News

Landmark Links November 3rd – Missing the Boat

 

Lead Story….  The topic of affordable and entry level housing have probably consumed more pages than just about any other topic since I started writing Landmark Links a couple of years ago.  The challenge that we face is daunting.  In a normally functioning housing market, yesterday’s executive housing stock becomes today’s entry-level housing.  This relationship makes sense – newer homes should be more expensive than existing homes, all else being equal.  However, all else is not equal and the exact opposite dynamic is taking place in many markets – yesterday’s starter homes in desirable locations are becoming today’s executive housing stock as mobility slows and renovation expenditures soar.  Back in 2007, American homeowners moved every 6 years on average.  Now they move every 10 years.  This is a trend that shows no signs of reversing any time soon especially with interest rates on the rise.  Couple this with the massive number of entry level homes that were bought up by investors to use as rentals over the past few years and it’s no wonder that we have an entry level housing crisis.

The lack of existing entry level homes pushes this large potential source of home buying demand towards the only other option that perspective home buyers have – new construction.  Problem here is that the labor market is tight, commodities prices are rising and impact fees in regions with the worst shortages are generally high.  In other words, it’s really, really difficult to build entry level affordable housing.  This chart courtesy of The Wall Street Journal’s excellent Daily Shot email newsletter tells a rather disturbing story.

The “over $500k” market is showing some momentum but the “under $200k” market has essentially collapsed since the mid-aughts and that is where the vast majority of production starts and sales typically come from.  Keep in mind that these numbers are for the entire United States.  I was unable to find the data set for new homes in California when I wrote this but the median existing home value here is double and I would imagine that the ratio reflected in the chart above is substantially worse.

The bottom line is that it’s going to be incredibly difficult to build new starter homes going forward in this sort of environment.  However, this is not for a lack of trying.  Generally speaking, any new communities that are priced at the FHA limit or below (at least in California) sells much quicker (in some cases twice as fast) as product priced above it.  When I speak with builder clients, the vast majority would prefer to only build less expensive entry level homes since that’s where the demand is and quicker sales mean better returns.  However, it’s incredibly difficult to make the numbers work in an environment where discretionary approvals can drag out for years and costs continue to rise while revenues are often constrained by government mandated FHA limits.  Short of a recession, the only way that the trend will reverse is through easing of immigration restrictions to help with the construction cost inflation issue and weakening the discretionary approval authority that local communities wield over new development.  Unfortunately, neither of these is likely to be politically palatable for the foreseeable future.  The end result, of course is this – rent is now eating up record share of US disposable income:

Economy

Disconnect: Many of the usual economic gauges are proving to be untrustworthy in this cycle, casting doubt about how the economy is actually doing.

Nothing Left Over: The US savings rate is at it’s lowest point since 2007 and getting it higher again could be a painful process.

The Bubble that Wasn’t: Why Treasuries are not a bubble despite predictions of doom and gloom in the years after the Great Recession.

Commercial

Saturated: There are far too many chain and fast food restaurants in the US today and Wall Street’s insatiable appetite for growth has a lot to do with it.

Everyone is a Competitor: Private equity firm Pitchbook estimates that Amazon competes head-to-head with at least 129 major corporations, a number that will only grow as new business lines are added.  There is a precedent for this and it doesn’t end well.

Residential

Hunker Down: A combination of a lack of new home construction and baby boomers staying healthier lAter in life has US homeowners’ mobility rate at a 30-year low and renovations at an all-time high.

Vultures Descend: Distressed investors are already buying damaged Houston homes for 40 cents on the dollar.

Bubble Watch – Negative: Calculated Risk’s Bill McBride says that we aren’t in a housing bubble due mostly to a lack of speculative mania…..but that housing is likely overvalued.

Strange Bedfellows: The unexpected but logical nexus between urban infill developers and environmentalists.

Profiles

No End In Site: PetroChina is the largest single stock collapse in history, having shed $800 billion in value since coming public in 2007.  Given oil’s current price and China’s policy of pushing for adoption of electric car technology, things could still get worse from here. 

This Ends in Tears: Rampant celebrity endorsement of Initial Coin Offerings have to be the most blatant bubble warning in history, especially when they involve a couple of young former con artists from Miami. See Also: Bitcoin mania has students flocking to crypto currency classes at Stanford and other top computer science schools.

The Highs are Too Damn Taxed: California will start taxing legalized pot as much as 45% which could be high enough to keep the black market in business.  When surveyed, 9 out of 10 economists agreed that this consumption tax is a blunt tool.

Chart of the Day

Source: The Daily Shot

WTF

Gotta Hear Both Sides: Police in Vermont arrested a man wearing a clown costume who was intoxicated and in possession of cocaine when he decided to pass out in the bedroom of a stranger’s house.

Make it Rain: Strippers are going on strike in New York to protest bottle girls stealing their tips. (h/t Elizabeth Poston)

Idiot Proof: Salzburg, Austria has taken to covering lampposts in airbags in order to prevent ‘smartphone zombies’ from getting hurt when they bump into them.

Goals AF: An dog survived a bear attack due to the fact that it was extremely obese because, Florida.

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

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