Landmark Links April 10th – Un-Level Playing Field


Lead Story…  As a northeastern transplant to California, one of the questions that I’m asked most frequently by those I grew up with is how housing is so expensive across the entire state out here.  Sure, there are incredibly expensive areas in the northeast (Manhattan being exhibit A) but there are typically desirable neighborhoods within a reasonable commute from those expensive areas that provide much more affordable alternatives.  In California, that just isn’t the case.  We have options that range from astronomically expensive to very expensive but don’t fall below that level unless you want to move all of the way out to a place like Hemet…and let’s face it, NO ONE actually wants to live in Hemet.  So why is it so expensive here?  The primary answer is supply and demand – we simply don’t create enough housing to accommodate everyone who wants to live here.  However, the more interesting part of this question is why this is so.  Pete Reeb of John Burns Real Estate Consulting wrote a post on their excellent Building Market Intelligence Blog that compared California to the other two major housing growth markets in the US – Texas and my beloved weird state of Florida to show why California is so much more expensive (emphasis mine):

Since we work all over the country, we can tell you that there are three big differences in California:

  1. Zoning. California has a very lengthy entitlement process. According to our Northern California expert Dean Wehrli, it can easily take eight to ten years or more to get a master-planned community approved for development, and it’s a BIG IF that you will even get approvals, while subdivisions that already have substantial conformance with local zoning laws can take three to five very expensive years.
  2. Fees. Most California municipalities require development fees from home builders that add $25,000 to $70,000 in some areas—substantially higher than in Texas and Florida.
  3. Environmental compliance. While California arguably has lots of land, wide swaths are off limits or require expensive environmental remediation per state laws, the most notable of which is called CEQA.

Zoning, fees, and environmental compliance combine to make California home building expensive, resulting in very high home prices.

In Texas, they have one new home community under construction today for every 10,000 people. In Florida, they build one new home community for every 20,000 people. In California, the ratio is one community per 45,000 people.The result is that we have clients who build and sell substantially the same house in Texas for $300,000 as they build in California for $800,000.

One large takeaway from this is that your macroeconomics professor was right. Prices go up when demand outstrips supply, fall when supply outstrips demand and stay stable (like the Texas housing market) when supply and demand are roughly equal.  Outsiders sometimes look at the housing market in California and wonder why builders don’t build more since the high home prices should make it so much more profitable to build here – after all, if an $800k home in California is only worth $300k in Texas, they must be killing it.  However, as you can see above, the costs and risks are much greater in California as well which is why the housing situation here probably won’t improve without major reforms.


Leverage: Jeff Gundlach of DoubleLine Capital points out that China’s massive Treasury holdings are only an effective trade war threat so long as they still have them – if they follow through and sell, the threat is gone. See Also: China’s real weapon in a trade war with the US is in it’s rare earth metals, not Treasuries.  And: There is no feasible way for China to dump their massive US Treasury holdings so long as the RMB is pegged to the dollar.

Other Side of the Story: So far, the press and most economic observers have presented a negative picture of the ability of the US to prevail in a trade war with China.  However, the US still has a number of advantages and there are more than a few reasons that Trump’s trade war tactic may actually work.

Bleak Picture: The economy is booming, yet state governments are strapped for cash because the proportion of state and local tax revenues dedicated to Medicaid and public pensions is the highest since the 1960s.

Two Part Question: The latest data shows that inflation meeting the Fed’s 2% target is here.  The next and more important question is where it is headed next.


Pushed Back: An ballot initiative to roll back Prop 13 protection for commercial buildings has been pushed back to 2020.

Space Available – At a Cost: How a game of chicken between landlords asking a fortune in rent and tenants who are unwilling to pay it has turned some of the most valuable retail locations in Manhattan into a virtual ghost town.


A Tale of Two Cities: In expensive cities, new residents make a lot more money than those who are leaving while the opposite is true in low cost regions.  See Also: Chances are that first responders, teachers and even techies can’t afford to purchase a home in America’s most expensive cities.

Blast From The Past: The argument to bring back much-maligned Savings and Loans in order to fuel more housing construction in California is a surprisingly persuasive one.

Changing the Conversation: State Senator Scott Weiner’s housing density bill is very much a long shot to make it into law but that doesn’t mean that it has done a great job at changing the conversation about what California should be doing to solve it’s housing affordability crisis.


Looking in the Wrong Place: There is a lot of investor hand-wringing going on over Tesla’s slower than projected Model 3 production.  However, the bigger issue that the company is facing is the mountain of debt coming due in the coming years and the fact that their bonds are paying a substantially higher yield than ratings indicate that they should be.

Con Artists: This quote from a recent Barry Ritholtz article on perfectly describes my feelings about self-help gurus:

The past three decades of minimal real wage growth have led some people to wonder why they haven’t gotten ahead. And in much the same way that nature abhors a vacuum, con artists hate missing an opportunity to separate suckers from their money. This might explain why we see a special class of self-help gurus — none of whom were rich until they developed this particularly odious grift — who have dedicated themselves to convincing people that if you only believe it, it can happen.

Getting in Early: Why Cannabis investors in recently-legalized markets could be poised to make a fortuneSee Also: Several studies have found that opioid prescriptions have fallen in states where marijuana was legalized.

Chart of the Day

Almost no one with good credit is refinancing:

Source: Black Knight


A Picture is Worth 1,000 Words: Ask yourself this – what would a woman who was arrested for walking into a 7-Eleven with a fake bomb and threatening to blow it up look like?  Then click on this link and see how close you were.

Not From the Onion: Man who was raised by wolves in a cave admits he’s disappointed with human life.

Gusty: A woman was arrested for driving erratically claimed that the two bags of cocaine in her purse were not in fact hers and were instead blown into her possession by strong winds because Florida.

Tastes Like…:  A student bit the head off of a live chicken at his high school because Florida.

Hopeless: A new study found that close to one third of Millennials are not convinced that the world is round. The other two thirds aren’t certain that it isn’t made of Tide Pods.

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