entitled  Lopsided Housing Rebound Leaves Millions of People Out in the Cold.  : The whole piece is well worth a read:

Tom Farrell, director of business development for Landmark Capital Advisors, which counsels investors on real-estate projects, said risk appetite is low, particularly outside core markets.

“We’re often saying ’You all want to be in the same spot, and you’re tripping over each other,” he said. “It’s just difficult to get people out to those secondary markets.”

Profiles

Early Exit: Startups are opting to sell rather than IPO as investors look to cash out early.

The Rise and Fall: How Yahoo went from tech powerhouse to also-ran and why Verizon bought it.

Chart of the Day

WTF

Headline of the Week: It’s hard to beat Subway rider smokes crack and strips naked before shocked witnesses on No. 3 train when it comes to news headlines.  Especially when said headline includes pictures (before the guy took his clothes off, thankfully).

Swipe Right: Judging by usage numbers and the 450,000 condoms provided to athletes, Tinder and the Olympic Village are a perfect match.

FAIL: Man tries to light house on fire in broad daylight but lights self on fire instead.  To make matters worse, the whole thing was caught on a security camera including the hysterical part where he tries to put it out.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 12th – Why We Can’t Have Nice Things

Landmark Links July 12th – We Know Nothing

sgt-schultz

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%.

BFLVI2

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 July 8th – The Plunge

fatcrash

First things first: Hayden Charlotte Deermount was born at 11:14am on July 5th weighing 7lbs and 13 oz. Baby Hayden and Mrs Links are both doing great! This is also Hayden’s fist blog post in a way since I wrote almost the entire thing with her sleeping on my lap….

Lead Story… Commercial real estate investors are rushing for the exits in British property funds as post-Brexit uncertainty about the future of London as a global financial center is on the rise. Withdrawals have been halted in several funds and the Pound is now at a 31 year low (and this could just be the beginning for the embattled currency). The situation could get worse before it gets better. The biggest beneficiary will likely be the US commercial real estate market which could see even further cap rate compression (yes, seriously). See Also: RBS and Lloyds have the most exposure to UK commercial real estate and could have issues if it continues to tank. 

Economy

Much Ado About Nothing? Pro Brexit politicians are dropping like flies adding to uncertainty.  Tyler Cowan of Marginal Revolution lays out 7 possible Brexit scenarios. The spoiler here is that there is a very strong argument that Brexit will not ever actually happen. See Also: Brexit fears have set a scenario in motion the could bring the yield on the benchmark 10-year US treasury note plunging to 1%.

Sea Change: Great infographic from the US Census Bureau shows just how much the “typical” 30-year old has changed from 1975 to 2015.  The difference is stark to say the least.

Commercial

Imagine That: Plateauing rents in the luxury apartment space have some developers putting new developments on hold as they acknowledge that trees can’t grow to the sky. Imagine that: housing cost inflation slows when you add more units.  Shocking. See Also: LA rents were flat from May to June according to Apartment List.

Residential

Not From The Onion: A Seattle house deemed “too dangerous to enter” sold for $427,000 after an insane bidding war with 41 offers after it listed for $200k. Perhaps the craziest part of this is that $427k for a tear down in a good neighborhood in coastal California sounds like a steal. Consider it today’s reminder that affordability is relative in local markets.

Not A Lot Remaining: Lot supply is still incredibly tight in the western US and at its lowest level since 1997.

Refi Boom: Plunging interest rates sent refinances soaring to an 18-month high even though mortgage rate spreads over the 10-year treasury are still high.

Profiles

LOL: Snapchat’s army of loyal teenage users aren’t happy that their parents are starting to use the app.

Out of Touch: Microsoft’s attempts at intern outreach are a perfect example of what happens when your grandparents try to be “hip.”
Chart of the Day


WTF

Brawl-Mart: 30 person brawl in an upstate NY Walmart that included baseball bats and a 17 year old throwing a can of food at a 52 year olds head resulted in several arrests. Nothing about this story is remotely shocking or even newsworthy except that it didn’t happen on Black Friday.

Can You Move that Plane So I Can Get a Better Shot? Idiots are increasingly putting pilots and firefighters at risk by flying drones over wildfires in an effort to get “cool” Instagram photos.  One drone almost collided with a plane late last month in Utah leading to the grounding of all firefighting planes during a blaze.

Ok Then: The brother of deceased former Colombian drug lord Pablo Escobar is asking Nexflix for a portion of the profits from the next season of Narcos, a show based on Escobar’s life. Doubt it will work but I suppose that the logic here is that If you don’t ask, you don’t get.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 8th – The Plunge

Landmark Links July 1st – East Coast Edition

909er

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

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

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

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

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

Industrial boom

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

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

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

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

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

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

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

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

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

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

Economy

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

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

Commercial

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

Residential

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

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

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

Profiles

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

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

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

Chart of the Day.

Supply and Demand for Housing

Supply = Blue, Demand = Gold

Difference Between Housing Supply and Demand

WTF

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

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

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

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 1st – East Coast Edition

Landmark Links June 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 21st – Worth the Investment?

bluto3

Welcome to summer!  Fortunately, we avoided the apocalypse that a crackpot astrologer (redundant) predicted last night when the full moon coincided with the summer solstice.  I know you’re all as relieved as I am.  Now, on to the news:

Lead Story… I recently read two studies that came out in the last week or so that appear contradictory, at least on the surface.  First off, the National Association of Realtors and SALT published a survey that strongly suggests that student debt is holding back the housing market:

Seventy-one percent of non-homeowners with debts from student loans said the burden of those monthly payments was keeping them from buying a home. More than half said it would likely continue do so for more than five years, according to a new study by the National Association of Realtors and SALT, a consumer literacy program provided by nonprofit American Student Assistance.

Second, John Burns Real Estate Consulting posted a story on their blog about rising college graduation rates are contributing to income inequality:

Rising college graduation rates, particularly for women, have significantly contributed to a greater share of high-income households. Among married couples, 23% now both graduated from college—a percentage that has steadily risen for decades. When both spouses went to college and work, household incomes at the top rise!

Consumer spending data provides strong support to the JBREC hypothesis of college education contributing to income inequality:

So which one is it?  Is college debt holding graduates back and not allowing them to take place in the “American Dream” of owning their own home or is the rising percentage of couples where both have a college education (and probably a bunch of student debt) leading to out-sized earnings for a percentage of the population?  I would contend that it’s both.  First off, we need to distinguish between cost and return.  Yes, college is expensive – arguably too expensive seeing as it’s cost has far outrun inflation for a long period of time.  However, if we are making the case, as the Realtor study is that college debt is holding back the housing market then we have to ask a simple question: what, is the alternative?  That’s where the problem lies.  Sure there are tech founders that didn’t graduate college only to become billionaires but they are extreme outliers, pure originals that can’t be replicated.  If they weren’t outliers, by definition they would never be able to earn that type of out-sized return.  Unfortunately, not everyone is able to change the world, even if they all got a trophy in youth soccer.  If a student isn’t independently wealthy enough to not take on debt (a proposition similar to winning the lottery – pure luck), the alternative is not to go to college.  Statistically speaking, that is a horrible bet.  This piece of Study.com sums it up perfectly:

Considering the high cost of a college education, potential students may question whether the expected earnings after graduation outweigh the possible debt incurred from student loans. In 2002, the Census Bureau looked at lifetime earnings of employees with bachelor’s degrees and those without for 1999: non-degree holders could expect to earn 75% less than bachelor’s degree holders, who could expect to earn $2.7 million over their lifetimes. However, since 1999, bachelor’s degree holders can now expect to make 84% more than high school graduates.

As the above numbers, and the JBREC study show, college is becoming more and more of a necessity to get ahead in the modern world.  If you want to join the middle or especially upper-middle class, a high school degree is not going to get you there (unless of course you happen to be the aforementioned tech genius/ future billionaire).  Yes, the debt is a necessary evil with an important caveat: not all colleges or all majors within a college are created equally and that’s where I believe that studies like the NAR one are in error: they overly generalize a very complex issue.

The seventy one percent referenced in the NAR study is an eye-popping number but there are a few issues with the way that the study was conducted: 1) There is a no segmentation (at least none was provided in what they published).  For example, the results aren’t sorted based on whether the respondent attended a 4-year college, a 2-year junior college or a for-profit college let alone what their course of study was.  2) There is no differentiation made between those that received a college degree and those that took out loans but did not complete a degree.  It’s easy to see where this is problematic.  I highly doubt that student debt is as large of an issue for an engineering grad from a top school as it is for a someone who dropped out of a for-profit college before receiving a degree.  Alas, we don’t know from this study since the data wasn’t provided.

Yes, the rate of increase in the cost of a college degree in recent decades has been massive.  However, if looked at strictly from an economic standpoint, the yield on investment is still quite good, IF you graduate AND and chose a major that will get you somewhere other than flipping burgers or spending your time at political rallies asking for debt forgiveness (yes, I know that was a cheap shot).  The primary reason is that the baseline for comparison: a high school degree provides little if any earning power even when debt is taken into account.  Like it or not, many jobs that previously required only a high school degree now require college.  So when will college cost begin to moderate?  IMO, it’s when the return on investment no longer justifies the outlay.  You can already see this happening in for-profit schools which have proven over time to be a poor investment for students which is why their stock performance has been utter crap.  As a further illustration, here are the 25 colleges with the best Return on Investment and the 25 colleges with the worst ROI.

The NAR study is factually correct: every dollar of additional debt that you take on be it student or otherwise will indeed make it more difficult to qualify for a mortgage. However, if one graduates with a worthwhile degree, that debt should still be a good investment over time and make the borrower more likely to be able to purchase a house than the alternative of not taking 0n debt by not attending college at all.  It’s a shame that the NAR data didn’t include a further breakdown because it would have made for a far more interesting story than the shocking 71% number.  It’s almost as if they had an agenda here….

Economy

What Gives?  Gregory Mankiw of New York Times on five possible reasons for our sluggish economy.

Cream of the Crap: The US economy is doing great….compared with pretty much everywhere else.  See Also: Swiss government debt now has a negative yield all the way out to 33 years, which makes even Japan look good in comparison.

The Fed Who Cried Wolf: The Federal Reserve has spent the last few months saber-rattling about imminent interest rate hikes only to backtrack at their monthly meetings.  The act is getting old and they are now at risk of losing investor faith in their policy rate path.

Demographics Are Destiny: This animated demographics chart from Calculated Risk is almost mesmerizing to look at.

Commercial

Refi Madness: America’s malls have been on the ropes for quite some time and would have plenty of issues even if they were not leveraged at all.  Unfortunately for their owners, they have billions in debt coming due.

Storm Clouds: PIMCO sees a potential downturn in the next 12-months for U.S. commercial real estate as tightened regulations, a wall of debt maturities and property sales by publicly traded landlords take their toll.

Residential

It’s Complicated : Morgan Housel of the Motley Fool is one of the best financial writers in the world.  He has also long been a critic of the concept of a home as an investment.  Recently he and his wife bought their first home after they started having kids.  I think this assessment of the complicated nature of the home buying process and it’s impact on transaction fees is spot on:

I consider myself reasonably astute in personal finance, because it’s so much of what I write about for a living. But I can’t count how many times I had to stop, realize something confused me, and spend an hour of research to understand what I was about to sign. After going through our loan documents I sent at lest 10 emails to the bank with various forms of, “What’s this?” What is this?” “WHAT IS THIS?”

Even with a realtor, home buyers need to be amateur lawyers to fully understand what they’re doing. I can’t imagine what it’s like for people for whom finance is already a daunting topic. And that’s most people.

This probably explains why transaction fees are still high. When you combine emotion with legalese, the path of least resistance is to just sign your name without considering what you’re doing. I had a few moments of, “They wouldn’t be offering me this if it wasn’t in my best interest” only to stop, want to slap myself, and keep researching.

For a Price: Multi-family landlord’s are offering free rent as a concession in San Francisco as a flood of units finally hit the market but you can’t get it unless you can afford a luxury apartment (h/t Jeff Condon).  See Also: San Francisco’s housing mania may finally have reached it’s limit.  And: Luxury housing demand appears to be on the wane.

Profiles

Hero: Meet the hacker who is fighting ISIS by spamming their Twitter accounts with porn.

Worker’s Paradise: Venezuela’s descent into failed state status where citizens fight in the streets for food is even worse when you consider that, based on it’s vast natural resources it should be one of the wealthiest countries in the world.

Bird Hunting: After Microsoft purchased Linkedin, the next question in Silicon Valley is who will buy perpetually-struggling Twitter.

Chart of the Day

A couple of fascinating graphics from JBREC.  It amazes me that still only 23% of the married population consists of couples who both have degrees.

share of married couples with college degree

percent of adults with bachelor's degree

WTF

What a Gas: Activists are planning a “Fart-In” at Hillary Clinton’s DNC acceptance speech this summer in Philadelphia (h/t Steve Sims).

All the Rage: England’s newest fitness craze known as Tantrum Club involves screaming obscenities and popping balloons with bad words written on them while stomping on bubble wrap.  This is right up there with the Shake Weight when it comes to dumb workout fads.

Keeping up with the Floridians: An obese naked man was videotaped relieving himself outside of a Georgia Waffle House in broad daylight.  When asked for comment, a spokesperson for Florida replied “see, it’s not only us.”

Boom: A group of arsonists set off fireworks in a Walmart in Phoenix leading to the building needing to be evacuated.  Fortunately, someone had the good sense to videotape it.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links June 21st – Worth the Investment?