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According to Richter “It’s chilling: for condos under $1.5 million, the number of withdrawn or expired listings soared 94%, and for condos above $1.5 million 128%.”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


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.


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.


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


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



Source: The Reformed Broker


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.

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Landmark Links April 15th – Looming

Landmark Links April 8th – Hide and Seek


Lead Story… A major leak of over 11 million documents from a sketchy Panamanian law firm that specializes in helping people launder money through offshore shell corporations is casting light on one of the sources of demand for high end real estate in Miami. The list of clients included politicians, drug lords, celebrities, billionaires and some very close associates of one Vladimir Putin. NSA whistle blower Edward Snowdon called it the “biggest leak in the history of data journalism.”  We posted a piece a couple of weeks ago about how the downfall of Swiss bank secrecy (ironically pushed by the US) was turning US real estate into a haven for money laundering due to a lack of oversight when it comes to all-cash transactions.  The Mossack Fonseca law firm helped clients set up offshore shell companies in countries with lax oversight laws which then become vehicles to purchase real estate in NY or Miami where the true owner is obscured.  The US Treasury Department is getting concerned and recently started cracking down on shell companies purchasing high priced units in Manhattan and Miami.  Why is this concerning?  First off, it appears that a lot of this is dirty money: political graft, drug money, cash from arms sales, illegal business, etc. Second, it only serves to drive up costs for would-be homeowners by taking units off the market in cities where inventory is already tight.  Just in case you were wondering, this is not just a Miami issue.  It’s happening in Irvine (mostly Chinese money) and New York (Russian money) as OC Housing News astutely pointed out as well as pretty much every high priced coastal city.  Consider this yet another factor that is hurting affordability in expensive cities.



Broken Clocks: Talking heads and pundits are constantly calling for a recession for one reason or another. However, as Bloomberg’s Barry Ritholtz notes, the conditions for one to occur simply aren’t present at the current time:

We can create a basic checklist to tell when an economic expansion cycle has begun to have run its full course:

● Full employment (check)
● Wage gains (hardly present)
● Inflation (1.7 percent is far below recession levels)
● And last, an aggressive Federal Reserve tightening that takes interest rates too high. We are now at a mere 0.25 percent, perhaps going to 0.50 percent — hardly soul-crushing rates.
Thus, while we can easily imagine the necessary conditions for the beginnings of a recession, they are for the most part simply not present.

The Big Squeeze: A new type of student debt puts the onus of repayment 100% on parents rather than students.


Conflicting Messages: REITs have become net sellers (h/t Scott Barnard) of assets while foreign investors and private equity are taking up the buying slack.  CBRE is saying that fundamentals are strong and they believe that the market is on solid footing (h/t Eric Snell).  However, there are a couple of significant developments to keep an eye on.  Historically, when private equity investors and foreign investors are buying while REITs are net sellers it is a contrary indicator that the market is near a top.  In addition, REIT yields are now below those of Baa bonds, (even when train-wreck energy and commodity company corporate debt is excluded)  which they historically trade at a premium to.  Again, this is not exactly a positive indicator historically.  A bull might point to the fact that the corporate bond market has been chaotic of late and that foreign investors are buying for different reasons this time around, primarily as a tax shelter in a stable country.  However, there is some mounting evidence that we might be in for some turbulence.


Struggling: Home builder stocks are taking it on the chin despite an economic environment that, at least on the surface should be favorable.

Don’t Call it a Comeback: Homes in the Rust Belt have largely been a dead asset in recent years as population has fallen and economic growth has been sluggish, keeping housing prices low.  However, shortages in certain key Mid-West markets could foreshadow an uptick in prices.

The Breaking Point: With venture capital investment waning and tech firms announcing layoffs, some tech workers in the Bay Area in particular and San Francisco in general are leaving town to get away from $4,500 per month rents and home prices well over $1MM. Thus far, Portland, San Francisco, Austin and even LA appear to be the beneficiaries as workers realize that there isn’t any point to paying that much if you don’t have the stock options to go along with it.


The Juggernaut: As we noted on Tuesday, Tesla pre-sold sold over 276,000 new Model ‘s for 2017 delivery (update: they are now over 325,000). As a point of reference for how huge this is, Audi only sells about 180k new cars a year in the US across all model lines. Despite some concern about Tesla’s capacity to manufacturer that many cars in such a tight time frame and then provide service, this is a game changer. So far, sales of electric cars have been a niche product measured in thousands of sales a year rather than hundreds of thousands. Tesla has now proven that the electric car can and will have mass appeal in the United States. In the meantime, they are using their cars as a platform to develop battery technology that will be used as a greener power plant for homes and businesses in the future. There is one other aspect to Tesla that I find fascinating: it’s an American company building a luxury car that can compete with any luxury brand in the world. When’s the last time that happened? Old school auto makers like GM, Ford, etc. have needed to appeal to a buyers patriotism to sell cars to American consumers. Why? Because the inferior products that they were building couldn’t compete against superior products from Japan and Germany on their own. Tesla not the only can compete, it is winning. On top of that, it doesn’t need a gimmicky patriotic marketing campaign to pull it off.

A Sucker Born Every Minute: Frank Bruni of the NY Times wrote a great satirical piece as an April Fools Day joke last week claiming that Stanford dropped it’s already record-low admission rate to 0% by not admitting any students to it’s class of 2020.  Right on cue, a lot of people on the internet fell for the joke because a lot of people on the internet are idiots. (h/t Tom Reimers – a Stanford alum)

Frivolous: A group of Patriots fans is suing the NFL for taking away their teams’ 2016 1st round draft pick as a penalty for Deflate Gate.  This is the end result when sports fans don’t have a life outside of their team.  I wish that they posted a picture of the fans who are suing with the article.  I’m guessing that they look like the Patriots equivalent of this.

Chart of the Day


Revenge Stinks: A Swedish man was arrested after a woman called the police on him for “revenge farting” in her apartment and leaving a disgusting smell after she declined to sleep with him.

Seems Reasonable: A Stockton, CA man is in police custody after he attacked a man with a knife on his front yard.  Why, you ask?  The man was pooping on his lawn.

Wimps: A British gym recently put up a billboard with a picture of an alien encouraging people together in shape because, aliens will go after fat people first when they land on earth. Right on cue, easily offended presumably chubby folks got offended and called for the sign to come down because it hurt their feelings. That sound that you hear is the worlds smallest violin in the world. Maybe if they spent the time wasted on complaining working out at the gym, they wouldn’t  have an issue. Just sayin’.

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

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Landmark Links April 8th – Hide and Seek