Landmark Links October 25th – When Will The Empire Strike Back?

darth-vader

Retraction: Before we get to today’s post, Leonardo DiCaprio’s rep announced that he doesn’t support the anti-density initiative that I spoke about on Friday, despite his name being all over it’s literature. ¬†Maybe he is a regular Landmark Links reader and didn’t like getting called out ūüėČ

Lead Story….¬†Since I began writing this blog last year, one of my main areas of focus has been how the historical relationship between primary and secondary markets has broken down in this cycle, especially in CA. ¬†In the past, the inland production markets would heat up when prices rose¬†along the coast. ¬†This lead to a virtuous cycle where housing starts beget jobs which beget more employment, wage growth and ultimately more household creation and home buyers. ¬†This cycle has been different for several reasons:

  1. Difficulty of inland builders to develop affordable homes profitably due to low FHA caps and high impact fees
  2. Growth in preference for urban living among wealthier adults
  3. Declining home ownership percentage impacts the marginal entry level buyer more than the affluent one and historically, the marginal buyer is more likely to look inland for housing.

It’s become fairly common in our industry to look to increases in FHA limits¬†as the salvation of the secondary markets. ¬†However, for that to occur in any substantial magnitude (all indicators point to a small increase next year), ¬†Congress would have to¬†revise the statutory formulas that they set back in 2008 to govern FHA limits. ¬†As my colleague Larry Roberts wrote in OC Housing News, that is far easier said than done:

Through the lobbying efforts by the National Association of Homebuilders or the National Association of Realtors, Congress knows exactly how the conforming loan limit impacts home sales and new home development.I recently spoke with Scott Meyer and Michelle Hamecs of the NAHB. They provided me their NAHB Issues Update that detailed the FHA loan limit issue (click here for that document). It isn’t ignorance to the problems the prevents Congress from raising the limit.

The conforming loan limit demonstrates the tug-of-war between two conflicting desires of policymakers.  On one side, advocates for the housing industry and advocates for expanded housing opportunities to all Americans want to push the loan limit higher. On the other side, the more fiscally conservative lawmakers want to lower the limit to restore the prior mandate of insuring loans only for lower- and middle-income Americans. Further, they want to reduce the potential liability for the US taxpayer, who would currently cover all the losses if the market crashes again.

If the conforming loan limit were reduced, it would decrease the potential liability for taxpayers and reduce the size of the GSE operations and make it easier to someday dismantle them; however, the last time the conforming limit was dropped, Irvine, CA witnessed an 84% decline in sales volume in the price range no longer financeable with GSE loans. Ouch!

There is no doubt that increasing FHA limits would help. ¬†There is nothing particularly healthy about having a market that is 100% reliant on government-backed loans to function but unfortunately that’s the hand that we have been dealt. ¬†Raising FHA limits attacks the problem from the bottom of the prospective home owner pool by allowing buyers at lower price points to purchase homes with much lower down payments than what’s available using a conventional mortgage. ¬†Today, I want to look at a different scenario that could play out in the next few years. ¬†It’s more from the upper end of the pool¬†where coastal renters could find themselves once again looking inland if prices continue to rise. ¬†Today, I’m going to focus on Orange County and the Inland Empire but the demographic dynamics that I’m going to focus on could apply to many affluent coastal regions and their less-affluent inland neighbors.

On the surface, things look great in Orange County. ¬†Economic growth is strong as is employment¬†and home prices are now above their prior peak. ¬†Development is humming along and occupancy levels are extremely high in commercial and multi-family projects. ¬†In addition, OC has diversified it’s economy quite a bit as finance and tech have taken a large role as¬†the County has become less dependent on real estate. ¬†However, as the OC Register detailed last week, Orange County has a growing demographics problem and I think that the Inland Empire just might be the prime beneficiary. ¬†The problem isn’t that Orange County isn’t creating jobs. ¬†It is and we actually have the lowest unemployment rate in Southern California. ¬†It’s that the jobs being created often don’t come with wages that would allow someone to live here. ¬†Combine that with relatively few new housing units being built and the cost of existing units rising quicker than inflation and you have a recipe for what economists predict will be a¬†declining population of prime workforce age population (25-64 year olds) from 2010 – 2060. ¬†From the OC Register (emphasis mine):

‚ÄúThey say demographics are destiny,‚ÄĚ Wallace Walrod, the Orange County Business Council’s Chief Economist told the conference. ‚ÄúIt is imperative that everyone in this room understand the consequences of pending demographic shifts.‚ÄĚ

The national trend of aging baby boomers moving into retirement, he said, is ‚Äúmagnified and exacerbated‚ÄĚ in Orange County, where the over-65 population is on track to nearly double by 2060 to ‚Äúa staggering 26.2 percent.‚ÄĚ

Unlike California as a whole, every age cohort other than seniors is shrinking in Orange County, where the median age has risen from 33 to 38 since 2000.

Most worrying, the prime working-age population ‚Äď 25-to 64-year-olds ‚Äď is expected to dip by 1 percent by 2060, even as overall population grows by 15 percent.

By contrast, working-age groups in Riverside and San Bernardino counties are on track to grow by 61 percent and 47 percent, respectively.

‚ÄúWe are losing not only our 25 to 34 year-old workforce ‚Äď millennials ‚Äď but also losing K-12 and the college-age cohort as well,‚ÄĚ Walrod said.

The trend, he warned, ‚Äúcould devastate O.C.‚Äôs pool of workers, creating talent gaps as large swaths of the workforce retires, leaving open positions that will likely go unfilled.‚ÄĚ

The Register went of to identify the the obvious culprit: housing. ¬†I frequently¬†hear friends, neighbors and co-workers and neighbors who live in Orange County complain that the area is being over-developed. ¬†The stark reality of simple math shows¬†that view couldn’t be more wrong. ¬†Again, from The OC Register¬†(emphasis mine):

A severe housing shortage has turned Orange County into one of the most expensive markets in the nation, with median home prices exceeding $650,000 and average monthly rents at about $1,900. Higher-density developments that could alleviate the shortfall are often opposed by current homeowners.

Rising values are ‚Äúgood news for current homeowners, but bad news for those looking to afford to relocate to O.C. or to buy a house and stay here, especially millennials,‚ÄĚ Walrod said.

As a result, he added, ‚Äúdomestic outmigration has been accelerating.‚ÄĚ

The report projects that “new job creation will significantly outpace projected new housing units over the next two and half decades, resulting in a housing shortfall that will grow from a current reading of 50,000-62,000 units to a staggering 100,000 units by 2040.

‚ÄúMany workers are being forced into neighboring counties to find more affordable housing, increasing their commute and complicating their work-life balance.‚ÄĚ

……

According to the report, it takes an hourly wage of $32.15 to afford a two-bedroom apartment in Orange County, putting it out of reach for minimum-wage workers in the county’s fast-growing service sector, given the current California wage floor of $10 an hour.

The story goes into much more detail about a developing skill gap and low wage job boom. ¬†However, I want to keep the focus on housing for this post. ¬†Note the above projections about working age populations in Riverside and San Bernardino Counties (growth of 61% and 47% respectively¬†from today until 2060). ¬†Those are massive numbers that will create a strong demand for housing and not all of it will be entry level. ¬†If you take the median income required to buy and rent a median-priced home in Orange County today, it is around $100k (assuming you can put down 20%) and $70k, respectively, so there are a lot of people with well-paying jobs that fall below that amount. ¬†Given the fierce opposition to density in the OC, it is likely that those numbers will only increase. ¬†Also, keep in mind that the averages above are for the entire county. ¬†The most desirable areas with the best school districts can easily be double those amounts which is incredible when you consider that median income to afford an apartment in the neighboring IE is around $55k. ¬†At some point, something has to give. ¬†My guess is that it’s a move towards more relatively affordable¬†housing markets, in this case the Inland Empire.

I want to make an important caveat about what I wrote above: I haven’t a clue as to when this change will actually take place and more affluent workers will start to look inland to buy or rent. ¬†However, one thing that I’ve learned witnessing¬†our current market is that things¬†change incredibly quickly once they hit a critical mass. ¬†Just a few short years ago we were subject to an endless barrage of “renting is superior to buying” articles in the mainstream and business press. ¬†Just this week, Bloomberg ran a piece that argued that it’s almost always better to buy. ¬†Such an article would have never seen the light of day in 2011. ¬†Both types of articles are virtually assured to be wrong since they argue in absolutes. In reality¬†it’s sometimes better to buy and sometimes better to rent¬†but that level of nuance doesn’t¬†lead to¬†many page views.

My comment about how quickly things change goes for regional and local trends as well.  For example, 15 years ago, pretty much no one with a college education wanted to live anywhere near downtown LA.  Within the past 10 years that has changed rapidly and an area which was once in the grips of urban decay has become one of the most desirable locations for young, affluent home owners and renters in the US.  Some of the same conditions that created the LA gentrification/urban renewal boom have caused the Inland Empire to lag: delayed household formation by Millennials, preference for urbanization among high earners and a downward trend in the percentage of Americans who own a home.  However, I have serious doubts that these are permanent trends and there are other factors at play already that could begin to create more inland demand:

  1. Addition of urban elements and amenities to existing CBD and downtown regions. ¬†This is already happening in downtown Riverside as more density and foodie oriented retail are on their way. ¬†There are other urban areas out in the IE that could experience the same thing over time, downtown San Bernardino for example. ¬†It’s probably difficult to imagine right now but that’s ok. ¬†Downtown LA as it currently exists was¬†didn’t seem feasible back in 2001 either and I doubt that many of us foresaw luxury condos and apartments going up next to Skid Row.
  2. Self driving cars could help to ease commute stress in markets without mass transit infrastructure.  The technology is advancing rapidly and the Inland Empire will arguably be the region that will benefit the most in the US.
  3. Bank lenders are starting to compete with the FHA for low down-payment loans to entry level buyers. ¬†Bank of America has been so successful with their 3% down program that they are doubling it. ¬†These lending programs are still tiny by comparison but it wasn’t long ago that they didn’t exist at all.
  4. Millennials are getting older.  Many of the oldest Millennials are now entering their mid to late 30s which are the prime household creation years.  Once people start families, studies show that they are more likely to favor the stability of owning over the mobility of renting and the family-friendly single family home over an apartment.

The Inland Empire is down but I wouldn’t count it out over the long term. ¬†The current trends that have hurt the¬†housing market there aren’t likely to last forever and the region is adjacent to¬†too many incredibly expensive areas¬†to not experience some spillover as even relatively high earning families eventually get priced out of the coastal regions. Conventional wisdom is that only an increase in the FHA loan limit can revitalize the IE housing market. ¬†In the short term, that may very well be the case but a sustainable recovery just might come from higher earners moving into the region.

Economy

The Walking Dead: How bankrupt oil companies that are continuing to pump could keep a lid on oil prices.

Stay In:¬†It’s getting more expensive to eat out even as grocery prices are falling.

Commercial

The Spigot: Pension funds have been steadily increasing commercial real estate allocations¬†for the past few years and that isn’t likely to change in 2017 despite signs of a maturing market. ¬†See Also: REITS have become a¬†more attractive target for activist investors.

High Times: A San Diego based medical marijuana landlord just filed for an IPO.

Residential

Further Afield: High prices and low yields near the coast have investors looking for rental homes in cheaper locations through management and investment services like Home Union, Investability and Roofstock. ¬†However, a lack of local knowledge can lead to out of area investors paying the dumb tax by thinking that they are getting a good deal when they aren’t.

Profiles

Pull the Lever: How smart phones and app developers create digital addiction by mimicking slot machines.

Paradise: The Cubs paved the way for the Dodgers to come to LA by hosting their spring training on Catalina Island. See Also: For the Cubs oldest fans, this year could be their last chance. And: There are people trying to get 6 figure ticket prices for a single seat at World Series games at Wrigley Field.

Chart of the Day

WTF

Hard at Work: Meet the TV weatherman who got bored with his job after 23 years and decided to become a porn star.

Not a Detail Person: Russian oligarch has giant hideous boat built at a German port on the Baltic Sea. Ship draws too much to get out of the straits at the entrance to the Baltic. Epic FAIL ensues.

Lawsuit of the Year Nominee: A woman is suing KFC for $20MM because she felt that her bucket of chicken wasn’t full enough.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 25th – When Will The Empire Strike Back?

Landmark Links October 11th – Put Your Money Where Your Mouth Is

USP NFL: CLEVELAND BROWNS AT BUFFALO BILLS S FBN USA NY

Lead Story…¬†As I wrote¬†a couple of weeks ago, the Obama Administration took the unprecedented action of calling on cities and counties to re-think their zoning laws. ¬†¬†This was a concerted¬†effort to increase affordability and fight back against NIMBY’s who have successfully stopped development in some of America’s most productive cities. ¬†The proposal is bold in that governors don’t often involve themselves in land use issues, let alone a sitting president. ¬†However, the toolkit presented by the Administration is somewhat toothless because cities are ultimately still ultimately free to do as they please and they ultimately have control over local land use policy.

An additional way to achieve more density is actually quite straight forward: cash.  If the Federal Government really wants denser, more walkable mixed use development then they need to incentivize it by amending FHA rules that currently make it very difficult to build product that fits that description.  From The Washington Post (emphasis mine):

Main Street-style development ‚ÄĒ the ‚Äústorefront on the first floor, apartments rented out above‚ÄĚ style that forms the core of any older town‚Äôs historic center ‚ÄĒ is a residential building form that uses first-floor commercial space to serve community members and enliven a neighborhood. This low-rise density helps prop up the balance sheets of towns responsible for running utilities all the way out to suburban developments, as former city planner and engineer Charles Marohn has repeatedly demonstrated. It also keeps a constant set of the ‚Äúeyes on the street‚ÄĚ that Jane Jacobs identified as necessary for safe streets; renters keep an ear out for burglars after business hours and shopkeepers keep the same at bay during the day. It is, in other words, the core of any successful town-building.

Yet for 80 years, Main Street development has been effectively driven from the market by the growth of federal housing policy hostile to mixed use. Ever since Herbert Hoover‚Äôs Commerce Department helped promote the spread of model zoning codes that physically separated people and their community institutions, the federal government has poured its energy and resources into encouraging the growth of widely dispersed single-family homes and large, centralized tower blocks. To this day, FHA standards for loans, which set the market for the entire private banking sector, prohibit any but the most minimal commercial property from being included in residential development. As a groundbreaking report by New York City‚Äôs Regional Plan Association found, these standards are ‚Äúeffectively disallowing most buildings with six stories or less.‚ÄĚ And depending on the program, a building could have to reach to 17 stories before it is eligible for participation in the normal housing markets. Without the FHA‚Äôs blessing, projects are granted the ‚Äúnonconforming‚ÄĚ kiss of death unless their developers can persuade a local bank to write an entirely customized loan for them, one whose risk the bank would have to keep entirely on its own books.

These caps on commercial space and income should be raised to level the playing field for housing development and let small developers invest as much in their home towns as huge corporations will in big cities. Caps currently limited to 15 and 25 percent should be raised to more than 35 percent to legalize even just three- and four-story buildings. As small towns and secondary cities across the country seek to revitalize their downtowns to become more competitive job markets, unreformed financing restrictions act as an invisible barrier, suffocating local efforts to invest in smaller communities. And while the housing affordability crisis has reached the most acute levels in a handful of coastal cities like New York, San Francisco and Washington, the White House admits that ‚Äúthis problem is now being felt in smaller cities and non-coastal locations.‚ÄĚ

The current financing restrictions make it so that the tail frequently¬†wags the dog in mixed use residential construction. ¬†Cities often want ground floor retail to be included to add to their¬†tax base and ¬†increase walkability but it’s incredibly difficult to finance. ¬†Instead what happens, is the developer gets¬†stuck trying to thread the needle between building just enough retail to appease the city but keeping it at a low enough percentage of the total project square footage to avoid the dreaded non-conforming label. ¬†The end result is that functional retail space is sacrificed in order to comply with FHA rules. ¬†So, rather than having a well-designed retail concept, you¬†end¬†up with small, non-functional retail¬†components¬†in all but the largest projects. ¬†The space has little¬†actual economic value except as a means to obtain financing. ¬†By way of example, a project one block from our office was recently¬†denied by Newport Beach’s city council due to a lack of ground floor retail. ¬†No doubt that the developer was designing to the financing constraints but didn’t include enough retail to get the City on board. ¬†The federal government took a step in the right direction earlier in the year by making it easier to finance condos. ¬†This is the next logical step if they are serious about increasing density and making housing more affordable. ¬†Time to put your money where your mouth is.

Economy

Meh: The September Jobs Report was sort of a dud.

Here to Stay? ¬†I love this explanation from Bloomberg’s Noah Smith on why low interest rates don’t necessarily cause excessive risk taking:

What is it that allows rates to hover around zero indefinitely without causing investors to do bad things with cheap money? It depends on why rates are low in the first place. If money is cheap because central banks are using their powers to keep rates lower than what the market would bear on its own, it stands to reason that investors will take cheap money and invest it in riskier things than they otherwise would. But if rates are low because of natural forces in the economy, and central banks actually have little to do with it, then there’s no reason business people would be taking extra risk.

Crude Math: An agreed OPEC production cut has oil back above $50/barrel but large, recently discovered reserves are likely to create yet another glut in the not-too-distant future.

Commercial

Over the Hump?  Apartment rents fell for the first time in a very long time in the 3rd quarter.

Dumpster Fire:¬†Bottom tier¬†retailers Kmart and Sears are technically still in business but both stores are utter disasters. ¬†Rating agencies just put Sears Holdings, the company that owns both on death watch and the only way that it’s keeping the lights on¬†is by selling the¬†best assets that it owns. ¬†Part of the problem is that Sears Holdings¬†still own or lease approximately 2,500 properties so this mess will be very difficult and time consuming to wind down.

Sears-map

Residential

Beneficiaries:¬†Vancouver’s home sales are down 33% after they introduced a foreign buyer tax. ¬†Seattle is likely to benefit. ¬†See Also: New York is overtaking London as the #1 destination for international property investment thanks to Brexit.

White Knight? ¬†Tech firms, often considered villains when it comes to housing issues in the Bay Area are now throwing their weight behind pro-development groups to push for more housing construction. ¬†See Also: The housing shortage is going to start negatively impacting economic growth in California more seriously if something isn’t done.

NIMBY Awards:¬†The Bay Area Metropolitan Observer put together a list of their top 10 Bay Area NIMBY moments of 2016. ¬†It would be funnier if it wasn’t so sad.

Profiles

Payday:¬†Everyone’s favorite sexting app, also known as Snapchat is working on an IPO rumored to value¬†the tech firm at $25 billion.

GTL is Cancelled: Tougher regulations and taxes are hitting tanning salons hard and there are 30% less of them than there were in 2008.

Chart of the Day

NIMBYs gone wild: LA Edition

Greg Morrow Capacity Graph

Source: Greg Morrow of UCLA

WTF

Best Excuse Ever: A Canadian pole vaulter who tested positive for cocaine just days before the Rio Olympics and nearly didn’t get to attend claimed that it happened because he made out with a girl that he met on Craigslist.

Wings (and Heads), Beer, Sports: Green Bay Packers tight end Jared Cook ordered some food at Buffalo Wild Wings and received a deep fried chicken head on his plate.

People of Walmart:¬†Walmart was selling a shirt on it’s¬†website that said: “I’d Rather Be Snorting Cocaine off a Hooker’s Ass.” ¬†Sadly, it was taken down once management realized what was going on.

Bad Idea:¬†Entering a Florida Walmart is a bad idea in the best of times. ¬†Doing it before a major hurricane when people are stocking up is just asking for trouble as you’ll see in the¬†video of the day.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 11th – Put Your Money Where Your Mouth Is

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

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

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

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

‚ÄúPets are becoming a replacement for children,‚ÄĚ said¬†Jean Twenge, a psychology professor at San Diego State University and author of ‚ÄúGeneration Me.‚ÄĚ ‚ÄúThey‚Äôre less expensive. You can get one even if you‚Äôre not ready to live with someone or get married, and they can still provide companionship.‚ÄĚ

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

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

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

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

‚ÄúThe clothing is, for them, an opportunity for performance ‚ÄĒ they put it on their dog or cat, take them for a walk, post a picture on Facebook,‚ÄĚ Richter said.¬†‚ÄúIt‚Äôs increasingly about getting a digital stamp of approval.‚ÄĚ

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

Economy

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

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

Commercial

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

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

Residential

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

Profiles

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

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

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

Chart of the Day

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

WTF

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

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

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

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

Visit us at Landmarkcapitaladvisors.com

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

Landmark Links August 23rd – Blind Sided

pool push

Animated photo in wordpress.com link (trust me, it’s worth it)

Lead Story… A massive number of Home Equity Lines of Credit (also known as HELOCs) were originated from 2005-2007, many of which have not been refinanced due to a combination of increased underwriting scrutiny and falling values (depending, of course on where the home is located).  Nearly all of these loans were revolving lines with adjustable rates that are interest only for the first 10 years.  Now those loans are beginning to convert to amortizing which is leading to an increase in missed payments and a whole bunch of headachese.  From the WSJ:

The bill is coming due for many homeowners on a type of loan that was widely popular in the run-up to the housing bust, causing a rise in delinquencies at banks.

More homeowners are missing payments on their home-equity lines of credit, or HELOCs, a type of loan that allows borrowers to withdraw cash from their house to pay for renovations, college tuition or almost any other expense. These loans typically require interest-only payments for the first 10 years, but then principal payments kick in for the next 15 or 20 years.

The increased cost of the loan can become a strain for some borrowers. This is becoming an issue now because many borrowers signed up for Helocs in the run-up to the housing bust as home values kept rising. Roughly 840,000 Helocs taken out in 2006 are resetting this year, with principal payments on an additional nearly one million loans expected to hit in 2017.

Borrowers who signed up for Helocs in early 2006 were at least 30 days late on $2.8 billion of balances four months after principal payments kicked in this year, according to Equifax. That represents 4.4% of the balances on outstanding 2006 Helocs. Delinquencies were at 2.9% before the reset.

Resets can lead to payments jumping by hundreds, or in some cases, thousands of dollars a month. Consider a Heloc with a $100,000 balance and a 4.5% interest rate. It would have a $375 interest-only monthly payment, which would then rise to about $633 when principal payments kick in, assuming a 20-year repayment period, according to mortgage-data firm HSH.com.

Consider this part of the lasting hangover from the Great Housing Crisis.  Banks, the government and borrowers spent a lot of effort in working through issues arising in the massive primary mortgage market both during and after the Great Recession but spent almost no time on HELOC’s.  This made sense as the primary market is far larger than the HELOC market and represented a much larger systemic risk.  Also, as stated earlier, almost all HELOC’s are adjustable meaning that borrowers generally benefited from falling interest rates over the past 10 years or so even if the loans couldn’t refinance.  Many borrowers who thought that they were mostly out of the woods are now getting blindsided by letters from their HELOC lender informing them that the payment is about to increase because it’s about to start amortizing.  Those with significant equity (mostly in the expensive coastal markets that have recovered the most) will probably refinance.  Those who don’t have significant equity are either going to have to absorb the higher payment, sell or try to work out a deal with their lender (who probably doesn’t want to foreclose and assume responsibility for the 1st DOT being that there is little to no equity and the HELOC itself might be underwater).  This is probably not a catastrophe in the making since it’s nowhere near the size of the primary mortgage market and inventory is generally tight to begin with.  However, it is another headwind in a housing market (and an economy for that matter) that is finally showing tepid signs of a real recovery.

Economy

New Normal: Federal Reserve officials are begrudgingly coming to the conclusion that they have long feared – the unconventional tools that they have had to use during and after the Great Recession are likely to be needed for a long time.

About Time: Middle-income jobs are finally showing signs of a rebound.

Resilient: A handfull of shale drillers are ramping up drilling in the oil patch again as prices close in on $50/barrel.

Commercial

The Beneficiaries of Hoarding: Self storage has been white hot and could be for some time, benefiting from declining home ownership, new management systems and better technology. (h/t Scott Ramser)

Residential

On the Move: The non-NIMBY argument for restrictive zoning in big coastal cities.  Not sure how this plays out in the real world but it’s sort of fascinating.  See Also: Bay Area startups find low cost outposts in Arizona.

Expensive Affordability: For the first time ever, Seattle is mandating that apartment and condo developers include affordable units in their projects or pay an in-lieu fee to develop affordable units elsewhere after a unanamous City Council vote. (h/t Scott Cameron)

Profiles

Dual Threat: Say what you will about Kobe Bryant’s final few crappy seasons with the Lakers but the guy seems to have an eye for good VC investments.

Swipe Right: Single people are starting to use Linked as a dating site.

Maverick: The story of how Mark Cuban went from a broke 20-something nicknamed “Slobbins” who knew nothing about computers and lived in a 2 bedroom apartment with 5 other guys to a billionaire is inspiring.

Chart of the Day

Things you need are getting more expensive while things that you want are getting cheaper.

prices2-1

WTF

Striptease: Two Mongolian wrestling coaches protested the outcome of an Olympic bronze medal match by stripping down to their underwear in a packed arena.

Hell NO: KFC is now selling a sunblock that makes you smell like a basket of fried chicken. They sold out right away because no one ever went broke betting against the taste of the American public.

Side Effects: You can’t overdose on marijuana but it might make you call your cat a bitch (and land you in the paper if your wife calls 911 and it’s a particularly slow news day).  (h/t Trevor Albrecht)

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 23rd – Blind Sided

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¬†‚ÄĒ¬†increase taxes or cut benefits¬†‚ÄĒ¬†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 ‚Äď 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 -July 22nd – On the Sidelines

Tebow-Sideline-600x340

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

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

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

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

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

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

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

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

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

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

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

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

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

Economy

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

Commercial

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

Residential

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

Profiles

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

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

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

Chart of the Day

WTF

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

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

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

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

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links -July 22nd – On the Sidelines