Landmark Links July 19th – One Size Fits All?

one-size-fits-all-rubber-duck

Lead Story…. Nobel Laureate Robert Shiller wrote a piece in the NY Times this weekend titled: Why Land and Homes Actually Tend to Be Disappointing Investments that caught my eye.  In the article, Professor Shiller discusses both farmland and residential land and makes a case they are both subpar investments over time (highlights are mine):

Over the century from 1915 to 2015, though, the real value of American farmland (deflated by the Consumer Price Index) increased only 3.1 times, according to the Department of Agriculture. That comes to an average increase of only 1.1 percent a year — and with a growing population, that’s barely enough to keep per capita real land value unchanged.

According to my own data (relying on the S&P/Case-Shiller U.S. National Home Price Index, which I helped create), real home prices rose even more slowly over the same period — a total increase of 1.8 times, which comes to an average of only 0.6 percent a year.What all that amounts to is that neither farmland nor housing has been a great place to invest money over the long term.

To put this in perspective, note that the real gross domestic product in the United States grew 15.5 times — or, on average, 3.2 percent a year — from 1929, the year official G.D.P. numbers began to be kept, to 2015. That’s a much higher growth rate than for real estate. But why?  For home prices, a good part of the answer comes from supply and demand. As prices rise, companies build more houses and the supply floods the market, keeping prices down.  

The supply response to increasing demand may help explain why real home prices nationwide fell 35 percent from 2006 to 2012 (and even more in some cities). Investment in residential structures in the United States was at near-record levels as a percentage of G.D.P. just before the price declines. Prices have been rebounding since then — and so has construction of new houses.

 

While the idea of supply and demand balancing out the housing market makes perfect sense from a textbook economic perspective, it quickly falls apart when you take into account the most local of all factors that has quite possibly the largest impact on both land and home prices: politics.  Essentially, there are two primary restrictions to developing more residential units.  The first is geographical.  This includes mountains, bodies of water and scarcity of available water resources for new units.  The second is political.  This includes restrictive zoning, discretionary approval rights, etc.

Shiller’s analysis is perfect for markets with little to no geographical restrictions and even fewer political restrictions.  For example, land and home prices are incredibly stable in a place like Houston, Texas where new homes can be added quickly.  However, it fits poorly in coastal California which is hemmed in by mountains and the pacific ocean, has incredibly restrictive zoning and a populace with political leanings typically hostile to new development.  I was a bit surprised that Shiller wrote this piece as he knows what I just wrote better than anyone.  In fact, the Case Shiller Index that bears his name tracks housing prices in individual cities and backs up what I just wrote.  For example, look no further than the difference between the Case Shiller Chicago Index (the don’t track Houston) and the Case Shiller San Francisco Index to see how land use restrictions can lead to explosive moves in asset pricing when coupled with real economic growth.

Shiller goes on to explain how adding density keeps land and housing prices stable over time (highlights are mine):

Of course, underneath every home is a piece of land. Although that is typically only a bit of former farmland, it is often in an urban or suburban area, where a plot of land tends to cost much more than in the country.

Sometimes that little piece of land dominates the value of the home, particularly in dense urban areas. But if we are to understand long-term trends, we need to realize what land represents, even in Manhattan or Silicon Valley or any booming area. People in such places usually aren’t buying land for its own sake but for the myriad services that housing provides. A home is not just a place to sleep and store clothing and keepsakes. It can be a place that is convenient to a stimulating place of work, good schools and entertainment and, indeed, part of an entire human community.

These services have developed enormously over the last 100 years, changing the spatial and geographic dimensions of housing. There are vastly more highways and automobiles, telephones and various electronic connections, enabling people to leave center cities and still obtain the housing services they want. Thus, from a long-term perspective, these developments relieved a great deal of the upward pressure on home prices in cities.

Right now, there are some interesting developments in the supply of housing services that economize even further on urban land. We have recently seen interest in “micro-apartments,” which may be little more than 200 square feet but manage to squeeze in a kitchen, a bathroom and an entertainment center. For many people, this tiny space, with its proximity to like-minded people, interesting neighborhoods and restaurants, is preferable to living in a house in a far-flung suburb. Carrying this idea further, keepsakes can be kept in remote storage, maybe deliverable someday, on demand, with driverless cars. Already, rules are being changed in many cities, including New York, allowing the little apartments to be built and to accommodate many more people per acre of city land. These factors could lead to near-zero future demands on valuable urban land.

First off, micro-units are wonderful as a means to drive housing prices down for those wishing to live in a high-priced urban area IF AND ONLY IF YOU ARE ACTUALLY ABLE TO GET APPROVALS TO BUILD THEM.  Clearly Professor Shiller has not attempted to get such a micro-unit development approved in a wealthy, coastal region of California – say Orange County, for example.  If a developer were to propose such a thing in a high-priced neighborhood, he’d be run out of town on a rail or worse for even daring to bring it up.  This type of concept that works great in some places (cities without restrictive zoning and economics text books) and not at all in others (pretty much every major city on the west coast and a few on the east coast as well).  In addition, adding density typically results in INCREASING underlying land values rather than causing them to fall. Please note that I’m not disagreeing with Shiller as to the premise of his article from a strictly economic perspective (at least when it comes to homes – not necessarily land) only noting that politics MUST BE taken into account because they play such an out-sized role in some regions.

I am far from an uber-bull when it comes to housing prices.  Trees don’t grow to the sky and asset values can go up in a straight line for an extended period of time.  That line of thinking has been fully debunked by the debacle that was the housing crash and Great Recession.  IMO, one buys a house for stability and as a hedge against future rising rents, especially in supply constrained regions.  If you are looking at a house soley as a means of making a large return on investment, you are doing it wrong.  Unlike say tech stocks, housing is a necessity.  Therefore the only way to properly judge it as an investment is versus the alternative: renting.  You either do better over time as a renter or an owner depending largely on economic and political factors where you live.  All real estate is local and making broad generalizations about housing supply being able to meet demand regardless of location and political climate is next to impossible even for an economist as accomplished as Shiller.

Economy

Bass Ackwards: How negative interest rates have turned the world’s economy upside down.

Delay: Britain has now pushed the projected date of the Brexit back to 2019.  The odds of this thing actually occurring are falling by the day.

Reaching: Someone published a research note on Seeking Alpha theorizing that the Pokemon Go app will lead to higher oil prices.  Color me skeptical.

Commercial 

That Didn’t Take Long: WeWork is cutting it’s revenue forecast and its CEO is asking employees to change it’s “spending culture.”

Residential

Over the Falls: London luxury home sales are plunging post-Brexit.

Profiles

Class Act: Tim Duncan was the greatest basketball player of his generation – sorry Lakers fans but deep down you know its true and not all that close.  True to Duncan’s persona, he left quietly, shunning the typically season-long distraction/going away party that players of his caliber so often demand in the modern era.

Fading Away: Why golf is going the way to the three martini business lunch.

Chart of the Day

The condo development capital stack is becoming a convoluted mess as banks pull back (h/t Tom Farrell).

(Click to enlarge)

WTF

Such a Bummer: McDonalds has stopped allowing customers to stream porn on their free in-store wifi.  It will be interesting to watch how this impacts the bottom line as I’m pretty sure that the free porn was the only reason anyone still went to McDonalds.

Headline of the Year Contender: Woman Decapitated By Passing Train During Sex will be a difficult one to beat.  In a twist that should surprise no-one, this happened in Russia and she was drunk at the time.

Inevitable: Someone shot a gun at a couple of teenagers playing Pokemon Go. Did it happen in Florida? Of course it did.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 19th – One Size Fits All?

Landmark Links July 15th – Proceeding with Caution

Squirtle

Last Tuesday, I was sitting in a hospital room with a somewhat-drugged-up Mrs. Links just after baby Hayden was born when I read an article about a new video game that had just been released. That game was just beginning to become a phenomenon like nothing I had ever seen.  I remarked to Mrs. Links that this was going to end up being the tech story of the summer.  She rolled her eyes at me in a painkiller-induced haze and told me that I had to be kidding.  I wasn’t.  If I were smart, I would have dropped everything and bought Nintendo stock.  I’m’ not.  Since then the Pokemon phenomenon has taken on a life of it’s own and not just among kids.  Twenty and thirty somethings are playing the augmented reality game which now has more users than Twitter and more engagement than Facebook.  It’s led to car crashes and muggings but has also helped to boost traffic at zoos and museums and is being utilized as a dating app by some.  I’m not a gamer and I personally find the whole thing rather lame (not for kids – for 30 year olds).  I also haven’t downloaded the app and don’t plan to although it has been a regular topic of conversation at Landmark World Headquarters.  However, there is no denying that that this game is dominating the news cycle and having an economic impact on everything from local businesses to real estate (yes, seriously).  As such, today’s blog has decidedly Pokemon Go theme…..and yes, I acknowledge that makes me almost as nerdy as the 30-somethings crowded onto Santa Monica or Newport Piers in search of imaginary cartoon characters that show up on their phones.

Lead Story… Property values in the US have recovered dramatically since housing bottom, leading to an additional $260 billion in home equity.  However, this hasn’t led to additional borrowing.  According to CNBC, this is why:

During the last housing boom, homeowners used their properties like cash machines, pulling out more equity than the house or the market could support. Arguably, no one wants to see that again, and so far, it is not happening.

“During the mid-2000s, as house prices went up, borrowing went up almost dollar for dollar. In the last few years, when house prices have again been increasing more rapidly than the long-term average, mortgage borrowing has not increased at all. In fact it has decreased,” said Sean Becketti, Freddie Mac’s chief economist.

Much of that may be due to more careful lending. The equity may be there, but lenders are far more strict about letting borrowers pull it out, especially if their incomes don’t support the higher debt.

“We are hoping that people continue to be prudent about cashing out, but part of it is, lenders are more cautious. One of our frustrations at Freddie Mac is we think we’ve set a very prudent credit box, but we find that lenders won’t go all the way out to the edge of our credit box. They are more restrictive than we would allow them to be. They just are super cautious,” added Becketti.

Mortgage refinances will likely rise on lower rates, but the same volatile global economic conditions pushing rates down are making borrowers even more cautious. The cash-out share is not expected to change, as lenders keep standards high and homeowners keep their personal leverage in check.

Economy

Vortex: How the black hole of negative rates is dragging down yields across asset classes and around the globe.  See Also: Germany just sold 10-year bunds at a negative yield.

Ancillary Benefits: How to drive insane amounts of traffic to your local business using Pokemon Go. Contra: Pokemon Go is actually terrible for the economy.  Here’s why.

Commercial

Bargain Shopping: Brexit could lead to foreigners buying up even more of London as UK real estate funds look to sell assets in order to meet redemptions as the pound continues to weaken.

No Moat: WeWork is the largest player in the co-working space, leading to a much scrutinized, sky-high valuation of $16 Billion for a real estate company.  However, the business is growing and, with very few barriers to entry, competitors are popping up everywhere.  I found this excerpt from the WSJ about valuations vs. barriers to entry particularly interesting (highlights are mine):

Some WeWork investors have compared WeWork with taxi-service provider Uber Technologies Inc. and overnight home-rental provider Airbnb Inc., saying WeWork will transform the office-space market.

But Airbnb and Uber enjoy high barriers to competition. The more drivers and hosts in their networks, the harder it is for an upstart to challenge them.

WeWork, by contrast, leases all its office space itself and then rents it out, making it more like a large hotel operator than a network that connects a buyer and seller—and potentially more susceptible to competition.

If the above is true, and scale isn’t as important as barriers to entry, that $16 billion valuation is looking awfully rich.

Residential

Millennials, They’re Just Like You and Me: Realtors marketing to Millennials are driving traffic to their open houses by advertising that Pokemon characters are present in said houses.

Profiles

Deal of the Century: I used to think that George Steinbrenner’s purchase of the Yankees for $8.8MM (now valued at $1.6 billion) or Al Davis’ purchase of 10% of the Raiders for $18,500 (worth around $800MM today) were the best investments in the history of sports. However, the UFC just surpassed both.  This past week, the Fertitta family and Dana White sold UFC for a whopping $4 billion after having bought it for a mere $2MM a mere 15 years ago.

LOL: Leadership at struggling online lender Sofi has long been highly critical of banks. However, a major slump could force the upstart company to become what it despises the most: a bank.

Podcast of the Day: The Big Man Can’t Shoot from Malcolm Gladwell’s Revisionist History series is 35 minutes long and absolutely worth the listen.  It’s about how Wilt Chamberlain (a historically terrible free throw shooter) started shooting his foul shots underhanded, was incredibly successful at it but then stopped because he was embarrassed.  The episode is much more about human behavior than basketball. I found it fascinating.

Chart of the Day

Remember this chart the next time you read an economic report referencing low productivity:

WTF – Pokemon Go Edition

Everybody’s Searching for Something: Searches for Pokemon porn are up 136% since the launch of Pokemon Go on July 6th.  The more that I learn about people, the more I like my dog.

Dragnet: A woman in Queens, NY used the Pokemon Go app to catch her boyfriend cheating on here when she noticed that he caught a Pokemon at his ex’s house.

Attempted Darwin Award: Two men fell off of a cliff in San Diego on Wednesday while trying to catch a Pokemon.  They both lived, despite their best efforts.  I can’t think of a good way to go but, when it’s my time, I don’t want a video game mentioned as the cause in my obituary.  See Also: Three people, at least one of whom was an adult were locked in a cemetery while playing Pokemon.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 15th – Proceeding with Caution