Landmark Links March 11th – Appearances Can Be Deceptive


Lead Story… One could be forgiven for looking at the recent home builder data and concluding that the market is going in the wrong direction.  The most recent new home sales report was not pretty with sales and prices decreasing and inventory rising.  However, as OC Housing News astutely pointed out earlier this week, if you look below the surface of the ugly numbers, builders may be doing exactly what we’ve hoped it would do for a long time: making the transition from the move-up to the starter home market.  Over the past few years, builders have focused almost exclusively on the move-up market which has become saturated.  The entry level market is coming back.  There is currently less starter home inventory and, the homes sell much quicker than higher priced homes when they come available.  Meanwhile, high end home inventory is building as the units take longer to sell.  This is a complete 180 from where the market has been for several years.  The impact on new home sales is two-fold: 1) There are less units selling since less builders are constructing entry level homes (DR Horton was early to the space and others are just now jumping on board) and 2) Prices appear to be falling because the homes that are selling are entry level and therefore less expensive, pulling down the average and median sales prices.  This is a market development that has been desperately needed in order for home building to return to health and generate job growth again.  Look for more home builders to turn to entry level if the high end continues to stall out.

Economy: More than a few economists have pointed out that we are due for a recession because of the duration of the economic recovery.  However, in a sluggish economy that shows no signs of overheating, it’s more complicated than that.

Resilient: Contrary to US government forecasts, shale gas production in the US has remained at elevated levels despite market volatility.  See Also: Don’t look now but oil is up big after briefly falling into the mid $20s/barrel.


Shorter Commute: A new study confirms that renters spend less time commuting than homeowners do.

B, as in Better Opportunity: With supply rising in the Class-A multi-family space, investors are increasingly beginning to focus on value add strategies for Class-B apartments, a space that had been largely ignored until recently.  See Also: Multi-family rents just hit a new high but growth is undoubtedly slowing as new high end units come online.


Positive Trend: Bill McBride’s latest Calculated Risk post on millennial demographic trends is arguably the most bullish case for housing there is.

Wake Up Call: Last week, Beacon Economics and non-profit group Next10 released three reports on the state of the economy in California: Employment by IncomeCurrent State of the California Housing Market and California Migration.  Each one of these is well worth your time to read and paint a striking, if not surprising picture of the challenges that California faces.  The conclusion of the housing market report was a particularly sobering assessment:

California’s current housing climate is not able to support its growing population.  The low levels of residential construction could result in further increases in home% prices, such that fewer and fewer California residents will be able to afford homes. It is true that home prices have increased throughout the country, but California  remains the most expensive state for purchasing a home. Rental rates have also  continued to climb, and residents who usually flock to the rental market to avoid un-affordable home prices find little relief. The state’s lower income residents suffer  the most; they are burdened with having to spend a higher proportion of their  incomes on housing and are forced to cut back on other discretionary, but  oftentimes necessary, purchases. However, diminishing levels of affordability are also reducing the ability for middle income residents to own a home, which is discouraging for residents of both low income and middle income categories.  Indeed, the current state of housing has led many to leave California in the hope of finding more affordable living circumstances elsewhere. To alleviate the housing affordability crisis that plagues low income and middle income households in the state, more housing construction needs to take place.  Home builders should be encouraged to build in California. One such way would be by streamlining the permitting processes and finding a way to reduce concerns about environmental protection policies. The LAO report references a few solutions  that may help alleviate the housing affordability crisis that California currently  faces, including encouraging more residential development along California coastal cities and, if possible, an increase in the residential density for such developments.

Headwinds: The strong dollar, rising home prices and Chinese crackdown on money transfers are beginning to have negative impacts on foreign buyers of US real estate. Taken as a whole, foreign buyers still make up a relatively small percentage of home buyers in the US.  However, their impact is disproportionately felt at the high end – which, not coincidentally has been where a lot of development activity has taken place.  If foreign buying power continues to wane, high end markets will feel the largest negative impact.


Irony: Technology is now playing disruptive role in the venture capital business by playing an ever-larger role in pre-screening investments.

Juggernaut: How Facebook is literally taking over the world of publishing and content distribution and leaving many legacy companies in search of a new business model.

Chart of the Day

This is chart encapsulates the long-term bull case for housing perfectly


Stupid Human Tricks: Mascots are typically asinine, lame, and serve basically no purpose (except for the often-drunk/incarcerated Stanford Treethat thing is awesome).  Unless of course a bunch of mascots get together to do a stunt and one of them gets inadvertently kicked in the nuts….then they are great.

No Brakes: Watching a skier in Austria crash into a rack of skiis at full speed is strangely satisfying.

Godfather Redux: A woman found a severed, cooked horse head in a beer box dumped in an upper Manhattan park last weekend.  Someone must have been visiting from Florida.

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

Visit us at