Landmark Links September 13th – Falling Behind

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Lead Story…. It’s incredible how quickly things change.  Just a few short years ago, conventional wisdom was that it would take an eternity to work through all of the excess inventory created by the housing bust and foreclosure crisis.  However, in reality banks were incredibly adept at managing their REO inventory, effectively preventing the massive  glut that so many expected.  In the meantime, very little in the way of new housing was built as financing dried up and builders pulled back in fear of competing with the looming bank REO inventory liquidation that never really materialized.  Fast forward to 2016 and the stark reality of a new sort of housing crisis: there simply aren’t enough residential units being built to satisfy household creation.  The pivot has been as pronounced as it has been swift and it doesn’t look like things are about to change anytime soon.  The Federal Government’s bi-annual report on housing inventory provides a rather bleak outlook, especially for entry level buyers and renters.  From ULI (emphasis mine):

Newly released data and analysis from several sources illustrate a major obstacle to a fully healthy housing market in the United States: the nation is not building nearly enough new residential units. The serious shortage of new supply is bottling up housing demand and pushing home prices and apartment rents well beyond what a growing number of households can afford.

A biennial report from the federal government titled The Components of Inventory Change found that the nation’s housing stock increased by a net 270,000 units between 2011 and 2013—the slowest growth measured by the survey over the past decade, which included the worst years of the Great Recession. The report concluded: “Despite the gradually improving economy, there were large declines in both new construction and net additions to the housing stock during the 2011–2013 period compared to the 2007–2009 period.”

A recent Freddie Mac market commentary noted that the total number of housing starts (single family plus multifamily) in 2015 was 30 percent below the historical average between 1970 and 2007. The National Association of Realtors estimates that the country’s supply of for-sale and rental units combined is 3 million units short of current demand.

The most substantial issue here isn’t even the massive shortfall in raw numbers, it’s the distribution of where what limited construction that we do have is occurring: at the high end.  Not only are we not producing enough units across the board but nearly nothing is being produced at the entry level in either for-sale or for-rent properties where units are most in need.  Again, from ULI (emphasis mine):

Not surprisingly, millions of Americans cannot find an affordable home to buy or an apartment to rent. A survey conducted by the National Association of Home Builders (NAHB) found that 59 percent of respondents said they could and would spend no more than $249,000 on a new home, but only 35 percent of new homes started in 2015 were at or below that limit. The online real estate service Trulia recently reported that the number of starter and trade-up homes available in the 100 largest U.S. metropolitan areas has plunged by more than 40 percent since 2012.

Yes, apartment development has experienced a historic boom: multifamily construction volume nearly doubled in 2012 compared with that seen in 2010, and increased another one-third from 2012 to 2014, according to a new study by the Research Institute for Housing America. New multifamily completions topped 310,000 units last year, the most in at least 25 years, according to the National Multifamily Housing Council. And 1 million more apartments could come on line in the United States in the next three years, according to projections by the market research firm Axiometrics.

But most new apartments and single-family homes are aimed at the top of the market. The median asking rent for a new apartment today exceeds $1,300, which is unaffordable for roughly half the renter households in the United States (based on a rent standard of affordability of 30 percent of income). The average price of new homes for sale in 2015 was $351,000—a 40 percent increase from 2009.

What is driving the trend towards builders constructing a smaller number of higher priced units versus a larger number of lower priced ones?  A few factors to consider:

  1. Post financial crisis, there wasn’t much of any mortgage financing available at the lower end of the market.  It doesn’t make sense to build homes for people who can’t obtain financing so builders focused on more expensive price points where buyers were willing and able to obtain financing or buy with cash.  Combine this with the higher margins often achieved on luxury units and you have a recipe for builders gravitating towards more expensive units.  Availability of financing is improving but it has left certain markets 100% beholden to FHA limits.
  2. Regulatory burden is soaring.  A study that the NAHB released earlier this year found that regulatory fees for new construction jumped nearly 30% (80k per home) over the past 5 years.  It’s incredibly difficult to make any profit on lower priced product in that type of environment meaning that builders need more expensive product to absorb the regulatory burden.
  3. People are staying put longer in their entry level homes since less move up houses are being constructed.  The result is less infill inventory which drives up prices.  Yesterday’s entry level home becomes too expensive to be classified as entry level if supply does not materialize to meet demand.
  4. While the development financing market has shown some marginal signs of improvement, it still pretty much sucks for all but the most credit worthy of developers in the best locations.
  5. Land owners aren’t selling, at least not when it comes to their best lots.  One would think that rising home prices would make this a great time to be a land seller.  However, that isn’t currently the case as Bloomberg detailed last week.  When asked for investment advice, Mark Twain once said: “Buy land, they’re not making it anymore.”  Right now, owners of well-located property are taking a similar stance in expectation (or, in some cases hope) of higher prices: don’t sell your well located land because you can’t sell it a second time and it’s likely to be more valuable in the near future.  In other words, there is substantial gap between what builders are willing to pay and what landowners are willing to sell for, particularly in the best markets.  Landowners will sell today but only if builders are willing to pay them for possible future inflation that may or may not happen.  To complicate matters further, a lot of landowners bought during a brief run-up in 2013 thinking that the market was about to take off.  It didn’t and now they are holding out in hope of larger profits down the road.

At some point, the laws of economics pretty much dictate that this has to change.  We aren’t going to stop creating households and people can’t continue to pay an ever-larger percentage of their incomes towards housing costs without the result being major adverse economic consequences.  In reality, demographics are actually improving for household creation through at least 2024, meaning that the housing shortage will get worse as the deficit continues to widen unless we ramp up production in short order.  Unfortunately, as you can see it’s not a problem that’s easily solved.

Economy

Christmas is Cancelled: The bankruptcy of South Korea’s largest shipper has a lot of cargo stranded at sea just as retailers are stocking up for the holidays. See Also: The shipping industry has a major problem – there are simply far too many ships for current demand.

Tougher Road Ahead: Economists are predicting a tougher road ahead for the labor market. But See: Short term optimism as wages expected to rise amidst the scramble for seasonal holiday workers.

Commercial

Yogi Bear, Architect: Brokers are having a difficult time selling a seven story office building in Columbus, Ohio designed to exactly resemble a picnic basket. 

Back Up the Truck: investors are bidding up REIT shares prior to real estate getting its own sector in the S&P500.

Residential

Good Riddance: Gaudy Mediterranean style McMansions that were all the rage in the 1990s have fallen out of favor and are not rising as quickly in value as other types of houses.

Sound Familiar? Norway’s economy is historically based on oil, which has had a rough go of it lately.  Norwegian interest rates have plunged along with the price of oil, leading to soaring housing prices and housing sector investment.  This sounds eerily similar to the post-tech bust era in the US to me.

Don’t Call it a Comeback: Cities in California’s Central Valley that were largely left for dead in the wake of the housing crash are making a comeback.

Profiles

Those Who Fail to Learn From the 90’s Are Doomed to Repeat Them: People are buying minivans again and trying desperately to convince themselves that the soccer mom mobiles are somehow “cool.” Newsflash: minivans will NEVER be cool

Viva Socialism: Venezuelians are turning to black magic and animal sacrifices to heal their sick due to a lack of basic medical services.

You Should Already Know This: Cheese triggers the same parts of the brain as hard drugs.

Chart of the Day

Super Size Me, urban home edition.

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WTF

FAIL: There are still 4 months left in 2016.  However, I think that we can safely call this year’s Darwin Award for a Florida man (of course) who found an old bulletproof vest in his garage.  He wanted to know if it still worked so he put the vest on and had his cousin shoot him.  It didn’t work and now he’s dead and the cousin is in jail.

Cultural Literacy 101: Apple’s iPhone 7 launch slogan: “This is Seven” translates to something sort of vulgar in Cantonese.

When You Gotta Go: How NFL players hide it when they have to pee during a game. Spoiler: there’s often more going on in the huddle than you think.

Sort of Impressive: A man was arrested for stealing $3,000….. in pennies.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 13th – Falling Behind

Landmark Links July 1st – East Coast Edition

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

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

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

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

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

Industrial boom

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

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

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

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

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

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

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

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

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

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

Economy

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

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

Commercial

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

Residential

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

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

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

Profiles

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

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

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

Chart of the Day.

Supply and Demand for Housing

Supply = Blue, Demand = Gold

Difference Between Housing Supply and Demand

WTF

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

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

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

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 1st – East Coast Edition