Landmark Links November 15th – Restraint

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Lead Story… To say that the past few days have been a shit storm in the fixed income market would be an understatement.  As I wrote last week, we’ve spent the past 6 or-so years becoming conditioned to believe that every major financial or geopolitical disruption would result in a flight to quality trade into US Treasuries, lowering borrowing costs for real estate.  Last week’s surprise election result obviously broke that trend and, even the few people out there that got the election result correct mostly got the bond market response incorrect.  As such, are now in a position where things could dramatically change in the lending market which would obviously have profound implications on real estate in general and housing in particular.  Interest rates are already up substantially as talk about potential tax cuts, a mountain of infrastructure spending and de-regulation of mortgage markets abounds.  What seemed to be a grindingly slow and somewhat boring market just a couple of weeks ago is now changing rapidly, leaving some worried and others excited.

But here’s the thing: no one really knows what this new administration is going to look like in terms of economic or housing policy or how it will interact with a congress that, although of the same party was often hostile towards the President-elect during the election.  Political campaigns have become little more than 2 years of mudslinging and bullshit and the one that mercifully just finished was far worse than most.  Markets appear to be jumping to the conclusion that it’s going to be easy for everyone on the right side of the isle to simply come together after all of their inter-squad fighting and slam through broad changes.  This line of thinking largely discounts that there is a very narrow majority in the Senate while disregarding the fact that there are major, major disagreements on key issues between the incoming administration and legislative branch.  Maybe they suddenly come together and do everything that market participants seem to believe they will, leading to higher inflation.  Maybe they don’t.  The fact is that we simply don’t know at this point.

Oaktree’s Howard Marks is one of the most brilliant and successful investors in the world.  His response to the election and policies that may or may not be enacted in the next 4 years is something that everyone should read.  From Financial Review (emphasis mine):

“I am in the ‘I don’t know camp’. We should not rush to conclusions,” the founder of $US100 billion ($131 billion) fund manager Oaktree told the audience at the Sohn Hearts & Minds Investment Leaders conference in Sydney on Friday.

“On paper he should be a pro-business president and objectively speaking he should be more pro-business than Hillary Clinton would have been,” Marks said, but added he will be watching to see which policies Trump will pursue and will be able to pursue and who he appoints.

“He said lots of things people didn’t like but he said some supportive things for the business environment such as cutting taxes. The negative is his view on trade.”

Another positive is Trump’s pledge to invest in America’s infrastructure.

“It will be a nice thing and put people to work but I don’t think it will redirect the trajectory of the economy, but it’s a plus and something people can agree on.”

The rise of populism would become a feature of the US political and economic environment.

“The Trump candidacy didn’t make people angry – it touched on an anger and a division.”

“Globalization and automation has cut into jobs and is going to cut in further.”

He feared that sustained lower growth will be a challenge for the nation.

That’s one of the world’s most successful investors freely admitting that he doesn’t know what’s going to happen with the economy from a policy standpoint.  If only all of the talking heads on the TV and internet could show such restraint….

The crux of the matter is this: infrastructure spending, tax cuts and financial de-regulation are all inflationary.  Protectionist trade policy and tarrifs are deflationary.  At this point, there is no way to tell whether the pro-growth or populist side will win out.  There is a fine balance to be struck here.  During the Bush administration, the regulatory pendulum swung too far towards de-regulation.  The result was banks gone wild and, eventually the Great Recession / housing crash.  Somewhat predictably it swung hard in the other direction during the Obama administration, leading to retulatory stagnation, a lack of bank credit and incredibly low interest rates.  My hope is that the new administration and Congress ease up on regulation enough to get banks lending again but not so much that we go back to the bad old days of 2005 which was basically the lending equivalent of the wild west.  IMO, we need policies that are more pro-growth but not at the expense of stability. To be sure, it’s a difficult tightrope to walk. We don’t know if it will happen or not but I’m remaining open minded until I know more.

 

Economy

Glass Half Full: Higher interest rates mean long term gain at the expense of short term pain.

Positive Trend: The prime working age population (ages 25 – 54) is finally growing again which should help to provide a positive economic tailwind.  See Also: 40-somethings are the prime drivers of US productivity but no one really understands why.

Breaking Away? As you can imagine, a large portion of Silicon Valley was not happy with the results of last week’s election.  Several tech titans got together and are now working on an initiative to put a referendum for California secession on the 2018 ballot.  Here’s why that would be an incredibly dumb idea from an economic standpoint.

A New Direction?  As I previously wrote, last week’s Election results have traders betting on more inflation in the near future.

Commercial

Giving Away the Farm: Manhattan landlords are offering more concessions than ever due to an oversupply of available apartment units.

Virtual Reality: Some online retailers are turning to physical locations in an effort to connect with consumers better.

Residential

Paying Up: A post-election Treasury sell-off that resulted in higher mortgage rates has home affordability in the United States waning.

Bullish: While the nation as a whole may be divided, construction firms are quite bullish on the result of the presidential election.

New Direction?  Silicon Valley is the poster child for the housing affordability crisis in the US.  However, the election of several pro-development candidates in local city council races should be a positive for a region that has become so expensive that it’s not uncommon to see Tesla’s in trailer park driveways.

Chart of the Day

More sensitive than an America college student.

Here’s what happens to values when rates rise 1%

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And here’s what happens to values when they fall 1%

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WTF

Good Boy: A town in Minnesota re-elected a dog as mayor for a third term.  In related news, if anyone asks me what leaders I admire I’m going to direct them to Duke the Great Pyrenees.

Cat Lady: A woman in Texas was arrested last week after police discovered three tigers, a cougar, a skunk and a fox in her house along with her and her 14 year old daughter.

Bottoms Up: A new study found that drinking a beer a day helps prevent stroke and heart disease.  You’re welcome.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links November 15th – Restraint

Landmark Links November 1st – Musical Chairs

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Lead Story…. I’ve spent quite a bit of space on this blog talking about segments of the real estate market that have been struggling of late.  From high end apartments and luxury condos in NY, SF and Miami to dying shopping malls in middle America, to struggling suburban office buildings, there’s been plenty to go around.  Today, I’m going to focus on a struggling segment that we haven’t paid much attention to: super high-end retail.  It seems that landlords at the extreme high end of the retail spectrum have been pushing rents like crazy lately, and now they are paying the price as even cream-of-the-crop retail tenants can’t afford it anymore.  Bloomberg ran a story that focused primarily on NY’s iconic 5th Avenue, home of the world’s most expensive retail rents.  From Bloomberg’s Sarah Mulholland:

Landlords on Manhattan’s Fifth Avenue are sitting on a record amount of open space as retailers balk at committing to expensive new leases in one of the world’s most prestigious shopping districts.

The availability rate on the famed strip, home to Saks Fifth Avenue and Tiffany & Co.’s flagship store, jumped to 15.9 percent in the third quarter, up from about 10 percent a year earlier, according to Cushman & Wakefield Inc. The rate has climbed steadily this year, surpassing the prior peak of 11.3 percent, set in the fourth quarter of 2014.

The rise of empty storefronts isn’t limited to Fifth Avenue. It’s part of a Manhattan-wide space glut as retailers — buffeted by e-commerce, tepid demand for luxury goods and a strong dollar that’s eroded tourist spending — push back against rents that have soared to records. Leasing costs have increased in tandem with property values in the past five years, outpacing gains in merchandise sales and making it impossible for retailers to run profitable stores at many locations, according to Richard Hodos, a vice chairman at brokerage CBRE Group Inc.

If you’ve read up to this point, the solution seems simple: lower rents and occupancy will rise again.  Only it’s not so simple in a world where properties trade hands relatively frequently and every buyer needs to assume that they can push rents further than the last owner in order to make the numbers work at an ever-higher basis.  This is not an issue that is in any way unique to 5th Avenue, or retail space for that matter.  It happens in commercial real estate transactions everywhere in an upward-trending market.  However,retail in particular, especially the shopping mall space is proving to be a very difficult business as eCommerce continues to gain share and department store anchors continue to go dark putting many landlords underwater. The aspect of this story that is incredibly staggering is the astronomical rental numbers. Again, from Bloomberg’s Sarah Mulholland (emphasis mine):

On the stretch of Fifth Avenue from 49th to 60th streets, which commands the world’s highest rents, landlords are asking an average of $3,213 a square foot, up from $2,075 a square foot in 2011, Cushman data show. In the tourist-heavy Times Square area, rents stand at $2,104 a square foot after tripling over a four-year period.
The brokerage’s retail availability rate takes into account vacancies as well as stores occupied by merchants that plan to leave when their leases expire. Retailers that signed leases at high prices in the past several years and are seeking a tenant to sublease their space are also included, according to Steve Soutendijk, an executive director at Cushman.
“Tenants that signed at the absolute top of the market are looking to mitigate their exposure,” he said.

At this point, you are probably assuming that the rents referenced above are a typo.  I can assure you that they are very real.  And just how did they rise so quickly? Also, how much are they overvalued? Mulholland continues (emphasis mine):

Property trades are being based on achieving ever-higher rents, and nobody ever really looks at what retailers can afford to pay,” Hodos said. “In some cases, rents need to come down 30 percent or more for rents to be at levels where retailers are able to make sense of them again.”

It gets even worse if the project is levered since signing a lease below a certain amount could lead to negative cash flow or put the loan in default if debt service coverage is inadequate.  This is a great illustration of one of the worst aspects of real estate investment: garbage in, garbage out underwriting.  You can make an investment model hit a targeted valuation if you put enough inflation into a model.  However, in the real world tenants actually have to be willing to pay and those assumptions don’t work nearly as well as they did in the model. The result is that you end up with vacancy when no tenants are willing to pay above-market rent.  If the assumptions in the proforma are garbage, then the proforma will be garbage as well.  It doesn’t matter how good your analysis tools are if you don’t use them correctly.

There’s an old saying about 5th Avenue being a safe haven real estate investment where you can’t lose money.  However, that simply isn’t true if you overpay by making such aggressive leasing assumptions that you can’t fill vacant spaces.  Trust me, you can lose plenty of money that way, especially when your entire business plan is predicated upon getting a tenant to pay you thousands of dollars a square foot.

Economy

Long in the Tooth? Yes, the current expansion cycle has been quite long but don’t assume that the next president will face a recession.

Shifting Playing Field: Workers with specialized skills, deep expertise or in-demand experience will be the big winners in the gig economy.  Everyone else?  Not so much.  See Also: While services sector booms, productivity gains remain elusive.

Residential

Choppy: US pending home sales rebounded in September after a disappointing August but inventory stayed tight.

Profiles

It Was the Best of Times. It Was the Worst of Times: Twitter as an app is absolutely indispensable.  Twitter as a business is absolute sh&t. See Also: How Instagram and Snapchat led to Twitter killing Vine.

Bet on It: Why Microsoft and Google could become the bookmakers of the future.

Seems Reasonable: A divorcing couple went to court to argue over who gets the Cubs tickets. See Also: How a pirated television station turned the Central American nation of Belize into Cubs fans.

Chart of the Day

I live in an area with extremely high rents but this is unreal

WTF

Busted: Roses are red, someone got laid, parrot outs husband for cheating with maid.

Desperate: Lonely men are increasingly turning to digital assistants like Siri for love and ‘sexually explicit’ chat.

But First, Let Me Take a Selfie: Drunk driving Texas A&M student takes naked selfie, runs into police car.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links November 1st – Musical Chairs

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 — the “storefront on the first floor, apartments rented out above” style that forms the core of any older town’s historic center — 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 “eyes on the street” 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’s 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’s Regional Plan Association found, these standards are “effectively disallowing most buildings with six stories or less.” 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’s blessing, projects are granted the “nonconforming” 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 “this problem is now being felt in smaller cities and non-coastal locations.”

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 – 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 23rd – What’s the Point?

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

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

 

Check if you qualify

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

5 minutes

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

Point Makes you an offer

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

1-3 days

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

Schedule an in-person home visit

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

5-8 days

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

Point pays you

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

3-5 days

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

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

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

1 to 10 years

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

Economy

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

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

Commercial

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

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

Residential

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

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

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

Profiles

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

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

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

Chart of the Day

Rise of the regional banks

RCA-CRE-capital-trends

WTF

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

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

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

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

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

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

Visit us at Landmarkcapitaladvisors.com

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

Landmark Links September 9th – Misunderstood

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Lead Story… I doubt that any generation has ever been hyper-analyzed the way that Millennials have.  You can’t turn on the TV, read a news website site or open a newspaper (yes, some people still read them) without coming across an opinion piece purporting to know everything about Millennials: how to make them happy at work, where they want to live, how they want to shop, etc.  Much of it reads as if the people born between 1980 and 2000 are some type of exotic beings that are to be observed in their natural setting to understand how their species live.  Spare me.  I’ve long suspected that most of this is BS and that Millennials aren’t really that different from previous generations.  Most of the actual survey data that I’ve seen confirms this to a large extent.  This past weekend a collegue sent me the link to a study done by CBRE appropriately titled: Millennial Myth Buster: Young Americans Do Like the Suburbs (h/t Tom Reimers)  In this report, CBRE’s research group dug into actual migration and census data to show where Millennials are actually moving as opposed to where conventional wisdom says that they are moving (emphasis mine):

The most recent available annual data (2014) show that 2.8 million people moved from the suburbs to cities that year; however, 4.6 million did the opposite.1 Since this runs contrary to the prevailing narrative about urbanization, it’s worth digging into the data to see what’s behind these numbers.

There are many ways to look at domestic migration——age, education and profession are all useful in breaking it down. In recent years, media stories have frequently focused on the role of millennials——those born between 1980 and 1995, roughly——in driving the resurgence of downtown areas. The focus on this generation was not unwarranted; millennials are now the largest age group in the country and make up the largest segment of the U.S. workforce. It is fair to say, however, that census data disagree with the media on where millennials actually live and where they have been moving to.

Approximately 30% of millennials live within urban areas. The other 70% do not appear to be rushing to move downtown: In 2014, 529,000 people between the ages of 25 and 29 moved from cities to the suburbs, while only 426,000 moved in the opposite direction. For younger millennials aged between 20 and 24, the flow’s direction was even more pronounced, with 721,000 moving out of cities for the suburbs and 554,000 leaving the suburbs to pursue life in the city. It’s true that some of those moving to the suburbs were returning to childhood rooms or basements in their parents’ homes, but the migration trend still holds: not every millennial can or wants to live downtown.

Ok, so that’s just one year but the data has actually been remarkably consistent over time. This is one case where the facts are 180 degrees away from the narrative.  The US is getting more suburban, not more urban.  CBRE’s conclusion was particularly interesting as it pointed out that younger people often want urban amenities but still a suburban setting (emphasis mine):

The remarkable discrepancy between population data and the prevailing narrative raises questions about the preferences of young people in the U.S. What do they want? Simply put: space and an urban feel. One recent survey showed that 81% of young people (defined as millennials and those born in the late 70s) want three bedrooms or more in their residence. Their responses regarding geography reflected this preference: two-thirds of respondents stated a desire to live in the suburbs, while only one in ten wanted to live in a city center. Such findings are corroborated by the results of another survey, in which nearly two-thirds of millennial-aged respondents self-identified as suburbanites or rural people.

Still, millennials have a reputation for appreciating the perks of urban life, such as easy access to public transportation, shops, restaurants and offices. This does not necessarily translate into demand for downtown real estate, however. Suburbs too, can develop in ways that appeal to younger demographics, by incorporating elements of urban life in suburban areas. This is occurring in metros across the country. New terms have even been coined to describe quasi-urban areas in the suburbs——among them, ‘‘hipsturbia’’ and ‘‘urban burbs.’’

I highly suggest reading the entire piece.  IMO, the reason that the media gets this wrong is that urbanization is primarily happening in the areas where they tend to be based: NY, LA, SF, DC, etc.  Influencers live in these places, witness urbanization occurring and assume that it’s happening everywhere else as well.  These large, wealthy, mostly coastal cities do not look like the rest of the US from a demographic standpoint and their demographic trends shouldn’t be extrapolated to everyone else.  I hate to break it to many of you but the average Millennial isn’t a mustachioed hipster wearing skinny jeans and drinking organic kombucha in a Brooklyn organic juice co-op.  He or she actually looks a whole lot more like you and I than we’ve all been led to believe.

Economy

Changing Tune: Barry Ritholtz of Ritholtz Wealth Management, The Big Picture Blog and Bloomberg View was a critic of banks as a risk to the US economy long before the crash in 2008.  Now that the crisis has been over for several years, he’s finally giving the all-clear as banks have finally deleveraged a bit and refilled the FDIC’s deposit insurance fund.  See Also: A longtime proponent of financial industry regulation thinks that regulators may have taken things too far in the wake of the Great Recession, leading to mountains of red tape and rising compliance costs.

Full Turn: Inequality in the US used to be most evident in the South.  Today, it’s most pronounced along the coasts.

Eating Well: How foodie culture defied expectations and not only survived but thrived post-recession.

Commercial

Slip Sliding Away: Walmart killed off rural downtowns when they started offering goods for cheaper prices.  Walmart’s position has been steadily eroded in recent years by big box stores like Costco and e-commerce, primarily Amazon.  Two interesting related stories this week:

  1. Costco is struggling as online bulk shopping provides strong competition. (h/t Mike Nash)
  2. Amazon, which is a primary culprit in the decline of Walmart, big box stores and malls is now starting it’s own delivery fleet, which could pose an existential threat to UPS and FedEx.

Residential

If Headlines Were Honest: Alternative headline from Bloomberg early this week: Housing Boom to Keep Going Even if Rates Rise Says CEO of Highly Levered Public Home Building Company.

Staying Away: Beazer made a tender offer to buy back $300MM in debt due in 2018 in yet another example of public builders spending money on pretty much anything except for land.

Profiles

Explains a Lot: Florida resident Dave Barry recently wrote a book about his freak-show of a state, a portion of which was excerpted by the Wall Street Journal last week in a well-titled article called – Florida: The Punchline State.  I recommend that you read the whole thing if you consider yourself a connoisseur of weird Florida news.  My favorite excerpt (emphasis mine):

The point is that, yes, Florida, because of its unique shape and warm climate, does have an unusually high percentage of low-IQ people doing stupid things, frequently naked. But most of these people came here from other states, the very same states that are laughing at Florida. Those of us who live here have to contend with not just our native-born stupid, but your stupid, too. We are like Ellis Island, except instead of taking the huddled masses yearning to breathe free, we take people who yearn to pleasure themselves into a stuffed animal at Wal-Mart.

House of Cards: Some Great investigative reporting from Nick Bilton of Vanity Fair on the downfall of Theranos and founder Elizabeth Holmes.

Can You Hear Me Now: New study finds that your dog knows exactly what the hell you are talking about.

Chart of the Day

Myth Busters – Urban Migration Edition

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WTF

Swedish Meatballs: A guy got his testicle stuck in an ill-designed Ikea chair and took to Facebook to complain about it (h/t Mandy McDonnell)

Inside Joke: North Korea just banned sarcasm. Seriously.

Bad Selfie: A battery suspect was apprehended after he used the police department’s “wanted” poster as his new Facebook profile picture, because Florida.

Misdirected Anger: A woman who was angry with her ex set the wrong car on fire,  because, once again, Florida.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 9th – Misunderstood

Landmark Links August 26th – Transition

Bruce JennerLead Story… Two particularly troublesome issues in the US real estate market are the need for more affordable housing and figuring out what to do with vacant malls and other underutilized retail sites.  The Westminster Arcade in Providence Rhode Island, the oldest mall in the US offers an interesting solution: converting un-used portions of malls to micro apartments:

As more people turn to the internet to buy what they need, shopping malls across the country are closing their doors. But one historic mall has found a creative way to re-purpose its former retail space: America’s first shopping mall, the Westminster Arcade in Providence, Rhode Island, has now been turned into micro lofts, offering people the chance to truly live inside a piece of history.

The Westminster Arcade opened in 1892, introducing the English-style indoor shopping experience to the United States. But in recent years, like so many other retail locations across the U.S., the mall had fallen on hard times. Despite undergoing a renovation, the space ultimately closed its doors in 2008 due to economic reasons.

But instead of being demolished, developers decided to give the mall a second life. The first floor is still being rented out as commercial space, but the top two floors have been turned into micro apartments. And the 38 units, which range in size from 225 to 300 square feet, are designed to accommodate the growing masses cramming into Rhode Island’s urban areas.

So far, residents are generally young professionals who don’t have much stuff, and so don’t mind living in such cramped quarters. Rent starts at $550 a month, and there’s already a waiting list of those eager to move into the “cozy” spaces.

This seems like an efficient way to kill two birds with one stone.  It’s relatively cost effective to build out the residential units since the structure is already there and just needs to be converted in order to transition to mixed use (I’m assuming that there are some issues with plumbing capacity so it may not work everywhere), meaning that rents can be on the low side for smaller units.  This is where the demand is anyway at a time when most new multi-family projects are expensive luxury product.  In addition, the upper-floor renters provide foot traffic to sustain the ground floor retail that now doesn’t need to rely on department stores.  To take it a step further, the department store spaces can be re-purposed for medical uses – which would fit perfectly if the apartment units were targeted towards seniors – or self storage which would be in high demand for residents of micro-units.  On the surface, it seems like a win-win.  Anyone out there have any thoughts as to why this wouldn’t work?

Economy

Still Holding Up: Despite some hiccups,  the underlying trend shows people are getting jobs, earning more money, and then spending some of those funds, meaning that the economy is still headed in the right direction.

Dirty Secret: There’s one part of central banking that central bankers often don’t like to talk about – their inflation targets are completely arbitrary.

The Old Fashion Way: How to get and stay rich in Europe – inherit money for 700 years.

Residential

Facepalm: The mayor of Palo Alto would prefer to see less job growth rather than more housing in order to “solve” his city’s housing crisis.  I guess when you buy a house for $490k in 1994 and it’s now worth $4mm, it’s difficult to see past the economic self interest in keeping housing scarce.

Rebuttal: I was going to write a rebuttal to the piece that I posted on Tuesday about the non-NIMBY argument for restrictive zoning but ran out of time.  Preston Cooper at Economics 21 did a better job than I would have anyway.  Long story short, it eventually results in the country looking like something moderately resembling The Hunger Games.

Imagine That: The 15% foreign buyer tax in Vancouver that we have posted about previously is already throwing ice water all over the already-cooling housing market there.  See Also: The white hot Seattle market is showing some early signs of cooling a bit. (h/t Scott Cameron)

Priorities: Apartment hunters are increasingly selecting units based on convenience for a very important family member: the dog.  As a self-professed crazy dog person I totally relate to this.

Profiles

Valuable Commodity: The fascinating story of how Instant Ramen Noodles overtook tobacco to become the black market currency of choice in America’s prisons (hint – the food there is really, really bad and getting worse).

Color Coordination: Great Britain decided that it was a good idea to give all of their Olympic athletes identical red suitcases which led to a hysterical epic FAIL upon their return to Heathrow after the closing ceremonies.

LOL: Looks like someone may have leaked the top secret recipe for KFC’s fried chicken.

Chart of the Day

Consider this your daily reminder that houses in CA are incredibly expensive

WTF

Friday Quiz: See if you can figure out whether or not some really arcane sports were ever actually in the Olympics.

Darwin Award Attempt: If you feel the need to jump from rooftop to rooftop to impress your date than you probably shouldn’t be dating.

Fight!  Watch a group of women beat the crap out of each other in a Chicago Walmart.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 26th – Transition

Landmark Links -July 22nd – On the Sidelines

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

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

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

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

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

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

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

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

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

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

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

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

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

Economy

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

Commercial

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

Residential

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

Profiles

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

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

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

Chart of the Day

WTF

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

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

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

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

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links -July 22nd – On the Sidelines