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 August 16th – Out of Balance

Usain Bolt

Lead Story… They say that demographics are destiny and by 2030, 56 countries will have more people aged 65 and above than children under 15.  By 2075, there will be more people 65 and older than children under 15 worldwide.  This is the result of two developments that have been taking place in developed countries for decades: 1) People are waiting longer to have kids and then having fewer of them; and 2) People are living longer.

The implications of this demographic imbalance in a world with an ever-growing pension bill are huge.  From Bloomberg:

While the prospect of longer lives is a good thing, problems arise when a shrinking work force cannot foot the pension bill. Several decades ago, you could have had about 10 workers per retiree, but that could shrink to the point where in Italy,  for example, you had three workers per retiree. While the political choices are unsavory — increase taxes or cut benefits — governments are running out of time to act.

As partially outlined above, the potential solutions are relatively straightforward, if difficult:

  1. People in developed countries need to start having more kids.
  2. Retirement ages need to increase substantially since people are living much longer.
  3. Benefits need to get slashed or begin at a substantially older age since pension plans were not designed to support people who live as long as they do today while retirement ages stay the same as they were decades ago.

Option one is a trend that likely won’t reverse for a whole bunch financial and cultural reasons so I’m guessing that the solution will have to come from two or three or some combination thereof, both of which are politically toxic in today’s global political climate.  Or we could just bury our heads in the sand, pretend that the problem doesn’t exist and continue to borrow money to bridge the gap.  On the plus side, at least interest rates are really low……

Economy

Confidence Inspiring: Federal Reserve officials are beginning to question accepted wisdom about what actually causes inflation.

Vultures Circling: PE funds have now raised over $100 billion to buy oil assets that no one else wants.

Pay the Toll: German Banks are now charging depositors to hold deposits as negative rates take a toll.  I’ve said this before and I’ll repeat now: there is no way that this isn’t deflationary.

Commercial

Let’s Make a Deal: Lease incentives are becoming a major feature of the San Francisco apartment market for the first time since 2009.  See Also: as rental supply grows, landlords negotiate.

Residential

Confidence Game: Home builders are becoming more optimistic about the market for single family homes as the supply of existing homes continues to tighten which they believe will lead to more starts.  One word of caution here: in this cycle, with it’s emphasis on proximity to cities, existing homes typically have a large advantage over new homes in that they are both less expensive and have location advantages.  See Also: Calculated Risk says that the slow, sluggish housing recovery is still on track.

Profiles

Plenty of Blame to Go Around: California’s gas prices are sky high compared to the rest of the US.  Stringent environmental regulation is partly to blame but that’s only part of the story.

Life Lessons: An old friend of mine, Charlie Buckingham recently competed in sailing at the Rio Olympics in the Laser Class.  Charlie finished 11th out of 46, missing out the the medal race on a tiebreaker.  It was a strong finish against the best sailors in the world in arguably the toughest Olympic sailing class, although I know that he had been aiming higher.  He penned an excellent short piece about what he learned on his Olympic journey for Sailing World Magazine.  The article is ostensibly about sailing but extremely applicable to life in general.  Here’s a quick excerpt but I’d highly recommend reading the whole thing:

Plan to be flexible
Sailboat ­races are in a constant state of flux. The fleet changes positions around you, the wind shifts and changes velocity, and you need to keep your own boat moving as fast as possible at all times. All of this makes it hard to plan the perfect approach in ­advance. Detailed plans can even give a false sense of security, causing one to ignore the present. Have the outcome in mind, but be open and ready to adapt to what is thrown at you during the race.

Tinfoil Hats: Believe it or not, there are still people who believe that the earth is flat and think that there is a massive conspiracy to cover it up.  Mic.com published a feature article last week that took a deep look at this and other kooky conspiracy theories.  It’s as entertaining as it is bizarre.

Chart of the Day

WTF

Hell NO: Burger King is coming out with a hamburger-burrito hybrid called a Whopperito featuring the same disgusting, artificially smoke-flavored beef found in a Whopper.  The race to the bottom by fast food restaurants continues unabated.

A Sucker Born Every Minute: Sketchy bootleg LA celebrity tour buses are lying about where stars live and causing serious and frightening issues for homeowners when stalkers show up at their homes.

Video of the Day: I could watch this video of a Pittsburgh Pirates fan going for a foul ball and ending up with a plate full on nachos on his face all day.

Brilliant Disguise: A man in China tried to smuggle his pet turtle through airline security by disguising it as a hamburger.  He was busted when security agents noticed “odd protrusions” sticking out of a hamburger in his bag.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 16th – Out of Balance

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 15th – Proceeding with Caution

Squirtle

Last Tuesday, I was sitting in a hospital room with a somewhat-drugged-up Mrs. Links just after baby Hayden was born when I read an article about a new video game that had just been released. That game was just beginning to become a phenomenon like nothing I had ever seen.  I remarked to Mrs. Links that this was going to end up being the tech story of the summer.  She rolled her eyes at me in a painkiller-induced haze and told me that I had to be kidding.  I wasn’t.  If I were smart, I would have dropped everything and bought Nintendo stock.  I’m’ not.  Since then the Pokemon phenomenon has taken on a life of it’s own and not just among kids.  Twenty and thirty somethings are playing the augmented reality game which now has more users than Twitter and more engagement than Facebook.  It’s led to car crashes and muggings but has also helped to boost traffic at zoos and museums and is being utilized as a dating app by some.  I’m not a gamer and I personally find the whole thing rather lame (not for kids – for 30 year olds).  I also haven’t downloaded the app and don’t plan to although it has been a regular topic of conversation at Landmark World Headquarters.  However, there is no denying that that this game is dominating the news cycle and having an economic impact on everything from local businesses to real estate (yes, seriously).  As such, today’s blog has decidedly Pokemon Go theme…..and yes, I acknowledge that makes me almost as nerdy as the 30-somethings crowded onto Santa Monica or Newport Piers in search of imaginary cartoon characters that show up on their phones.

Lead Story… Property values in the US have recovered dramatically since housing bottom, leading to an additional $260 billion in home equity.  However, this hasn’t led to additional borrowing.  According to CNBC, this is why:

During the last housing boom, homeowners used their properties like cash machines, pulling out more equity than the house or the market could support. Arguably, no one wants to see that again, and so far, it is not happening.

“During the mid-2000s, as house prices went up, borrowing went up almost dollar for dollar. In the last few years, when house prices have again been increasing more rapidly than the long-term average, mortgage borrowing has not increased at all. In fact it has decreased,” said Sean Becketti, Freddie Mac’s chief economist.

Much of that may be due to more careful lending. The equity may be there, but lenders are far more strict about letting borrowers pull it out, especially if their incomes don’t support the higher debt.

“We are hoping that people continue to be prudent about cashing out, but part of it is, lenders are more cautious. One of our frustrations at Freddie Mac is we think we’ve set a very prudent credit box, but we find that lenders won’t go all the way out to the edge of our credit box. They are more restrictive than we would allow them to be. They just are super cautious,” added Becketti.

Mortgage refinances will likely rise on lower rates, but the same volatile global economic conditions pushing rates down are making borrowers even more cautious. The cash-out share is not expected to change, as lenders keep standards high and homeowners keep their personal leverage in check.

Economy

Vortex: How the black hole of negative rates is dragging down yields across asset classes and around the globe.  See Also: Germany just sold 10-year bunds at a negative yield.

Ancillary Benefits: How to drive insane amounts of traffic to your local business using Pokemon Go. Contra: Pokemon Go is actually terrible for the economy.  Here’s why.

Commercial

Bargain Shopping: Brexit could lead to foreigners buying up even more of London as UK real estate funds look to sell assets in order to meet redemptions as the pound continues to weaken.

No Moat: WeWork is the largest player in the co-working space, leading to a much scrutinized, sky-high valuation of $16 Billion for a real estate company.  However, the business is growing and, with very few barriers to entry, competitors are popping up everywhere.  I found this excerpt from the WSJ about valuations vs. barriers to entry particularly interesting (highlights are mine):

Some WeWork investors have compared WeWork with taxi-service provider Uber Technologies Inc. and overnight home-rental provider Airbnb Inc., saying WeWork will transform the office-space market.

But Airbnb and Uber enjoy high barriers to competition. The more drivers and hosts in their networks, the harder it is for an upstart to challenge them.

WeWork, by contrast, leases all its office space itself and then rents it out, making it more like a large hotel operator than a network that connects a buyer and seller—and potentially more susceptible to competition.

If the above is true, and scale isn’t as important as barriers to entry, that $16 billion valuation is looking awfully rich.

Residential

Millennials, They’re Just Like You and Me: Realtors marketing to Millennials are driving traffic to their open houses by advertising that Pokemon characters are present in said houses.

Profiles

Deal of the Century: I used to think that George Steinbrenner’s purchase of the Yankees for $8.8MM (now valued at $1.6 billion) or Al Davis’ purchase of 10% of the Raiders for $18,500 (worth around $800MM today) were the best investments in the history of sports. However, the UFC just surpassed both.  This past week, the Fertitta family and Dana White sold UFC for a whopping $4 billion after having bought it for a mere $2MM a mere 15 years ago.

LOL: Leadership at struggling online lender Sofi has long been highly critical of banks. However, a major slump could force the upstart company to become what it despises the most: a bank.

Podcast of the Day: The Big Man Can’t Shoot from Malcolm Gladwell’s Revisionist History series is 35 minutes long and absolutely worth the listen.  It’s about how Wilt Chamberlain (a historically terrible free throw shooter) started shooting his foul shots underhanded, was incredibly successful at it but then stopped because he was embarrassed.  The episode is much more about human behavior than basketball. I found it fascinating.

Chart of the Day

Remember this chart the next time you read an economic report referencing low productivity:

WTF – Pokemon Go Edition

Everybody’s Searching for Something: Searches for Pokemon porn are up 136% since the launch of Pokemon Go on July 6th.  The more that I learn about people, the more I like my dog.

Dragnet: A woman in Queens, NY used the Pokemon Go app to catch her boyfriend cheating on here when she noticed that he caught a Pokemon at his ex’s house.

Attempted Darwin Award: Two men fell off of a cliff in San Diego on Wednesday while trying to catch a Pokemon.  They both lived, despite their best efforts.  I can’t think of a good way to go but, when it’s my time, I don’t want a video game mentioned as the cause in my obituary.  See Also: Three people, at least one of whom was an adult were locked in a cemetery while playing Pokemon.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 15th – Proceeding with Caution

Landmark Links April 22nd – The Rise of BARF

barf1

Lead Story…. We’ve been spending a lot of time lately talking about what’s going on in the high priced/high barrier to markets.  Of particular interest is San Francisco since it’s a market that Landmark is quite active in and it also has the most stringent land use restrictions (and the arguably worst affordability crisis) in the US.  Recently Tyler Cowan of Marginal Revolution posted a piece summarizing a new book that urbanist Joel Kotkin published and made the following head-scratching statement:

Lots of high-density, vertical building doesn’t really make cities cheaper.  In fact it sucks more talent in, and more business activity, and in the longer run makes cities more expensive.  Just look at Seoul and Singapore, which have built plenty but are nonetheless considered some of the most expensive cities to live in.  After all, isn’t that the increasing returns to scale story?

This in spite of overwhelming evidence that cities that add units are more affordable than those that don’t.  Let’s try a quick thought experiment: San Francisco currently has around 382,000 housing units.  Hypothetically, let’s assume that SF suddenly becomes Houston overnight and decide to build like crazy, sending that number up to 1.5 million units in a few years.  Raise your hand if you think this will have no impact on prices and rents.  Now take that same hand and slap yourself in the face until you realize that San Francisco is not magically immune to the laws of economics.  Kevin Erdmann penned a strong retort to this, pointing out that first off, it’s not accurate and, even if it were, building more density would still have a highly desirable outcome:

Even if it is true, it would be an even better reason to build, because it means that the value of density is practically limitless….On careful reading, I don’t think Tyler is saying this is a problem, per se.  He’s just saying building won’t lower costs.  But, even here, I think it would be quite a jump to argue that greatly expanded building in the Closed Access cities would not benefit the current residents who are being stressed by rising rents.  Even if expansion only led to more rising incomes and rising rents, the increased local market for non-tradable services would surely raise the incomes of current residents, too.  They would likely get some relief from rising incomes, even if rents didn’t relent.

We mentioned a few months ago that restrictive zoning as a driver of income inequality was an issue that would start getting more national attention once it started showing up in papers from economists employed by the Federal Government and across the political spectrum.  It is now indeed happening.  That brings us to BARF.  Last weekend the NY Times published a profile piece on a new political advocacy group called the Bay Area Renters Federation or BARF.  There are plenty of left leaning renter advocacy groups out there so what’s so special about BARF (aside from a great acronym) that garnered them a large profile in the weekend edition of the NY Times? Unlike most renters advocacy groups that focus on subsidized housing, BARF is very, very pro development.

Sonia Trauss is a self-described anarchist and the head of the SF Bay Area Renters’ Federation, an upstart political group that is pushing for more development. Its platform is simple: Members want San Francisco and its suburbs to build more of every kind of housing. More subsidized affordable housing, more market-rate rentals, more high-end condominiums.

Ms. Trauss supports all of it so long as it is built tall, and soon. “You have to support building, even when it’s a type of building you hate,” she said. “Is it ugly? Get over yourself. Is it low-income housing? Get over yourself. Is it luxury housing? Get over yourself. We really need everything right now.”

Her group consists of a 500-person mailing list and a few dozen hard-core members — most of them young professionals who work in the technology industry — who speak out at government meetings and protest against the protesters who fight new development. While only two years old, Ms. Trauss’s Renters’ Federation has blazed onto the political scene with youth and bombast and by employing guerrilla tactics that others are too polite to try. In January, for instance, she hired a lawyer to go around suing suburbs for not building enough.

As you can probably imagine the San Francisco old timers and aging hippies are not fond of BARF:

Ms. Trauss is the result: a new generation of activist whose pro-market bent is the opposite of the San Francisco stereotypes — the lefties, the aging hippies and tolerance all around.

Ms. Trauss’s cause, more or less, is to make life easier for real estate developers by rolling back zoning regulations and environmental rules. Her opponents are a generally older group of progressives who worry that an influx of corporate techies is turning a city that nurtured the Beat Generation into a gilded resort for the rich.

Those groups oppose almost every new development except those reserved for subsidized affordable housing. But for many young professionals who are too rich to qualify for affordable housing, but not rich enough to afford $5,000-a-month rents, this is the problem.

Adding to the strangeness is that the typical San Francisco progressive and the typical mid-20s-to-early-30s member of Ms. Trauss’s group are likely to have identical positions on every liberal touchstone, like same-sex marriage and climate change, and yet they have become bitter enemies on one very big issue: housing.

If the affordability/restrictive zoning issue is going to improve, there are going to need to be a grass roots movements like this to combat the entrenched NIMBYs.  IMO, we are likely to see more of these groups popping up in closed access cities as prices and rents continue to rise.  The California Legislative Analyst’s Office has taken notice and published a report in February stating that underdevelopment with the main cause of high prices in coastal cities.  However, there is only so much that state government can do (or frankly that we would want them to do).  The locals in these cities are going to have to start making as much noise supporting projects as the NIMBYs are opposing them so hats off to BARF for taking up the fight in San Francisco.

Residential

Upside Down: In Denmark and Sweden, negative interest rates have led to a real estate boom and have even resulted in negative interest rate mortgages in some instances.

Lifestyles of the Rich and Famous: While entry level sales struggle, high end realtors are providing helicopter real estate tours for wealthy clients and luxury developers are throwing in memberships in private jet charter programs for buyers of premium condo units.

Profiles

Growing Pains:  Several years ago, online lending companies like Sofi, Lender Club and Prosper were the darlings of the banking world.  They rolled out a peer-to-peer model that was touted as faster and more reliable than heavily regulated plodding banks and sure to turn the conservative lending industry on it’s head.  Last week Fitch released a report highlighting concerns about the online lenders and their business models which was picked up by Fortune:

The problem, according to Fitch, is that online lenders are taking on riskier borrowers than they originally suggested they would. And they have perhaps been relying too much on credit scores, which the fintech lenders appear to be recognizing. “Pockets of recent credit underperformance beyond initial expectations have likely contributed to the ongoing refinement of underwriting models, including further de-emphasizing of the use of traditional FICO scores in certain instances,” Fitch said in its note. In other words, traditional banks may actually be able to assess borrowers with more accuracy, then the data-driven fintech lenders.

So they are taking on riskier borrowers than they initially said they would AND their underwriting models are proving to be weak.  They also have high loan delinquencies and, perhaps most importantly: this model hasn’t yet been tested through a full interest rate or credit cycle. Sounds great so far, huh?

Fitch made another very important point – the online lenders aren’t really lenders at all:

Online marketplace platforms aren’t actually lending, rather they typically match up potential borrowers with the source willing to fund the money—such as hedge funds, institutional investors, or even traditional banks. As a result, the “lack of alignment of interest due to separation of lenders and originators . . . present additional challenges,” according to Fitch.

This arms length relationship enables companies like Lending Club to earn oodles on fees for a while, and not actually have to be responsible if the loans go bad.

That can work for a while. The trouble is that if quality is bad, the actual lenders, that is the hedge funds and others that fund the loans are going to stop coming back for more. And that’s exactly what’s going on. “As institutional demand waned in recent months, marketplace lenders began to seek alternative funding sources to sustain loan originations,” Fitch says.

If that sounds familiar to you, it’s because it’s pretty much exactly what happened in mortgage lending before the bust when banks got stuck with a bunch of crappy paper after investors balked.  The online lending business is minuscule compared to  the mortgage market so I don’t expect much to come from this.  However, it bears mentioning.  As Mark Twain once said “History doesn’t repeat but it rhymes.”

 

Chart of the Day

WTF

Banned: The California State Senate voted earlier this week to ban Palcohol or powdered alcohol.  If the concept of consuming alcohol in powdered form sounds at all appealing to you, please stop reading this blog immediately and check into your nearest rehab because you have a problem.

What Happens in Vegas: Las Vegas hotels are about to start offering virtual reality porn in your room for $20.  No word on how the Vegas hookers are taking this news.

Smart Move: China has made the brilliant move of banning rich kids from appearing on reality TV shows that make them look like rich douche bags.  It’s a shame that the Kardashians don’t live there.

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Landmark Links April 22nd – The Rise of BARF