Landmark Links October 28th – Trick or Treat


Lead Story/Chart of the Day… Want to know the rental boom will end?  Possibly when homeownership rates stop falling.  Some thoughts from the St Louis Fed’s excellent FRED Blog:

For five hundred twenty-five thousand six hundred minutes each year, people have to live somewhere. And it looks like renting is becoming more popular.

The graph clearly shows the U.S. homeownership rate has steadily declined and that the rental vacancy rate has declined right along with it. So the two trends seem closely related, especially recently. But does a decline in homeownership mean homeowners are moving out of houses and into apartments? Not necessarily. So what is going on? At least two things. 1. The financial crisis: The recent economic downturn left many households wary of investing (or reinvesting) in a home. 2. Kids today: The younger generation seem less interested in living in the suburbs. In quite a few cities, St. Louis included, they seem to prefer to live where they work and spend leisure time. Urban commercial buildings are being converted to apartments to accommodate this increased flow of renters. The rental vacancy rate has still been declining, which means the pace of rental property construction hasn’t been fast enough to keep the rental vacancy rate steady. Be sure to check back with the FRED Blog in a few years to see where all this stabilizes.


The homeownership rate has rebounded a bit after hitting a 51-year low so this definitely bears watching. 


Surprise? Lots of bond investors are buying longer duration bonds in search of yield as evidenced by a flattening yield curve.  However, some of the largest and most sophisticated investors are shortening the duration of their holdings in the expectation that 10-year rates are about to rise.

Burdened: US corporations are outspending their cash flow, leading to an massive amount of corporate debt issuance.  Low interest rates are keeping debt service affordable for the time being but this could become a major economic headwind if interest rates rise and labor costs increase and balance sheets are weak. 


Umpteenth Times the Charm? New data from First American suggests that it’s only a matter of time until Millennials take over the housing market….if a lack of inventory doesn’t kill affordability first. (h/t Doug Jorritsma)

House of Horrors: High-end fixer-uppers have become more of a thing recently.  As most of you probably already know, the Playboy mansion recently sold.  It was in less than great shape.  Today’s quote of the day comes from one of the interior decorators hired to fix the place up.  It’s less than surprising (h/t Tom Reimers):

“It’s in horrible disrepair and the whole place smells like a urinal,” interior designer Kenneth Bordewick told TRD.


Good Vibes: The origin story of OC’s own Wahoos Fish Tacos is as American as it gets: a trio of surfer immigrant brothers who came to America as kids and built an iconic brand from scratch.

Leaving the Back Door Open: Credit card scammers are taking advantage of lax security of online shopping sites and fraudulent purchases have soared from around $2 billion in 2011 to $4 billion today.

 Imitation iPads:  Microsoft’s Surface tablet deal with the NFL has been one of the great marketing fails of all time.  Bill Belichick trashing the ill-fated device at a press conference is only the latest indignity.



Cruel: The best way ever to mess with kids that you don’t like on Halloween.

You Want Fries With That?  A man in Wyoming was arrested in a prostitution sting after he tried to pay a hooker with a McDonald’s Quarter Pounder and French fries.

Pit Stop: An Arizona man stopped at an In-N-Out drive through as he was getting chased by the police.  He was eventually caught but at least he has good taste.

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

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Landmark Links October 28th – Trick or Treat

Landmark Links August 2nd – Summer Fun



Blah: Seven years later, the current recovery is still the weakest of the post WWII era.  This should come as no surprise if you know anything about credit recessions versus more typical inventory cycle recessions.  See Also: What is the shrinking yield curve really telling us?


White Hot: While local housing remains soft, industrial developers can’t build 1MM+ sf Class-A industrial buildings fast enough to keep up with demand in the prime portions of the Inland Empire, the top distribution market in the US. See Also: The growing logistics business is spurring a resurgence in spec industrial development in San Diego.  (h/t Tom Farrell)


Which Way From Here: Home ownership rates are now at 5-decade lows.  However, future demographic trends have led to a contentious debate over whether they are bottoming or have much further to fall.

Rich People Problems: Property and HOA disputes in wealthy communities are an attorneys dream come true.

That Sinking Feeling: San Francisco’s Millennium Tower, a 58-story condo project is home to A-list stars and tech titans.  The tower features units that sell for up to $10MM dollars a pop.  It’s also sunk 16 inches since completion in 2008 and tilted 2 inches to the northwest so buying a condo there (or being in the general vicinity of the building) might not be a great investment.  (h/t John Medford)


Ya Think: A new study finds that swimming in the LA River may be hazardous to your health.  In other obvious news, the water in the LA River is also wet. (h/t Chris Gomez-Ortigoza)

Useful Information: A new app called Weepo allows users to check the male-to-female ratio at a given bar or club before heading out rather that unwittingly ending up at a sausage party.

Hard Nut to Crack: Apple is struggling to gain traction in the TV space like it did in the music space as its assertive negotiating style alienates cable providers and networks.

Chart of the Day

You had better graduate if you take out a student loan.

Likelihood of homeownership relative to a high school graduate without student loans

Source: Fannie Mae


Self Awareness Award of the Week: Paris Hilton thinks she is a target for ISIS, primarily because Paris Hilton is an idiot.

This Makes Sense: Arguably the best ping pong player in the world has a secret weapon: booze.

FAIL: Overeager animal rights activists purchased a 100 year old, 15 lb lobster from a Florida restaurant and shipped him to an aquarium in Maine in a styrofoam container with ice and gel packs.  The lobster was dead on arrival when he reached the aquarium because the activists didn’t have a clue as to what they were doing and didn’t include nearly enough ice.  This is a tragedy as I’m sure the lobster was delicious.

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

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Landmark Links August 2nd – Summer Fun

Landmark Links June 14th – Underexposed


Lead Story…. REITs are the best performing asset class in the market over the past 15 years, yet, according a Goldman Sachs, 40% of large-cap core mutual funds still don’t own any and the ones that do often have a very small percentage of their funds allocated to real estate.  I don’t think its a stretch to say that this goes a long way towards explaining why most fund managers under-perform the market.  Not only have REITs outperformed the rest of the market, it actually hasn’t even been that close.  From the WSJ:

Since 2000, REITs have returned an average of 12% a year, according to J.P. Morgan Asset Management. That crushed the No. 2 finisher, high-yield bonds, which returned 7.9%. Large-cap U.S. stocks returned 4.1%.
Despite the performance, nearly 40% of large-cap core mutual funds, which largely invest in S&P 500 stocks, don’t own any REITs, according to Goldman Sachs. Overall, funds with no REIT exposure have a total of $528 billion in assets, Goldman says.

Funds that do own REITs hold about 2% of their assets in the stocks, less than two-thirds of the sector’s weight in the market, Goldman says. Turning REITs into its own sector will make it clear which managers are avoiding real estate. Of course index funds have always had a full weighting in REITs.

This is going to become increasingly important because, as we mentioned earlier this month, real estate is about to get it’s own sector in the S&P 500 which will make it even more obvious who is underexposed.  If tech, finance, manufacturing, emerging market, utility or natural resource stocks were hot you can bet that fund managers would be piling in as quick as possible.  So why are REITs the proverbial red-headed stepchild despite outperforming?  According to the WSJ:

REITs aren’t like other stocks because they are essentially conduits to take rent and pass it on to investors. Analyzing a REIT is different than trying to figure out a company that produces products or delivers services.

For stock pickers, REITs are frustrating because they tend to rise and fall based on what’s happening in the economy, making it hard for a fund to stand out. The stocks perform well when the economy is humming along at a modest pace, just like now when rents are rising and occupancy is high. But when the economy tanks, they can get hit hard. In 2007 and 2008, REITs lost 15.7% and 37.7%, respectively.

And when the economy runs too fast and interest rates rise, they lag. Many managers see REITs as bonds masquerading as stocks. There is truth to that. REITs tend to lag behind the market when interest rates are rising, just like bonds. REITs also are compared with stodgy utilities, which also throw off lots of dividends but do little else.

Ultimately, many fund managers didn’t buy REITs because they didn’t have the time or staff to figure out the industry.

Shorter version of that: REITs are boring and hard to understand so fund managers don’t bother spending the time to figure them out.  Also, I don’t by the “not good when the economy tanks” rationalization because the ’07-’08 train-wreck is included the 15-year period of out performance.  Also, you could say the same thing about tech stocks after 2001 or emerging markets over several time periods but clearly the funds have not stayed away from those sectors.  As an aside, the performance data for listed REITs should be enough to kill off the seedy and perpetually under-performing non-traded REIT industry.  However, one should never underestimate the determination of a broker stands to earn a commission exceeding 10% by selling to a less-than-sophisticated mark.  Ironically, the sector split happening this summer is going to force fund many managers to allocate more to REITs at a time when out-performance is unlikely to continue.  Again, from the WSJ:

Sadly for investors who now have to take the sector more seriously, the big gains recorded by REITs over the past 15 years aren’t likely to continue. REITs have been the best-performing asset class in five of the last six years, a record that’s unlikely to repeat itself even though valuations are in line with history.

Trees don’t grow to the sky, after all.  Either way, I’d expect that it’s going to be a busy few months for Green Street Advisors.


Loud and Clear: The still-flattening yield curve is telling the Fed everything it needs to know about the economy.  Whether or not the Fed listens is another matter.  See Also: Economists surveyed by the WSJ have sharply lowered their growth estimates for next year.

In the Rear View Mirror: Remember the US manufacturing renaissance after the Great Recession ended?  Recent jobs data suggest that it could be coming to an end.

Ticking Time Bomb: Bill Gross likens negative interest rates to a “supernova that will exlpode.”  But See: Denmark has had negative interest rates longer than any other country and hasn’t exploded yet.


Extended Stay: Despite concern about new supply in the capital markets, hotels are still on pace for another great year.


Party Like it’s 2005: Some prospective buyers in Seattle are camping out overnight to put a deposit on a downtown condo.

Head Above Water: According to CoreLogic, 268,000 US homeowners regained equity in their homes in the 1st quarter of 2016.

Lonely at the Top: Calculated Risk on Merrill Lynch’s report showing some signs of slowing at the high end of the market.  See Also: Rent hikes are slowing but mostly at the high end where almost all of the new construction has been happening.


Taking Stock – Silicon Valley is sick of dealing with Wall Street and looking to create it’s own stock exchange.

Hipster Darwinism: Fertility experts are telling men to ditch the skinny jeans if they want to have kids.  Also because they look ridiculous.

Stacked: As if online lenders didn’t have enough problems….new reports show that their quick underwriting often doesn’t pick up loan stacking – the act of multiple lenders making loans to the same borrowers, often within a short period of time, meaning that borrowers are far riskier than advertised.  This is not going to help win back investor confidence

Chart of the Day


Leave the Driving to Us: An allegedly possessed woman went apeshit on a bus in Argentina and fortunately someone video taped it.

Pet of the Week: Can someone out there please help find Pinky the cat a new home?  He’d make a great pet.  He’s also a Warriors fan and Draymond Green is his favorite player

Frivolous: A woman is suing a spin instructor in LA for bullying because she hurt herself in class.  When the world ends, there will be nothing left to inhabit the earth but insects and lawyers.

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

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Landmark Links June 14th – Underexposed

Landmark Links June 10th – Border Skirmish


Lead Story… One of the problems with restrictive zoning is that it’s often highly inconsistent among neighboring cities meaning that a (relatively) more pro-development municipality often ends up picking up the slack for a more anti-development one.  It should come as no surprise that this issue is front and center in Silicon Valley as San Jose, one of the few moderately pro-residential development (less anti-development would be more accurate)  cities in the region is getting fed up with it’s neighbors.  The Wall Street Journal reports:

As Silicon Valley swelled with technology jobs for much of the past half-century, the city of San Jose was happy to serve as its bedroom community, blanketing vineyards and plum orchards with homes until it became the nation’s 10th-largest city.

But all that building has taken a toll, leaving this city of roughly one million people low on land and fiscally stretched. Now, grappling with soaring housing costs thanks to the region’s continued job growth, city officials are criticizing neighboring cities for failing to create enough housing of their own even as they continue to cut ribbons on new office buildings.

One recent target: nearby Santa Clara, which is planning a major development of offices and retail that includes little residential construction. San Jose has taken the rare step of publicly opposing the project, saying it would add far too many jobs, exacerbating the region’s housing shortage.

San Jose “cannot single-handedly solve the housing problem,” said Kim Walesh, the city’s economic development director. “It really is going to require other cities stepping up.”

So what’s the big deal if San Jose is mostly residential and neighboring cities like Santa Clara are mostly new retail and office?  The answer is simple: tax revenue and lots of it.  Retail and, to a lesser extent other commercial uses bring in recurring tax revenue to a city and requires very little in infrastructure such as schools, parks and other amenities.  Residential is the opposite.  It brings in little revenue after one-time development impact fees are paid and requires a lot of infrastructure.  If you want to see what happens when a city has very little tax generating retail and other commercial real estate, go to Google and type in Vallejo Bankruptcy.  What’s happening in the Bay Area is a classic example of too much of a good thing: tons of job creation.  This would be great if cities were willing to build housing but clearly they are not.  More from the WSJ:

“It is hard to understand how we’re going to get around this,” said AnnaLee Saxenian, a professor at the University of California, Berkeley, who studies Silicon Valley and other technology hubs. “The whole Bay Area really is having a very hard time creating sufficient housing.”

Housing has lagged behind commercial projects in part because it is less lucrative for municipalities. Land that goes to residential uses tends to bring in less tax revenue—and requires more services like schools and parks. San Jose last year estimated that for every 1,000 square feet of single-family housing, the city budget takes a net loss of $255 a year, compared with a gain of $1,064 for the same size commercial space.

That’s around 4x as much revenue  generated by commercial space.  In a perfect world, every city would develop both commercial and residential units but that isn’t currently happening.  San Jose is moderately more friendly to residential development than it’s hostile neighbors so it’s been bearing the brunt of any new housing supply and it’s citizens and government aren’t happy with neighbors not carrying their weight when it comes to proving new residents a place to live:


“This is a classic collective-action problem, where what is rational for each city’s individual perspective is highly sub-optimal for the region,” said Gabriel Metcalf, chief executive of the nonprofit planning think tank SPUR. “These supposedly local decisions have huge regional impact.”

Of course, conflicts over rapid growth have long been a feature of Northern California. But the latest tech boom has created so many jobs that it would take a massive building boom of housing to meet the demand.

San Francisco, San Mateo County and Santa Clara County together added 385,800 jobs between 2010 and the end of 2015, according to the California Employment Development Department. Over the same period, building permits were issued for just 58,324 housing units, according to the U.S. Census Bureau, enough space to hold roughly 150,000 new residents.

Left with little option, San Jose is fighting back and has taken the unusual position of suing Santa Clara over a large-scale commercial development that it claims would add a ton of jobs but little in the way of new housing:

Balance is central to the fight between San Jose and Santa Clara. A city of 120,000, Santa Clara two years ago struck a deal with developer Related Cos. to turn its golf course, previously a landfill, into a town square in the shadow of the new football stadium for the San Francisco 49ers. Plans call for 9 million square feet of development, or the size of three Empire State Buildings, including 1,360 housing units but dominated by retail and offices.

Santa Clara’s projections show that if the development is fully built, the city would add 49,000 jobs but just 16,000 housing units citywide by 2035.

“That is going to create demand for housing elsewhere, especially in San Jose,” said Ms. Walesh, that city’s economic development director. “It brings them more out of balance.” Santa Clara’s ratio of jobs to housing would rise to 3 to 1 under its projections, compared with 2½ to 1 in 2008 and San Jose’s 0.87 to 1 today.

“We’re responsibly growing our city as much as we can,” she said, including construction of many “high density projects that are well above our comfort zones.”

San Jose, meanwhile, is trying to steer itself more into balance. While city officials want to add 120,000 housing units by 2040, the city has just 15% of its land devoted to employment-heavy uses like office and retail. That compares with 24% in Santa Clara, and 28% in Mountain View, according to a recent SPUR report on San Jose.

The jobs vs housing balance issue is 100% due to restrictive zoning and the disproportionate influence that NIMBYs have on Silicon Valley land use politics.  The problem could be solved by simply easing zoning codes and reducing red tape and the brutal discretionary entitlement process that can ensnare a residential project for a decade or more.  However, in order to accomplish that you have to overcome the entrenched interests of existing NIMBY homeowners which is far easier said than done.  One irony here is that many residents oppose higher density in Silicon Valley under the guise that it could create more traffic.  However, higher density development would allow mass transit in the area to be more viable, as it is in SF and Oakland which could actually reduce traffic over time especially if higher density residential towers were built in commercial areas.  Don’t hold your breath though.  The most innovative place on earth also happens to be one of the most backwards when it comes to land use. 



In the Dark: Despite investor fixation with US Payroll data and other economic reports, figures often have a huge margin for error and are almost always revised after they are released, making the monthly numbers little more than just noise.  That brings us to this: the always-excellent David Rosenberg of Gluskin Sheff is getting nervous about the economy based on a trend that he is seeing in the employment data (from Business Insider):

Not just that, but there were downward revisions to the prior two months totaling 59,000 – something we have not seen since June of last year.

Look at the pattern; +233,000 in February, +186,000 in March, +123,000 in April and +38,000 in May. Detect a pattern here (he asks wryly)?

You can see why I was gagging when I heard some of the pundits on “bubblevision” tell the anchors this morning that the Fed will look through one number. Dude – this isn’t one number. It is a pattern of softness that has been in effect for the past four months … and counting.

In terms of sectors, two developments really stood out and neither particularly constructive.

First, goods-producing employment declined 36,000, which was the steepest falloff since February 2010. But this is not just one data-point but a visible weakening trend – this critical cyclically sensitive segment of the economy has contracted now for four months in a row and the cumulative damage is 77,000 jobs or a -1.2% annual rate.

I don’t want to alarm anyone but the facts are the facts, and the fact here is simply that this is precisely the sort of rundown we saw in November 1969, May 1974, December 1979, October 1989, November 2000 and May 2007.

Each one of these periods presaged a recession just a few months later – the average being five months.

There was just one time, in the 1985/86 oil price collapse, that we had such a huge decline in goods-producing employment without a recession lurking around the corner – but the Fed was easing then and fiscal policy was a lot more accommodative than is the case today.

Not even the job slippage in goods-producing sectors during the 1995 soft landing and the 1998 Asian crisis were as severe as what we have had on our hands from February to May.

For such a long time, the service sector was hanging in but services ultimately service the part of the economy that actually makes things.

Private service sector job gains have throttled back big-time – from +222,000 in February to +167,000 in March to 130,000 in April to +25,000 in May (ratified by the non-manufacturing ISM as the jobs index sagged to 49.7 in May from 53 in April – tied for the second weakest reading of the past five years).

Once again, a discernible pattern here, but it is where the slowdown is taking place that is most disturbing.

Rosenberg is not a broken clock and is one economist that I pay close attention to.  This post was published after last week’s big jobs report miss that essentially took a June rate hike off of the table.  See Also:  The yield curve is still flattening out.

Almost Zero: Toyota Finance Corp issued 20 billion yen ($186MM) of notes at a record-low yield of 0.001% earlier this week – and no that isn’t a typo.  The Bank of Japan dropped the yield on Japanese government bonds out to 10-years into negative territory, sending investors piling into corporate bonds as they attempt to generate a meager negative yield.  I’m still trying to wrap my head around this but the consequences are a bit scary.  If Toyota can borrow for nothing, why wouldn’t they take the company private, go on an acquisition binge or expand their credit business dramatically, basically becoming a hedge fund that could borrow cheaply and pocket a spread.  The possibilities are endless as are the unintended consequences.

Demographics are Destiny: Based on experience from previous economic cycles, the number of babies born in the US in 2015 should have gone up.  Instead, it actually fell, leaving the US mired in what some are terming a “baby bust” that has not improved since the Great Recession and housing crash.  These five charts from the WSJ show just how bad the baby bust has been.  The implications for future economic growth are not positive if the population shrinks.



No Need to Flip Out: Home flips are at decade highs but today’s flips, which often involve buying and fixing distressed homes with little leverage look very different from those during the bubble, many of which were strictly market dependent and highly leveraged.  That is a good thing.

Gimme Shelter: There is much debate about where we are in the housing cycle.  Cutting through that noise, top housing analyst Ivy Zelman makes a critical point: we simply don’t have enough places for people to live in the US.  From Business Insider:

“This cycle will be elongated, and the slope of the recovery is flatter than what we thought the trajectory would look like when we called the bottom in 2012. Builders have been slower to see the growth. There’s a shortage of shelter. We’re pretty indifferent whether shelter should be owned or rented. We’re just saying there isn’t enough. The U.S. is at a 30-year low of inventory available for sale. We are predicting double-digit housing-starts growth this year, next year, and in 2018.”


Technology is Bad for Your Love Life: Couples are having sex less.  The likely culprit according to one professor is Netflix binge watching.  See Also: Tinder blamed for a rise in STDs.

Vultures Circling: Distressed investors are circling the carcasses of distressed oil assets in North Dakota.

The Alchemist: Meet the Ukrainian refugee who made billions of dollars for Citibank by doubling down on subprime mortgage bonds at pennies on the dollar when everyone else was selling.

Chart of the Day

Almost back to the all time high?  Not so fast.

Source: Real Clear Markets


Vegans Gone Wild: I could fill the WTF section of this blog exclusively with crazy vegan Astories were I so-inclined.  Today’s story of bat-shit crazy vegan-ism:  An unhinged woman in Ontario who likely owns no less than ten cats paid $400 to “rescue” a lobster from a grocery store and ship it back to Nova Scotia where the dopey (but delicious) crustacean will likely be caught again and eaten, hopefully by me. Since crazy vegan stories are now considered news, this hysterical tale found it’s way into the Washington Post which used to be a serious paper.  If you want to lose all faith in the ability of all humans to think rationally, feel free to peruse the comments.  See Also: Kids find a new way to be a pain in the ass – by becoming vegans.

At Least He Appears to be Eating Well: Guns n Roses front man Axl Rose is demanding that Google take down unflattering pictures of him from a show several years ago because he apparently has absolutely no clue how the internet actually works.  Rose was overweight at the time that the pictures were taken, leading to some of the best internet memes ever created.  Here’s one example:

Axl Rose Wants Google To Remove The 'Fat Axl' Meme Off The Internet

Public Service Announcement: A windblown beach umbrella killed a woman in Virginia Beach.  909ers and other tourists take note: between runaway umbrellas and great white sharks, Newport Beach is unsafe.  Best to stay home this summer.  You can thank me later.

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

Visit us at

Landmark Links June 10th – Border Skirmish