Landmark Links March 25th – Stuck in the Middle


Lead Story…. It’s getting tough to escape the middle.  As we’ve stated numerous times, there is a housing supply crisis at the low end where not enough homes are getting built.  An issue that gets less focus is the widening gap between the middle and upper tiers of homes which makes it harder to trade up, resulting in tightening inventories and upward pricing pressure.   In a recent study of the top 100 metro areas, Trulia found that there is a high correlation between the lower inventory of mid-range homes and the price gap between trade-up homes and premium homes.  For a real-life example, look no further than our home market of Orange County, where according to Trulia “the price difference between a median trade-up and premium home in early 2012 was $421,938. That gap jumped to $664,000 by this year—a 57% increase. The inventory of trade-up homes in the area fell by nearly 70% over the last four years.”  This has a significant negative impact downstream as well.  As previously mentioned, not much product is getting built at the entry level.  In addition, those currently living in starter homes who want to trade up can’t find mid-level homes to move into.  The result is that they stay put in their starter home causing even less entry level homes go on the market.


No Easy Fix: 600 interest rate cuts and $12 trillion of asset purchases haven’t moved the inflation needle the desired amount leaving Central Banks looking for even more unconventional ways to get capital directly to spenders by fusing monetary and fiscal policies together.


Pullback? Sales of commercial property hit the skids in February.  This data, along with the virtual implosion of the CMBS market could be pointing towards a more substantial pullback.  See Also: There signs popping up everywhere that CRE lending is going to tighten and reprice higher.


Quote of the Day: There were plenty of culprits that bear at least some degree of responsibility for the housing bubble and subsequent bust.  Warren Buffett gave an interview back in 2010 addressing what went wrong that was just released last week.  It’s a fascinating read.  He cuts to the core of bubbles in general and the housing bubble in particular as few can:

“The basic cause, you know, embedded in psychology, was a pervasive belief that house prices couldn’t go down and everyone, virtually everybody, succumbed to that. But that’s the only way you get a bubble is when basically a very high percentage of the population buys into some originally sound premise. It’s quite interesting how that develops.

The originally sound premise that becomes distorted as time passes and people forget the original sound premise and start focusing solely on the price action. So the media investors, the mortgage bankers, the American public, me, my neighbor, rating agencies, Congress, you name it — people overwhelmingly came to believe that house prices could not fall significantly. And since it was biggest asset class in the country and it was the easiest class to borrow against, it created probably the biggest bubble in our history……

…..My former boss, Ben Graham, made an observation, 50 or so years ago to me that it really stuck in my mind and now I’ve seen evidence of it. He said, “You can get in a whole lot more trouble in investing with a sound premise than with a false premise…..

….We saw the same thing in housing. It’s a totally sound premise that houses will become worth more over time because the dollar becomes worth less. It isn’t because construction costs go up. It isn’t because houses are so wonderful. It’s because the dollar becomes worth less, and that a house that was bought 40 years ago is worth more today than it was then.

And since 66 or 67 percent of the people want to own their own home, and because you can borrow money on it and you’re dreaming of buying a home, if you really believe that houses are going to go up in value, you buy one as soon as you can. And that’s a very sound premise. And once that gathers momentum and it gets reinforced by price action and the original premise is forgotten, which it was in 1929.

The Internet was the same thing. The Internet was going to change our lives. But it didn’t mean that every company was worth $50 billion that could [go public].

And the price action becomes so important to people that it takes over their minds. Because housing was the largest single asset, around $22 trillion or something like that. Such a huge asset. So the public — they might not understand stocks, they might not understand tulip bulbs, but they understood houses. And the [easy] financing, you could leverage up to the sky, it created a bubble like we’ve never seen. I wish I had figured that out in 2005.” – Warren Buffett

The Struggle is Real: A crappy stock market is hurting the market for luxury homes in the Hamptons.  Prices in the top tier of Hamptons properties were $35.5MM in 2015, down 20% from 2014.  Somehow I doubt that many people outside of Manhattan and Greenwich, CT are shedding a tear about this….

Depressing: A new proposal in Palo Alto would allow families making $150k – $250k to qualify for subsidized housing.  To be clear, the previous sentence is not a typo.  A family that makes $250k a year can be considered below middle class in Tech-Land.  Silicon Valley can keep coming up with asinine schemes like this that will generate some buzz but ultimately do nothing to relieve their high cost of living or they could simply relax zoning restrictions and build more units.  Then again, we all know how it goes when a developer tries to add more desperately-needed housing in upscale California communities.

Chart of the Day


Subprime Hot Wheels: A Florida man attempted to purchase a $60k BMW with food stamps last week.  Shockingly, the dealership turned him down and he later returned and stole the car anyway.  He’s now in jail.  Remember to reference this story the next time someone brings up subprime auto loans.  It may be too easy to get debt on a car purchase.  However, it’s not so absurd that you can use food stamps as a down-payment on a luxury automobile….yet.

Video of the Day: Watching a man solve 3 Rubik’s Cubes in under 30 seconds while JUGGLING THEM will make you feel completely insecure about both your coordination and cognitive ability at the same time.

Born to Run: Grand theft auto is a big theme for the WTF section today.  An 11 year old kid in Minnesota stole a cement mixer and led cops on a high speed chase that reached 70mph at times.  The police even needed to call in helicopters for backup in order to catch the runaway tyke.  This kid is virtually guaranteed to have the best story in juvy hall.

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

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