Landmark Links June 14th – Underexposed

underexposed

Lead Story…. REITs are the best performing asset class in the market over the past 15 years, yet, according a Goldman Sachs, 40% of large-cap core mutual funds still don’t own any and the ones that do often have a very small percentage of their funds allocated to real estate.  I don’t think its a stretch to say that this goes a long way towards explaining why most fund managers under-perform the market.  Not only have REITs outperformed the rest of the market, it actually hasn’t even been that close.  From the WSJ:

Since 2000, REITs have returned an average of 12% a year, according to J.P. Morgan Asset Management. That crushed the No. 2 finisher, high-yield bonds, which returned 7.9%. Large-cap U.S. stocks returned 4.1%.
Despite the performance, nearly 40% of large-cap core mutual funds, which largely invest in S&P 500 stocks, don’t own any REITs, according to Goldman Sachs. Overall, funds with no REIT exposure have a total of $528 billion in assets, Goldman says.

Funds that do own REITs hold about 2% of their assets in the stocks, less than two-thirds of the sector’s weight in the market, Goldman says. Turning REITs into its own sector will make it clear which managers are avoiding real estate. Of course index funds have always had a full weighting in REITs.

This is going to become increasingly important because, as we mentioned earlier this month, real estate is about to get it’s own sector in the S&P 500 which will make it even more obvious who is underexposed.  If tech, finance, manufacturing, emerging market, utility or natural resource stocks were hot you can bet that fund managers would be piling in as quick as possible.  So why are REITs the proverbial red-headed stepchild despite outperforming?  According to the WSJ:

REITs aren’t like other stocks because they are essentially conduits to take rent and pass it on to investors. Analyzing a REIT is different than trying to figure out a company that produces products or delivers services.

For stock pickers, REITs are frustrating because they tend to rise and fall based on what’s happening in the economy, making it hard for a fund to stand out. The stocks perform well when the economy is humming along at a modest pace, just like now when rents are rising and occupancy is high. But when the economy tanks, they can get hit hard. In 2007 and 2008, REITs lost 15.7% and 37.7%, respectively.

And when the economy runs too fast and interest rates rise, they lag. Many managers see REITs as bonds masquerading as stocks. There is truth to that. REITs tend to lag behind the market when interest rates are rising, just like bonds. REITs also are compared with stodgy utilities, which also throw off lots of dividends but do little else.

Ultimately, many fund managers didn’t buy REITs because they didn’t have the time or staff to figure out the industry.

Shorter version of that: REITs are boring and hard to understand so fund managers don’t bother spending the time to figure them out.  Also, I don’t by the “not good when the economy tanks” rationalization because the ’07-’08 train-wreck is included the 15-year period of out performance.  Also, you could say the same thing about tech stocks after 2001 or emerging markets over several time periods but clearly the funds have not stayed away from those sectors.  As an aside, the performance data for listed REITs should be enough to kill off the seedy and perpetually under-performing non-traded REIT industry.  However, one should never underestimate the determination of a broker stands to earn a commission exceeding 10% by selling to a less-than-sophisticated mark.  Ironically, the sector split happening this summer is going to force fund many managers to allocate more to REITs at a time when out-performance is unlikely to continue.  Again, from the WSJ:

Sadly for investors who now have to take the sector more seriously, the big gains recorded by REITs over the past 15 years aren’t likely to continue. REITs have been the best-performing asset class in five of the last six years, a record that’s unlikely to repeat itself even though valuations are in line with history.

Trees don’t grow to the sky, after all.  Either way, I’d expect that it’s going to be a busy few months for Green Street Advisors.

Economy

Loud and Clear: The still-flattening yield curve is telling the Fed everything it needs to know about the economy.  Whether or not the Fed listens is another matter.  See Also: Economists surveyed by the WSJ have sharply lowered their growth estimates for next year.

In the Rear View Mirror: Remember the US manufacturing renaissance after the Great Recession ended?  Recent jobs data suggest that it could be coming to an end.

Ticking Time Bomb: Bill Gross likens negative interest rates to a “supernova that will exlpode.”  But See: Denmark has had negative interest rates longer than any other country and hasn’t exploded yet.

Commercial

Extended Stay: Despite concern about new supply in the capital markets, hotels are still on pace for another great year.

Residential

Party Like it’s 2005: Some prospective buyers in Seattle are camping out overnight to put a deposit on a downtown condo.

Head Above Water: According to CoreLogic, 268,000 US homeowners regained equity in their homes in the 1st quarter of 2016.

Lonely at the Top: Calculated Risk on Merrill Lynch’s report showing some signs of slowing at the high end of the market.  See Also: Rent hikes are slowing but mostly at the high end where almost all of the new construction has been happening.

Profiles

Taking Stock – Silicon Valley is sick of dealing with Wall Street and looking to create it’s own stock exchange.

Hipster Darwinism: Fertility experts are telling men to ditch the skinny jeans if they want to have kids.  Also because they look ridiculous.

Stacked: As if online lenders didn’t have enough problems….new reports show that their quick underwriting often doesn’t pick up loan stacking – the act of multiple lenders making loans to the same borrowers, often within a short period of time, meaning that borrowers are far riskier than advertised.  This is not going to help win back investor confidence

Chart of the Day

WTF

Leave the Driving to Us: An allegedly possessed woman went apeshit on a bus in Argentina and fortunately someone video taped it.

Pet of the Week: Can someone out there please help find Pinky the cat a new home?  He’d make a great pet.  He’s also a Warriors fan and Draymond Green is his favorite player

Frivolous: A woman is suing a spin instructor in LA for bullying because she hurt herself in class.  When the world ends, there will be nothing left to inhabit the earth but insects and lawyers.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links June 14th – Underexposed

Landmark Links June 7th – Super Size Me

supersizeme

Lead Story…. Much like our waistlines, America’s new houses are expanding.  According to the US Census Bureau, the median size of a new single-family house last year was 2,467sf, the largest on record.  Many pundits predicted the demise of the much-maligned “McMansion” once the housing crash hit.  Clearly that prediction has been less than prescient.  According to the Wall Street Journal:

Homes are 61% larger than the median from 40 years earlier and 11% larger than a decade earlier.

One particularly interesting aspect of this trend is that it has been happening while American families are actually getting smaller, not larger.  It’s not just the size of new houses either.  The components that are going into those new homes are changing as well. More from the WSJ:

“McMansion” may not be a popular term post-housing bust. But American homes have not only been getting larger, they’re also including more bathrooms and amenities such as air conditioning. Some 93% of new houses had air conditioning in 2015 compared with 46% in 1975. About 96% of new homes last year had at least two bathrooms versus 60% four decades earlier.

That may go some way toward explaining rising prices. The median sales price of a new home was $296,400 last year, according to Census, a new high. Even when adjusted for inflation, new-home prices hit a record last year.

First off, the fact that single family homes are getting bigger says as much about increasing land and permitting costs as it does about consumer demand for larger homes – the builders are building what they have to based on the cost of land and other inputs rather than strictly what consumers want.  This helps to explain why new home sales have been sluggish coming out of the housing bust. Building a larger, more expensive house is one way to overcome the ever-higher drag of land, permits, impact fees and regulatory costs.  Public builder CEOs have been saying this for some time, the latest of which was Lennar’s Stuart Miller who spoke about builders’ inability to produce low-cost new homes at a conference last week:

“This is a tough market condition. We have seen the market recover since the downturn, but the recovery has been slow, steady and in a pretty tight band.  When you start with a high land basis [cost] it’s very hard to end up with a purchase price that the first-time buyer finds affordable.”

All that being said, the fact that new homes are now coming with features that entry level houses never had in previous eras does say a lot about consumer demand and points to a simple but oft-overlooked fact: part of the reason that its so difficult to build an entry level home is that what we consider entry level has changed…a lot.  Bathrooms and kitchens are by far the most expensive rooms to construct.  Believe it or not, there was a time that an entry level home didn’t come complete with a master suite, several bathrooms, quartz kitchen counters and stainless appliances.  When you start adding extra bathrooms, higher-finish kitchens, air conditioning, etc costs rise quickly, making it very difficult to produce a home that entry level buyers can afford.  More bathrooms and larger homes are not favorable trends if we want more entry level product.

Economy

Hold Your Nose: Last week’s jobs report pretty much sucked and is making it substantially less likely that a rate hike is imminent this summer.

Blame Game: Low interest rates are supposed to stimulate the economy by making investment cheaper.  Their impact has been muted at best this cycle and the two of the culprits may be dividends and stock buybacks.

Muted Impact: Low oil prices really haven’t provided the economic boost that they were supposed to.

Commercial

Hitting the Road: Sky high rents have tech firms are looking at markets outside of San Francisco in order to cut costs as VC funding wanes.

Residential

Pacman: Today’s must read is a thought-provoking piece from Connor Sen on why housing is about to eat the US economy.  Here’s an excerpt of his conclusions but you really ought to read the whole thing (highlights are mine):

-The economic shortfall in the US right now is mostly on the housing side. Because of how important housing is to the US economy, this is why 4.7% headline unemployment doesn’t feel like full employment.

-Construction employment as a share of total employment is likely going to rise at least another 0.4% to get to a level of 5% in this cycle.

-At the current level of employment, this means we need another 550,000-600,000 construction workers.

-Construction unemployment is already near record lows.

-Demographic trends in the US – an aging workforce, a workforce that’s growing more educated, the changing mix of immigration towards Asian knowledge workers rather than Hispanic blue collar workers (29% of construction workers are Hispanic) – all act as headwinds towards finding more construction workers.

-From a labor slack standpoint, the pool of potential construction workers is probably well-represented by unemployed men under the age of 55. To get back to late ‘90s levels of male unemployment (from a level standpoint, not an unemployment % standpoint), we would need essentially every single male unemployed worker who finds a job in the coming years to go into construction. This doesn’t take into account skill, desire, education level, geography, etc.

If we had to find 500,000 construction workers tomorrow, from a math standpoint it would be impossible. The slack isn’t there. But this isn’t the way things work in the real world. Time and market forces allow for adjustments. So here’s what that means:

-Over time, as construction employers become more aggressive they will bid away workers from similar fields – agriculture, oil & mining extraction, manufacturing. New entrants to goods-producing fields will be drawn overwhelming to construction, so as workers quit or retire from agriculture/oil/manufacturing-related industries it will create increasing scarcities in those industries.

-Goods-producing/blue collar workers will increasingly bleed from the Midwest/Northeast to the faster-growing southeast and west coast, where increasing numbers of construction jobs will be. This will put more and more of a strain on Midwest/Northeast goods-producing firms.

-With construction-friendly immigration flows not being what they were, the globalization solution will be to move ever more numbers of agricultural/manufacturing activity overseas to free up their domestic workers for construction. Neither California farm owners nor Midwest voters and governments will be happy about this.

-Construction wages/costs going up will mean higher housing/real estate costs for households and firms, leaving less of a spending pie available for the rest of the economy. If you’re spending an extra 3% of your pay on housing that’s taking business from a grocery store or a movie theater or Amazon.

-Capital will flow increasingly towards the housing sector, starving other sectors of capital. If construction can’t achieve productivity gains then labor shortages in other sectors (agriculture, manufacturing, entry level services/fast food) will mean more and more incentives to automate labor-intensive tasks to free up those workers to work in construction.

“Software eating the world” implied that digital upstarts were going to create low cost solutions to take demand away from older, high cost analog firms. Amazon eating big box stores, Facebook eating print and TV. Demand was going to shift. “Housing eating the US economy” implies that housing is going to steal your inputs. They’re coming for your workers and capital on the supply side. It’s a different dynamic but a similar outcome – housing is poised to reassert itself as the main driver of the US economy.

Enhanced Sale: Homes listed at $100MM have been languishing on the market of late.  However, The Playboy Mansion, which had a listing price of $200MM was just purchased by Heff’s next door neighbor, a 32 year old financier who was involved in buying Hostess Brands out of bankruptcy when the Twinkie maker went belly up a few years back.

Profiles

Survival of the Fittest: It may seem hard to believe today but Google+ was viewed as an existential threat to Facebook when it launched in 2011.  Here’s the inside story of Mark Zuckerberg’s war to crush Google+ that sent Facebook on it’s current trajectory of web dominance.

@Trouble: Snapchat has now overtaken Twitter when it comes to average daily users.  See Also: Twitter has a major anonymous troll problem that’s holding it back and the solution comes with a huge price: a dramatic drop in daily users.

Rosetta Stone: theSkimm put together a list of acronyms so you can figure out what the hell your kids are actually talking about.

Chart of the Day

Houses are growing while households are shrinking.

 housing1
houses2
Source: AEI.org

WTF

Video of the Day: This parking lot brawl in the parking lot of a Canadian Costco is quite possibly the least Canadian thing I’ve ever seen, eh.

Subtle: A Chinese highway services company has started striping it’s parking lots with spaces specifically for women.  The spaces are 1.5x the size of a normal spot, framed in pink and market by an icon representing a skirt-wearing woman.  When pressed for a comment, the highway service company district manager responded:

“The bigger parking spaces are for women drivers whose driving skills are not superb,” Pan Tietong, the service area’s manager, told the newspaper. He said he had encountered female drivers who were unskilled at backing up into spots, and sometimes asked security guards to help them park.

The spots “are especially designed for women drivers,” he said. “It’s a humane measure.”

As much as I’d like to comment further on this “humane measure,” I’m going to refrain primarily because I have no interest in sleeping on the couch tonight.

Thin Crust Alimony Pizza: An Italian court ruled that alimony can be paid in pizza because Italy is awesome.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links June 7th – Super Size Me