News

Landmark Links May 12th – Round We Go

 

Lead Story… Human beings are incredibly adept at explaining things by creating narratives to justify why something increases or decreases in value.  During the housing boom, we rationalized away booming housing prices by pointing out the positive feedback loop created by increased housing production and expenditure.  Houses were going up in price so people bought more houses and tapped into their increased equity to consume more via HELOC, which in turn boosted the greater economy.  Back in the internet bubble of the late 90s, we explained away absurd valuations and skyrocketing stock prices for unprofitable companies by rationalizing that “this time was different” and that companies could sustain high valuations so long as they continued to grow – profitability (or even revenue, for that matter) be damned.  We even came up with new BS metrics. Suddenly clicks mattered more than PE ratios. In the teeth of the Great Recession, we were often told by pundits that home values would never recover because the bubble had burst and demand would stay low forever since home ownership was almost always a bad investment.  In hindsight each of these economic narratives which justified excess of one form or another were proven wrong.

The problem is that the chosen narrative du jour is often just a description of the symptoms of economic growth or contraction as opposed to the cause.  Daniel Gross of Strategy+Business explained this phenomenon in as straightforward and clear a manner as I’ve seen in a piece about procyclicality lengthening business cycles, titled Economic Cycles Cut Both Ways (emphasis mine):

During uptrends, generally speaking, financial success begets more success. People earn wages and borrow money, which allows them to buy cars and homes. Because jobs are plentiful, they’re able to stay current on their debt, which boosts the profits and confidence of lenders — who then extend more credit, which allows more people to spend and invest. The longer the cycle, the greater the tolerance for risk. When everybody succeeds, everybody else succeeds. Between June 2004 and February 2007, for example, there were no bank failures in the United States, the longest such streak in history.

By many accounts, we may be in the middle of the longest economic expansion in recorded history, as Goldman Sachs noted earlier this week.  Yes, it’s been a bit of a slog and uneven to say the least.  However, the above passage accurately reflects the current state of the economy in general and the housing market in particular, IMO.  But there is a dark side. The above-noted feedback loop works on the downside as well, as Gross notes in the post (emphasis mine):

But procyclicality, as we learned in the mortgage and financial crisis, also moves in the other direction. And it can do so very quickly. When one party fails to keep up with an obligation — on a mortgage, lease, payment for services — it can push others to fail to keep up much larger obligations. And when there is a lot of leverage built into the system, the margin for error is smaller. For want of $5,000 in mortgage payments, somebody might lose their house, causing a bank to take a $300,000 loss on the mortgage, which leads instantly to larger losses in securities backed by those mortgages, which leads quickly to big losses for financial institutions that had borrowed money to invest in those securities, which leaves those financial institutions unable or unwilling to extend a mortgage to a homebuyer.

George Soros refers to this as reflexivity and has become a billionaire many times over by applying it to financial markets both on the way up and on the way down.  Gross goes on to point out that recent negative trends in auto loans and credit card defaults could be pointing to the beginning of a downward swing in the economy.  Housing has been going up in value in core markets for quite a while despite relatively low sale and start volume. The housing market (at least in terms of price) has tracked economic growth at the high end of the income spectrum, which has been where most of the gains have been in terms of wages and net worth.  

The narrative has become that housing prices will continue to rise due to the supply-demand imbalance in desirable markets.  The question that bears asking is what happens when this imbalance inevitably changes, either on the supply side (more units being built) or the demand side (a recession that impacts finances, out-migration from expensive markets, increased selling from Baby Boomers in expensive markets, etc)? I don’t know when this will happen or if it will be soon, but it will happen at some point. No cycle lasts forever no matter how strong the narrative justification behind it is.  This one won’t be an exception.

Economy

Myth Busters: You know the story about how people are fleeing California in droves?  It doesn’t exactly hold up to close scrutiny.

What Happens Next?  Central banks have been yuge buyers of government bonds for years.  What happens when they become sellers?

Scammers Delight: Auto loan fraud is soaring in parallel to the housing bubble.

Buddy System: JPMorgan tells banks to partner up as a U.S. deposit drain looms.

Commercial

Scarcity: The biggest challenge facing industrial property investors is finding assets to buy.

It’s a Long Way Down: Sears was once the giant of American retail.  Now it’s likely headed for the scrap heap in a collapse like none other.  See Also: Sears billionaire CEO is apparently planning on running for president.  He’s blaming the “irresponsible media” for his company sucking.

Residential

About Time: Fannie and Freddie are going to start proving financing for buyers of manufactured homes in an effort to help low income owners.  Hopefully it will help get rid of shady programs like this.  See Also: In Silicon Valley, even mobile homes are getting too pricey for longtime residents.

Starting Strong: 2017 is looking like a big year for starter home sales in general and Millennial buyers in particular.  See Also: Un-related adults are now pairing up to buy homes in desirable markets.

Profiles

Priced to Perfection: How oil companies are using algorithms to constantly update the prices that gas stations charge.

Chart of the Day

Chicken or the egg: are young people postponing marriage because they are living at home or are they living at home because they are postponing marriage? Source: Calmatters.org

Living at home 1

Living at home 2

WTF

Gross: The internet’s most cringe-inducing subculture is pimple-popping videos.

Bad Medicine: Consider this a public service announcement – sticking a live eel up your butt to relieve constipation is a really, really bad idea.

Secret Weapon: Venezuelans’ new weapon against riot police are ‘poopootov cocktails.’

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

Visit us at Landmarkcapitaladvisors.com