Landmark Links September 27th – Unusual Trend

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Lead Story… “When Orange County catches a cold, the Inland Empire gets the flu.”  If you’ve spent any time in the real estate industry in Southern California, you’ve probably heard some variation of this truism.  The relationship has held up over the years because the two regions are closely linked in terms of geography and economy: OC has white collar jobs and executive housing, whereas the IE traditionally has more blue collar jobs and more plentiful affordable housing.  In a typical cycle, OC home prices rise first, followed by IE prices.  When the cycle turns, the IE pricing and volume typically falls off first when entry level financing disappears and blue-collar employment falls off.  The price movements in the Inland Empire are typically greater in percentage terms (although substantially less in nominal dollar terms) to both the upside and the downside since values there are lower.  This cycle, that historical relationship has broken down, as I detailed in a blog post titled Mind the Gap back in May.  Last week, JBREC’s Rick Palacios JR posted a research piece about the disjointed nature of the recovery across housing markets in the US, summed up neatly in the chart below:

jbrec_housingcycle-marketbymarket_q32016_black3

The first thing that I noted on the chart is that, aside from Houston, every market on here is still on the positive side of the slope.  Larry Roberts at OC Housing News wrote a follow-up post that helps put the above chart in context about how Dodd Frank’s crackdown on so-called affordability products will dampen volatility in future housing cycles.

The second thing that I noticed is more local and that is that JBREC classifies both OC and LA as late Phase 2 to early Phase 3 while the Inland Empire has barely made it out of Phase 1 and is plagued by relatively low levels of housing construction.  Orange County prices exceed the prior cycle peak while Inland Empire prices are still 20% – 30% below.  IMO, there are several reasons for this:

  1. While development impact fees are very high in both Orange County and the Inland Empire, they are far higher as a percentage of new home price in the Inland Empire.  Housing prices crashed in the late aughts but impact fees didn’t, making it very difficult to build homes profitably in further out locations that haven’t experienced the coastal recovery.
  2. The Inland Empire is a less diverse economy than Orange County and is more reliant on real estate development to power it’s economy, which has struggled in light of the low number of housing starts the region is experiencing from what we would typically see at this point of the cycle.
  3. There was a far higher level of distress in the Inland Empire markets during the housing crash which took longer to work off than it did in Orange County.
  4. Perhaps most importantly, the Inland Empire is an affordability-driven market.  Orange County is not.  Riverside and San Bernardino Counties are both highly reliant on FHA financing that allows for much lower down-payments than conventional financing options.  San Bernardino and Riverside Counties are constrained by the FHA limit of $356,500 which is absurd given the massive geography of these two counties – if they were their own state it would be the 11th largest in the US by land mass.  At or below this loan amount a borrower can put up a down-payment as low as 3%. That down-payment goes up substantially for loan amounts above $356,500.  That is a huge problem for builders in the IE since they are essentially sandwiched between rising impact fees / regulatory costs and an FHA price ceiling.  If a builder wants to sell homes priced at or below FHA, he has to find cheap land and it’s still tough to make a profit.  Price above it and his absorption dries up due to a lack of a buyer pool with substantial down payment capacity.  Orange County has an FHA limit of $625,500.  Even still, Orange County just isn’t that beholden to FHA limits because home prices are so high here.  Perhaps the only silver lining is that it’s highly unlikely that the FHA will reduce loan limits for Riverside and San Bernardino Counties next year and increasingly likely that they will raise it a bit.  Still, being constrained by a completely arbitrary government loan cap on a huge and diverse area is hardly a healthy situation, even if you can get some relief when that cap increases.

Perhaps I’m incorrect and the historical relationship will remain in tact when the market eventually turns.  However, it seems unlikely given that the Inland Empire really hasn’t experienced much of a real estate recovery while Orange County has.  It’s a lot more painful to fall off of a ladder than off of a curb.

Economy

Happy Losers: So much of what’s wrong with the US economy is summed up in this paragraph from the Washington Post:

Most of the blame for the struggle of male workers has been attributed to lingering weakness in the economy, particularly in male-dominated industries such as manufacturing. Yet in the new research, economists from Princeton, the University of Rochester and the University of Chicago say that an additional reason many young men are rejecting work is that they have a better alternative: living at home and enjoying video games. The decision may not even be completely conscious, but surveys suggest that young men are happier for it.

Quick to Jump Ship: Why decreasing employee tenure could be a positive sign for the economy.

Paycheck to Paycheck: Small businesses are now surviving but still not thriving. A new JP Morgan study found that the average small business has less than a month of cash operating reserves.

Residential

Movin’ Out: KB Homes is seeing more young people entering the first time home buyer market.  Apparently, there are a few more vacancies in mom’s basement now.

Slim Pickin: Home sales fell in August as inventory fell over 10% from this time last year.

Super Sized Incentives: Builders are constructing super sized homes because they are highly economically incentivized to do so.

 Profiles

Acquisition Target: Suitors are beginning to line up to acquire beleaguered Twitter. Google and Salesforce are the among the latest rumored to be interested as is Disney.  See Also: Why is Salesforce interested in Twitter?  It’s all about the data.

Fashion Statement: Snapchat is entering the hardware business with a line of camera-equipped sunglasses.  This is great news as is it will instantly ID people who deserve to get punched in the face.

Gross: Hampton Creek is a San Francisco startup that wanted to become “the first sustainable-food unicorn” in part by selling a vegan concoction called “Just Mayo.”  The problem was that it apparently tasted like crap and the company was busted buying gallons of their own disgusting concoction from Whole Foods and other stores in an effort to boost it’s sales. (h/t Mike Deermount)

Chart of the Day

REITs get their own sector in major S&P 500 makeover

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WTF

No Regrets: A 27 year old man from Boston attempted to create something he called a “scuba bong” by filling a scuba tank with marijuana smoke. He failed miserably and lost both of his testicles when the tank exploded. The gene pool has been chlorinated once again.

Stupid Is As Stupid Does: As many of you probably know, Apple got rid of headphone jacks on the iPhone 7 leading to angst among many loyal Apple users. A prankster posted a video purporting to show owners of the new phone how to “add” the headphone jack by drilling a hole in the phone. The video went viral and idiots are now breaking their phones by drilling them out. Imagine a person of average intelligence. Now consider that half of the world’s population is dumber than that person.

Florida Has Jumped the Shark: A tweaker on a 5-day methamphetamine binge cut off a certain part of his anatomy and fed it to an alligator because, Florida.  A friend first sent me this story and I thought it was a fake.  It appears to be legit.  When it comes to Florida weirdos, reality is often stranger than fiction. (h/t Andrew Shugart)

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 27th – Unusual Trend

Landmark Links July 8th – The Plunge

fatcrash

First things first: Hayden Charlotte Deermount was born at 11:14am on July 5th weighing 7lbs and 13 oz. Baby Hayden and Mrs Links are both doing great! This is also Hayden’s fist blog post in a way since I wrote almost the entire thing with her sleeping on my lap….

Lead Story… Commercial real estate investors are rushing for the exits in British property funds as post-Brexit uncertainty about the future of London as a global financial center is on the rise. Withdrawals have been halted in several funds and the Pound is now at a 31 year low (and this could just be the beginning for the embattled currency). The situation could get worse before it gets better. The biggest beneficiary will likely be the US commercial real estate market which could see even further cap rate compression (yes, seriously). See Also: RBS and Lloyds have the most exposure to UK commercial real estate and could have issues if it continues to tank. 

Economy

Much Ado About Nothing? Pro Brexit politicians are dropping like flies adding to uncertainty.  Tyler Cowan of Marginal Revolution lays out 7 possible Brexit scenarios. The spoiler here is that there is a very strong argument that Brexit will not ever actually happen. See Also: Brexit fears have set a scenario in motion the could bring the yield on the benchmark 10-year US treasury note plunging to 1%.

Sea Change: Great infographic from the US Census Bureau shows just how much the “typical” 30-year old has changed from 1975 to 2015.  The difference is stark to say the least.

Commercial

Imagine That: Plateauing rents in the luxury apartment space have some developers putting new developments on hold as they acknowledge that trees can’t grow to the sky. Imagine that: housing cost inflation slows when you add more units.  Shocking. See Also: LA rents were flat from May to June according to Apartment List.

Residential

Not From The Onion: A Seattle house deemed “too dangerous to enter” sold for $427,000 after an insane bidding war with 41 offers after it listed for $200k. Perhaps the craziest part of this is that $427k for a tear down in a good neighborhood in coastal California sounds like a steal. Consider it today’s reminder that affordability is relative in local markets.

Not A Lot Remaining: Lot supply is still incredibly tight in the western US and at its lowest level since 1997.

Refi Boom: Plunging interest rates sent refinances soaring to an 18-month high even though mortgage rate spreads over the 10-year treasury are still high.

Profiles

LOL: Snapchat’s army of loyal teenage users aren’t happy that their parents are starting to use the app.

Out of Touch: Microsoft’s attempts at intern outreach are a perfect example of what happens when your grandparents try to be “hip.”
Chart of the Day


WTF

Brawl-Mart: 30 person brawl in an upstate NY Walmart that included baseball bats and a 17 year old throwing a can of food at a 52 year olds head resulted in several arrests. Nothing about this story is remotely shocking or even newsworthy except that it didn’t happen on Black Friday.

Can You Move that Plane So I Can Get a Better Shot? Idiots are increasingly putting pilots and firefighters at risk by flying drones over wildfires in an effort to get “cool” Instagram photos.  One drone almost collided with a plane late last month in Utah leading to the grounding of all firefighting planes during a blaze.

Ok Then: The brother of deceased former Colombian drug lord Pablo Escobar is asking Nexflix for a portion of the profits from the next season of Narcos, a show based on Escobar’s life. Doubt it will work but I suppose that the logic here is that If you don’t ask, you don’t get.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 8th – The Plunge

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
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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