Landmark Links June 24th – Follow the Money

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Lead Story…. Urban Dictionary (my go to source for all things slang) defines a tiger mom as:

“A mother who is overly strict with her child in order to foster an academically competitive spirit.  This form of upbringing is intended to direct a child towards financially successful careers at the potential risk of feeling emotionally unfulfilled and/or socially inept.”

Just my opinion, but it sounds like a rather terrible way to grow up.  I’ve always assumed that children who were raised in such an environment would be the ones most likely to end up driving the porcelain bus in a dorm bathroom once they go to college and finally obtained their first taste of freedom from overbearing parents.  However, there is a relatively new trend where tiger moms, typically from China are following their children to college to ensure that their offspring’s hard work doesn’t get flushed down the drain in a torrent of booze and late night parties. From The Economist (h/t Jeff Condon):

EVERYONE knows that Chinese students are flooding American campuses. Less widely known is that their mothers are coming, too. Last year 394,669 pupils from China were studying at American universities, secondary and primary schools, the largest contingent of all international students. Increasingly their parents are moving in with them, buying local properties or investing at least $500,000 in businesses to try to qualify for a green card.

The tiger mums usually come to America alone, leaving their husbands behind. “When I wasn’t here, my son would survive on instant noodles and energy drinks for several days without eating fruit or vegetables,” says Wenxue Hu, mother of a masters student studying applied mathematics at the University of Pennsylvania. She gave up her job as a corporate finance director in Shenzhen to cook for him in Philadelphia. Through a local church she met other Chinese tiger mums, most of whom entered with a tourist visa that allows them to stay up to six months each time. New Haven, Connecticut now boasts a “Yale Chinese grandparents’ village”, with 15 residents. The old folk live under the same roof as their children, mostly PhD and post-doctoral students at Yale who are too busy to take care of their own offspring.

On one hand, I suppose this keeps kids more focused on school helps to make good on the massive investment the college represents.  On the other, college is supposed to be the time when young people strike out on their own, make mistakes and learn from them – rather than continuing to live under the thumb of their mothers.  As you can probably imagine, this is having a massive impact on housing markets in markets around top universities.  Again, from The Economist (highlights mine):

Last year China became the largest source of foreign property investment in America, pouring in $28.6 billion. Roughly 70% of inquiries from the Chinese indicated that education was the chief motive, says Matthew Moore, president of the American division of http://www.juwai.com, a Chinese international-property website. In Chicago estate agents anticipate more Chinese parents buying expensive condominiums. In Irvine, California, about 70-80% of buyers of new-builds are Chinese parents whose children attend, or plan to attend, nearby colleges, says Peggy Fong Chen, the CEO of ReMax Omega Irvine. Other college towns such as Los Angeles, Seattle, Boston and Dallas, see a similar trend.

The Irvine statistic surprised me a bit.  Irvine has long been a hot spot for Chinese buyers and much of that demand has been driven by it’s phenomenal schools.  However, I’d always assumed that the demand was driven more by it’s public schools than surrounding colleges such as UC Irvine.  Then again, UCI’s student body is 46.2% Asian and 11.7% international with a student body of around 24,500 undergrads and 5,500 graduates so it’s not hard to see how this could drive demand for housing if there are 3,500 foreign students at UCI and even a small percentage have parents who move with them and buy a home. According to The Economist, buying a house can make good financial sense, as well as  cultural sense for a Chinese investor/parent:

For the rising middle class in China, parking their wealth overseas also makes good business sense. The near-bubble in housing prices at home and the depreciation of the yuan have made them nervous, so diversification becomes pressing. As property prices shoot up in some college towns, more Chinese buyers are drawn in, says Susan Wachter, a real-estate professor at the Wharton School of the University of Pennsylvania. Ownership, rather than renting, becomes more attractive, because their children can rent extra bedrooms to classmates to cover utility and tax bills, while also being able to benefit from future price rises.  Some tiger mums also try to help their children get married by making the down-payment or even meeting the full cost. In Chinese culture, owning a property gives a sense of security and helps to attract a spouse.

Coming out of the Great Recession, there has been no better housing bet than going where the Chinese investors want to be.  If their buying demand is really being dictated by higher education, I would imagine that this is a trend that could continue for quite a while, especially given the ever-rising cost of college at top schools and the growing number of newly-wealthy people in China that can afford it.

Economy

Say What? Every now and then, Jose Canseco emerges from his steroid-induced coma, pulls a needle out of his butt and goes on Twitter to impart his wisdom of all things finance – which I try to cover here whenever possible.  This week our roid-addled friend opined on the Brexit vote and the it was everything that you would expect financial advice from Jose Canseco to be. Update: UK citizens declined Jose’s advice and voted to leave the EU.  Market chaos this morning and Jose declined offers to go on air with both Bloomberg and Yahoo finance because they wouldn’t pay him (I’m not making this up. You NEED to follow him on Twitter). 

The Whole Story: We often hear about how the top 1% of Americans is doing dramatically better than everyone else.  While that is true it misses a larger point: the upper middle class (defined as any household earning $100,000 to $350,000 for a family of three) is growing rapidly as well.  According to a new study from the Urban Institute:

“The size of the upper middle class grew from 12.9 percent of the population in 1979 to 29.4 percent in 2014. In terms of shares of total income, the middle class controlled a bit more than 46 percent of all incomes in 1979, while the upper middle class and rich controlled 30 percent. By 2014, the rich and upper middle class controlled 63 percent of all incomes, while the middle class share had shrunk to 26 percent.”

This goes a long way towards explaining why the luxury segment of the housing market has done so much better than lower segments in recent years.  If you don’t have time to read the full report, the Wall Street Journal put together an excellent summary.

70 is the New 65: According to PIMCO, demographics support rates staying lower for longer.  See Also: The yield curve is nearing its cycle low.

Commercial

Sea Change: Someday we are going to talk about department stores the way that our parents talk about switch board operators.  They are being eaten alive by internet retailers.  Great news for class-A distribution warehouse space.  Not so great news for retail.  I could go on but this chart from Bloomberg tells the story better than I can:

Residential

Non-Starter: When is a starter home not a starter home?  When no one can afford it.  Yes, inventory is extremely low nationwide but in some markets buyers are dropping at a quicker pace than inventory is, leading to softening prices.  From Trulia:

One might think that falling starter home inventory over the past year would cause starter home prices to rise, and for the most part, that’s what has happened in most markets. In places like Portland, Dallas, and Colorado Springs, Colo., large decreases in starter home inventory has led to double-digit increases in starter home prices. However, price movements aren’t just determined by changes in supply (inventory) – they’re also affected by the number of home buyers actively bidding on homes. In fact, in 20 of the 74 markets where starter inventory has dropped, demand has fallen at faster pace and so prices have fallen.

For example, starter home inventory has fallen by about 20% of the past year in both Columbia, S.C., and Charleston, S.C., but starter home prices have actually fallen in these markets by 0.8% and 5%, respectively. And these two cities aren’t outliers – 18 others large metros that have experienced a drop in inventory have also seen price drops, including New York, Kansas City, and Montgomery County-Bucks County-Chester County, Pa.

Don’t get too excited though if you’re a prospective homebuyer.  Trulia found that affordability is still getting worse in many of the hottest markets:

Starter homes continue to experience the largest drops in inventory over the past year, followed closely by trade-up homes. While starter home buyers in California have seen some of the largest decreases in affordability, those in central Florida are non-California metros in the West are starting to feel their pain. But a fall in inventory for trade-up and premium homes is occurring at a time when demand for those homes is rising, so those buyers are feeling a tighter pinch than starter home buyers in markets where demand has fallen enough to keep prices from rising.

 

Profiles

Unintended Consequences: Rule 34 states that: “If it exists, there is porn of it – no exceptions.”  As skeevy and disturbing as that sounds, it’s been scientifically proven to be pretty much true.  There is a corollary to Rule 34 that if you provide free wifi, it will be used to watch porn.  This should be obvious by 2016 unless you are incredibly naive, which the City of NY apparently is.  The city announced an initiative earlier this year to convert former payphones in Times Square to wifi-enabled screens to provide free internet to citizens.  But well-meaning project went horribly wrong when homeless men figured out that they could use the ill-conceived devices to stream porn in public.  For those of you unaware of the history of Times Square, it used to be a haven for peep shows and seedy adult video stores until it was cleaned up back in the 90s, thanks mainly to then-mayor Rudy Giuliani.  From the NY Post (for whom this story was tailor-made):

“I used to come here in the ’70s, and I remember thinking Times Square was as skeezy as you could get, but I was wrong,” said former New Yorker Richard Herzberg, 61, who now lives in Dallas, Texas.

“This is as skeezy as Times Square could get. I mean, in the old days there was plenty of porn, but you could only see it behind closed doors. So at least there was that level of modesty.”

To their credit the city responded by installing filters (which will likely be compromised any day now).  As you can imagine the homeless guys weren’t too happy about losing access to their free porn:

“I was watching porn on one of them things on, like, Saturday,” said a homeless man who identified himself as Hakeem, 44.

“Then on, like, Monday or Tuesday, all of a sudden I couldn’t,” he added.

“Once word got around, it stopped. It sucks, man. It was great.”

Looks like the NYC homeless population will have to find their porn elsewhere for the time being.

Mad Money, Questionable Ethics: Multiple studies have shown that Jim Cramer’s stock picks basically suck and don’t come close to beating the S&P – while taking substantially more risk, yet he continues to use his CNBC show as an infomercial to promote his $59.95/month stock picking service.

Of Buggy Whips and Floppy Disks: Apple is indicating that headphone jacks are on the way out.

Chart of the Day

Growth of Upper Middle Class

 

WTF

I Wonder What He Had For Lunch: A Swedish soccer player was ejected from a game recently for ripping a fart.  I know that soccer players are notorious for being drama queens but this feud between the ref and player over whether it was intentional or not is next level (h/t Tom Farrell):

The referee explained himself. “I perceived it as deliberate provocation,” Kako said, adding that he’d once given a player a yellow for peeing by the field as well. “He did it on purpose and it was inappropriate. Therefore, he received a yellow card.”

Ljungkvist then re-litigated the matter to Aftonbladet, which definitely is a newspaper. “To provoke anyone with a fart is not particularly smart or normal,” he said. “It’s nonsense – I just broke wind and got a red card. I spoke to the referee afterwards, I was annoyed, but there were no bad words. I just said he was a buffoon.”

Follow Friday: Every now and then I stumble across a must-follow Instagram or Twitter account.  City Subway Creatures (@subwaycreatures), an account that posts pictures of the odd folks who ride the NYC subway system is one such account.  Follow them today.  You won’t regret it unless you don’t have a sense of humor or are easily offended – then don’t both.

Indecent Exposure: Meet the inmate who stripped naked and ran into a court room in the middle of a trial to yell: “Court is back in session“!  He is now facing additional charges.

Special Delivery: Meet the Wyoming man who was arrested for going door-to-door selling cocaine and meth. When asked for comment, he replied “it wasn’t going to sell itself.”

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links June 24th – Follow the Money

Landmark Links April 15th – Looming

Golden Gate

Lead Story…  Another day, another story about one of America’s astronomically expensive and typically chronically under-supplied markets getting hit with a massive wave of high end condos (and high end apartments).  Over the past few weeks, we focused on New York, Miami and even Hong Kong.  Today it’s the patron saint of expensive US housing markets, San Francisco.  Even casual follower of the residential real estate market are well aware of the lack of supply and nose-bleed prices that people pay to live in SF for a whole bunch of reasons.  However, as Wolf Richter notes in Business Insider this week, things appear to be changing.  According the the SF Planning department, there are 44,700 units in the pipeline from “building permit filed” to “under construction.”  That doesn’t include the 17,900 units approved but not yet permitted.  Nor does it include the 23,980 units that are approved in the Park Merced, Candlestick and Treasure projects that are approved but could take well over 10 years to build out.  That’s a ton of inventory coming online in a city with only 382,000 units in it’s existing housing stock.  The impact is already being felt in the condo market:

In the first quarter of 2016, various market segments in the city began to trend in significantly different directions. Houses, especially those below $2 million, are still often selling in a frenzy of bidding: Recent reports of houses selling with 5, 10 or more competing offers are not uncommon, especially in neighborhoods considered more affordable (by San Francisco standards). Demand remains very high, supply remains extremely low, and new house construction is virtually nil.

As of early April, the number of condo listings actively for sale in MLS is up over 40% year over year, and that does not include most of the new-construction condo units hitting the market (not listed in MLS).

These condos often go into contract during the construction phase, long before sales actually close, and access to information during that period is very limited. There can be no doubt that they comprise serious competition to resale condos in the areas they’re being built.

– Patrick Carlisle, Chief Market Analyst at Paragon

According to Richter “It’s chilling: for condos under $1.5 million, the number of withdrawn or expired listings soared 94%, and for condos above $1.5 million 128%.”

First off, this had to happen at some point but it should have been more incremental and should have happened earlier.  San Francisco’s market has been notoriously tight for years and the entitlement process there is reminiscent of running the gauntlet.  If entitlements weren’t so difficult to come by, many of these units could have been delivered years earlier when demand began to ramp up but construction didn’t.  Instead, many developers started at roughly the same while prices of SF condos ran up 70% in the interim, meaning that we now have a tidal wave of units starting to get delivered just as the VC market is slowing and tech firms are beginning to lay people off.  Reality is that the local market desperately needed more units but that doesn’t make it any less painful for the developers holding the bag or the home owners who bought in the late stages of the run-up.  Either way, we are certainly going to test the true depth of demand for high priced housing in the next few years.

Second, this is what happens when everyone builds the same thing.  The only thing getting approved in SF are high density, high end condos and apartments.  That’s where all of the units are so that is where the glut is going to occur.  Want to know why the single family home market is holding up much better?  Simple.  Almost no SFD’s are getting built so supply hasn’t increased.

Third, several fund investors the we respect a lot are telling us that they are taking a wait and see approach on current investment opportunities in anticipation that there will be large distressed opportunities in the NY and Miami high rise condo markets in the coming quarters that will result in a buying opportunity.  Their investment thesis is that many of these high end condos will end up going back to the lenders since foreign investors have begun to retrench from the market and there isn’t enough domestic demand to buy up the units at their high pro-forma prices.  I guess we can now add San Francisco to that list.

San Francisco housing

Economy

Black Gold?  According to the talking heads, it was bad for the economy when oil prices were plunging so is it now good that they have rebounded to $40/barrel?  See Also: Why wasn’t there any economic boost from low oil prices?

It’s All Relative: Top Venture Capitalist Peter Thiel says that pretty much everything is overvalued but some things are more overvalued than others.

Get Real: Real (inflation adjusted) 10-year treasury yields have gone negative for the first time since 2012.

Commercial

Just Speculating: Growth in the San Francisco office market has been a safe bet for several years as VC money poured into new investments and tech companies gobbled up any available space in order to account for aggressive growth projections in a supply constrained market.  Times are changing though and the assumption that the good times would continue has put some speculative office investments at risk now that the VC spigot is slowing while several landlords are trying to unload buildings for over $1,000/sf.  At the same time, available sublease space from downsizing tech companies, an indicator of a slowdown, is creeping up.  From the Wall Street Journal earlier this week:

“We’ve started seeing the cautionary winds start blowing,” said Steve Barker, executive vice president at Savills Studley, which advises companies on their real estate. “In the last two to four months, you’ve really seen the impact of the strained capital environment hitting the real-estate market.”

A cautionary tale exists with online game maker Zynga. In 2012, the then-rapidly growing company bought its 680,000-square-foot building at 650 Townsend St. It saw plenty of space to grow, and at one point occupied 480,000 square feet.

Soon after, its growth stalled, and stock price plunged, layoffs followed, and now the company is trying to sell the building.

Subleasing, though, carries its own risks.

Health-care startup Practice Fusion, which leased former Zynga space in the same building, underwent layoffs in February. Now Practice Fusion, too, has put its 60,000-square-foot space up for sublease.

From what we’ve been hearing from local market sources, this is much more of an issue in downtown San Francisco which is heavily dominated by startups that aren’t profitable and are reliant on VC money fund operations.  It isn’t as much of an issue in Silicon Valley where huge and incredibly profitable mature companies like Apple and Google and the myriad of companies in their ecosystem have come to dominant the local commercial real estate markets.  Why? Because these companies don’t rely on VC money and aren’t impacted by it’s availability.  Still, it bears watching to see if the issues starting to appear in SF spread to other Bay Area markets.

Residential

Stay in School: New research suggests that student debt is a substantial impediment to college dropouts buying a home a home but only has a marginal impact on those with a Bachelor’s degree or higher.  Moral of the story: if you borrow money to go to college, you had better graduate.

Signs of Strength: Mortgage rates have dropped to an annual low and apps for mortgage refinances have been surging  for several weeks.  However, purchase money mortgage applications had not moved much recently.  That all changed last week when purchase apps increased to the second highest level since May 2010.

Graphic of the Day: I found this 3-D image from The Visual Capitalist fascinating:

The Salary Needed to Buy a Home in 27 Different U.S. Cities

Profiles

Long Shot: Leicester City entered the English Premier League season as a 5,000 – 1 underdog to win the league championship.  To put some context to that, you can place a bet with the same odds that Elvis is still alive.  Furthermore, the Cleveland Browns are only 200-1 to win next years Super Bowl.  You read that correctly, they were 25x LESS likely to win a championship than the Cleveland Browns. The key word there is “were.”  With 4 games left in the season, the perennial doormat which was nearly relegated last season is in 1st place, 7 points ahead of the second place Tottenham.  Hang in there Cleveland fans.  There is hope.

The New Buggy Whips? The i-Phone is doing to cameras what the automobile did to horse carriagesBut See: The Apple Watch has not been the FitBit killer that may thought it would be.

Really Bad Idea:  Stalkers rejoiced when new app allows anyone to spy on Tinder users and track them to their last location, an invasion of privacy that would make Zuckerberg blush. See Also: Body parts from a missing woman were found in a dumpster outside the home of a man she went on an online date with.

Chart of the Day

LOL

crude

Source: The Reformed Broker

WTF

The Saddest Record: A Brooklyn man set a record by watching TV for 94 hours straight. That’s just under 4 days for those of you who don’t like math. This is one of those situations where there are no winners, only losers.

They Flying Farm – It’s gotten ridiculously easy (and cheap) to bring a comfort animal on a flight.  All you need is a doctors note and a $65 certificate for your pet. This started in 2012 when the US Department of Transportation amended a statute that was originally intended to cover guide dogs.  Since then, service animal registrations have risen from 2,400 to over 24,000.  It’s not just dogs and cats either. People are bringing all sorts of barnyard and exotic animals aboard especially in LA and NY, leading some to wonder how much is too much:

The zaniest anecdotes (like the “support pig” ejected from a D.C.-bound plane after it relieved itself in the aisle or the “therapy turkey” whisked via wheelchair onto a recent Delta flight) tend to go viral. But the habit has become particularly commonplace on the LAX-JFK route favored by fussy celebrities and industry execs.

Having to call home to say “honey, my flight is going to be late because a pig crapped in the aisle” was something that was only previously an issue in 3rd world outposts with names like The People’s Democratic Socialist Republic of __.  Now we have barnyard animals on planes in the US ostensibly to keep someone from getting nervous on a plane. I think it’s safe to say that this has gone a bit too far.

In Soviet Russia: Saying that Russia is a bit of a freak show is a bit like saying that water is wet.  It’s a factually accurate but unnecessary statement given that anyone over the age of four already knows it to be true.  Example A: a Russian entrepreneur recently opened a cafe in East Siberia that’s a tribute to Vladimir Putin.  It’s complete with Putin shrines and the toilet paper in the restrooms has pictures of Barack Obama and other western leaders on it. (h/t Steve Sims)

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links April 15th – Looming