(Diana Olick) Communities are desperate for more affordable housing, but the cost for developers is just too high. Land, labor and materials were pricey before the pandemic, and they are even more so now.
That is why some creative developers are now turning to hotels – and it appears to be a match made in real estate heaven.
“I don’t see any way of avoiding a great deal of pain in the commercial real estate market in 2021. It is almost inevitable. My friends at the Federal Reserve and FDIC are becoming increasingly uncomfortable with what’s going on in the commercial real estate world.”
Cam Fine, Former President of Independent Community Bankers of America
Days before the State of Wisconsin denied Foxconn’s request for state tax credits – in the form of direct payments from the state to Foxconn’s bank account – related to the “factory” built by the world’s largest contract tech manufacturer in Mount Pleasant, Wisconsin. The project was announced shortly after President Trump’s upset election victory, but quickly ran aground as reporters complained that the facility being built by Foxconn bore little resemblance to the enormous Gen 10.5 LCD factory the company had promised.
(Bryan Horwath) The median sale price of existing homes in the Las Vegas area grew to record high $337,250 in September, according to a monthly report from Las Vegas Realtors.
That’s an increase of 9% from September of last year, and a bump of about $2,000 from August.
The median price for September sets a new all-time for the region, though a shortage of inventory has led to an unbalanced market despite near all-time low mortgage rates.
The continued rise of home prices has come despite a global pandemic that has decimated the region’s tourism-based economy.
“Local home prices keep setting records, which is remarkable when you think about the challenges we’re facing,” said Tom Blanchard, president of Las Vegas Realtors and a longtime area agent. “The pause during the beginning of the pandemic seems to have pushed the traditional summer sales season into the fall.”
For town homes and condominiums, the median sale price for a unit in September was $195,500, which represented a 14% increase from September 2019.
With Gov. Steve Sisolak’s order that allowed open houses to resume earlier this month, Blanchard said he envisions the potential for market activity in the coming weeks and months.
“We’ll see if we can sustain this momentum heading into next year,” Blanchard said. “We’re also dealing with a housing shortage, with no signs of that changing anytime soon.”
The number of homes available for sale remains “well below” the six-month supply that’s generally considered to represent a balanced market. At the end of last month, just under 4,800 homes — not including condos or town homes — were listed for sale without an offer, down 35% from September 2019.
Prince Harry could face a ‘monumental’ tax bill unless he takes a break from his £11 million Californian mansion next month, according to experts.
The Prince moved to Los Angeles with his wife Meghan and their baby son Archie in early May after leaving a rented mansion in Vancouver, Canada, in March.
The couple were first reported to be staying at a sprawling Beverly Hills mansion owned by TV producer Tyler Perry on May 7 – meaning that, as of today, Harry has been in the US for at least 151 days. If he reaches 183 days he is legally liable to pay taxes there.
Smoky skies in San Francisco (Springfield News Sun)
A new report confirms what we’ve been talking about since the early days (read: here) of the virus pandemic, that is, an exodus out of major cities.
According to real estate analytics company Zumper, the exodus, out of San Francisco has been so great, that the median rent for a one-bedroom apartment collapsed more than 20% in September from a year ago to $2,830. Month over month, September rent for a one-bedroom apartment in the city fell by 7%.
Over the past 6 months ZeroHedge has repeatedly discussed the plight of commercial real estate which unlike most other financial assets, failed to benefit from a Fed bailout or backstop (but that may soon change). It culminated in June when we wrote that the “Unprecedented Surge In New CMBS Delinquencies Heralds Commercial Real Estate Disaster.” The ongoing crisis in structured debt backed by commercial real estate in general and hotel properties in particular, prompted Wall Street to launch the “Big Short 3.0“ trade: betting against hotel-backed loans, which had the broadest representation in the CMBX 9 index, whose fulcrum BBB- series has continued to slide even as the broader market rebounded.
What do you say when you’re asked to cut your commission? Are you regularly asked to cut your commission? Do you immediately “cave” and cut your commission when asked?
(Nina Hollander) In my personal experience, when prospective sellers ask Realtors to cut their commission it’s more often than not because the agents have not properly presented and defined their value to the seller. This means having a very detailed and specific listing presentation that leaves no doubt about what you will do to market their home, along with impressive statistics such as your average days on market versus your market’s average agent’s.
Then, there are those sellers who read on the internet that they should always ask for a commission reduction up front. What always amuses me is that when I ask why they’re asking and say no in a nice way, these sellers typically smile and say “well, you know we had to ask.” I always smile back and answer “yes, I know.” Then I steer the conversation on to other topics. More often than not, sellers drop the conversation about commissions right there and then. But you should always ask why they are asking… you can’t respond properly until you know what’s behind their question.
Let’s face it, you don’t want to lose a potential listing client, but you also don’t want to immediately slash your rate and devalue your worth. Since the commission cutting conversation never seems to go away, here’s a link to some great scripts from McKissoc Learning to show prospective listing clients why you’re worth every penny of what you earn without sounding defensive. These scripts address the three primary reasons home sellers ask for a commission cut according to McKissoc Learning:
The sellers don’t have sufficient equity in their home
The sellers are being “savvy” consumers, looking for the “best” deal they can get.
The sellers don’t see the true value of what you bring to the table.
Clearly, there’s not much you can do about the lack of equity. And maybe that is a listing you don’t want to be handling The two second reasons are totally in our control to handle in the listing presentation/conversation.
The plandemic-induced summer of escape from New York continues at a moment violent crime is on the rise, restaurant and public venue closures make the city less appealing, public transit is reeling in debt, and remote working set-ups are giving those with means greater mobility.
More worrisome trends… or rather signs of the times signalling that for many the gentrified Big Apple has as one family recently put it reached its “expiration date”. Two separate NY Times reports on Sunday detailed that moving companies are so busy they’re in an unprecedented situation of having to turn people away, while simultaneously the suburbs are witnessing an explosion in demand “unlike any in recent memory”.
And then there’s fresh data showing that during the plandemic Americans are fast getting the hell out of the more expensive “real estate meccas” of New York and New Jersey.
According to FlatRate Moving, the number of moves it has done has increased more than 46 percent between March 15 and August 15, compared with the same period last year. The number of those moving outside of New York City is up 50 percent — including a nearly 232 percent increase to Dutchess County and 116 percent increase to Ulster County in the Hudson Valley.
“The first day we could move, we left,” a dentist was cited as saying of the moment movers were declared an “essential service” by Gov. Cuomo late March. Her family moved to Pennsylvania where they had relatives.
And second, the Times details the unprecedented boom in the suburban real estate as an increasingly online workforce is fed up with closures in the city, losing its appeal and vibrancy.
July alone witnessed a whopping 44% increase in home sales among suburban counties near NYC compared to the same month last year, as the report details:
Over three days in late July, a three-bedroom house in East Orange, N.J., was listed for sale for $285,000, had 97 showings, received 24 offers and went under contract for 21 percent over that price.
On Long Island, six people made offers on a $499,000 house in Valley Stream without seeing it in person after it was shown on a Facebook Live video. In the Hudson Valley, a nearly three-acre property with a pool listed for $985,000 received four all-cash bids within a day of having 14 showings.
Since the pandemic began, the suburbs around New York City, from New Jersey to Westchester County to Connecticut to Long Island, have been experiencing enormous demand for homes of all prices, a surge that is unlike any in recent memory, according to officials, real estate agents and residents.
They’re not just fleeing for the suburbs or upstate, but also to the significantly cheaper and lower cost of living areas of the country like Texas, Florida, South Carolina, and Oregon, or to rural areas.
COVID-1984 is fast reviving American mobility on scales reminiscent of the mid-20th century. Bloomberg describes separately that“Far more people moved to Vermont, Idaho, Oregon and South Carolina than left during the pandemic, according to data provided to Bloomberg News by United Van Lines.”
“On the other hand, the reverse was true for New York and New Jersey, which saw residents moving to Florida, Texas and other Sunbelt states between March and July,” the report finds.
General fear of living in densely populated areas, better enterprise video communications platforms making possible fully remote workplaces which in some cases are ‘canceling’ the traditional office space altogether, and a lack of nightlife or entertainment allure of big cities is driving the exodus.
In addition to the aforementioned states, “Illinois, Connecticut and California, three other states with big urban populations, were also among those losing out during the plandemic,” according to United Van Lines data.
Things are going so great in California that Pinterest just paid $89.5 million to cancel its 490,000-square-foot lease at the upcoming 88 Bluxome project in San Francisco.
The company blames working from home as a result of the pandemic as the reason for abandoning the lease – but we’re sure the state’s rising taxes, impending real estate market crash and conversion of the property to a temporary homeless shelter in March likely helped contribute to the decision making.
Either way, Pinterest wanted out of the lease so badly they were willing to fork over a hefty sum to ensure they would not be held to it. The company’s total lease obligations for the property would have amounted to $440 million.
Pinterest’s CFO told the San Francisco Chronicle: “As we analyze how our workplace will change in a post-COVID world, we are specifically rethinking where future employees could be based. A more distributed workforce will give us the opportunity to hire people from a wider range of backgrounds and experiences.”
Rendering of 88 Bluxome as it would exist years from now. Today, the city has converted the property to a homeless shelter.
Pinterest appears to be following in the steps of companies like Facebook, who has also embraced the idea of remote work for its staff. Facebook aims to have half of its company working remotely “within a decade”, CEO Mark Zuckerberg has said.
To us, it appears to be more of a statement about San Francisco’s real estate market than about Pinterest. After all, the company was the first and only lease commitment “in San Francisco’s 230-acre Central South of Market district, where numerous large commercial and residential projects have been approved after the city raised height limits last year,” the Chronicle said.
They were to help contribute to 30,000 new jobs and 20,000 new residents in the district, which the city hoped would fuel more than $2 billion in public benefits. The project is “now in doubt”. The proposed 88 Bluxome project was supposed to start construction this year, but current plans for the project are now “unclear”.
And in peak San Francisco fashion, the city converted the tennis club currently on the lot to a homeless shelter in March.
While mayor Lori Lightfoot continues to try and assure the public that she has everything under control, the exodus from Chicago as a result of the looting and riots are continuing. Citizens of Chicago are literally starting to pour out of the city, citing safety and the Mayor’s ineptitude as their key reasons for leaving.
Hilariously, in liberal politicians’ attempt to show the world they don’t need Federal assistance and that they don’t need to rely on President Trump’s help, they are inadvertently likely creating more Trump voters, as residents who seek law and order may find no other choice than to vote Republican come November.
And even though residents who support BLM understand the looting and riots in some cases, they are not waiting around for it to get better on its own, nor are they waiting around for it to make its way to their house, their families or their neighborhoods.
One 30 year old nurse that lives in River North told the Chicago Tribune: “Not to make it all about us; the whole world is suffering. This is a minute factor in all of that, and we totally realize that. We are very lucky to have what we do have. But I do think that I’ve never had to think about my own safety in this way before.”
The city’s soaring crime has been national news this year and many residents are claiming they “no longer feel safe” in the city’s epicenter, according to the Tribune report. Aldermen say their constituents are leaving the city and real estate agents say they are seeing the same.
The “chaotic bouts of destruction in recent months” are the catalyst, the report says.
Residents of the Near North Side told a Tribune columnist that they would be moving “as soon as we can get out” and others “expressed fear” of returning downtown. The Near North Side is 70% white and 80% of residents have a college degree. The median household income is $99,732, which is about twice the city’s average.
Real estate broker Rafael Murillo says people are moving to the suburbs quicker than planned: “And then you have the pandemic, so people are spending more and more time in their homes. And in the high-rise, it starts to feel more like a cubicle after awhile.”
(Wolf Richter) There is a lot of discussion about the low levels of inventory for sale, as potential sellers have pulled their homes off the market or are not wanting to list their homes at the moment, waiting for the Pandemic to blow over, or waiting for more certainty or whatever; or their mortgage is now in forbearance and they don’t want to make a move.
These discussions cite buyers who, after being kept out of the housing market for a couple of months due to the lock downs, are now swarming around out there, stumbling all over each other, looking for homes to buy, jostling for position, and engaging in bidding wars with each other.
And then there is the widely reported move to the suburbs, or to small towns, and away from big densely populated cities, by those who have shifted to work-from-home, to work-from-anywhere, which blatantly contradicts some of the other stories of big cities being overrun by buyers engaging in bidding wars.
Those are some of the narratives we’re hearing, and they all make some intuitive sense. But this is not the case everywhere. So we’re going to look at San Francisco, one of the most expensive housing markets in the US, based on weekly data that was compiled by real-estate brokerage Redfin, from local multiple listing service (MLS) and Redfin’s own data, updated at the end of last week.
San Francisco is now flooded with homes for sale. “Active listings” surged to 1,344 homes in the week ended July 5, up 65% from the same week last year, and the highest number since the housing bust, amid a 145% year-over-year surge in “new listings.”
There normally is a seasonal surge in active listings after Labor Day that peaks in late October. But this month, the surge of active listings (1,344) has already blown by those peaks in October, including the multi-year peak of 1,296 in October 2019. This is “pent-up supply” coming on the market at the wrong time of the year when supply normally declines (chart via Redfin):
Redfin’s data doesn’t go back that far. But the 1,344 active listings would be the highest since 2011, during the final stretch of the San Francisco Housing Bust, based on MLS data provided by local real-estate site, SocketSite.
Supply of homes for sales has more than doubled, from 7.8 weeks last year at this time to 16.6 weeks now, at the current rate of sales. Note the spike of supply in May, a function of sales that had collapsed (chart via Redfin).
Homes are being pulled off the market again: 61 homes were delisted, over double the number in the same week last year. The chart below shows the spike in delisted homes that started in mid-March during the early phases of the lock down. It also shows the normal seasonal spike of delistings ahead of the holidays in December – yes, inventory is low because sellers pull their unsold property off the market. But now, with the flood of inventory for sale on the market, the surge in delisted homes has started again (chart via Redfin):
Pending sales lack pent-up demand. Pending sales had collapsed 77% by early April compared to the same time last year, but then started digging out of that trough. In early July, pending sales were still down 8% from last year and now are following the seasonal downtrend and appear to be back on track, just slightly lower.
In terms of the recovery, that was pretty good. But there is no sign of pent-up demand, and the home sales that didn’t happen during the collapse in March, April, and May have not created a surge in deals, and there is no sign of pent-up demand (chart via Redfin).
Buyers now have the largest choice of homes for sale since the Housing Bust nearly a decade ago. And there is no need to engage in bidding wars or other foolishness.
Sellers might be motivated, as they say. Among the sellers might be those who – given the issues of the Pandemic, or future Pandemics – are itching to leave the second most densely populated city in the US, and one of the most expensive, and head to cheaper pastures inland in California, or to other states, or to smaller towns with big price tags along the California coast.
There are lots of anecdotal reporting on these trends, including housing markets that have caught fire in places such as Carmel-by-the-Sea, a beach town on California’s Monterey Peninsula, on Highway 1, about 110 miles south of San Francisco and about 75 miles south of Silicon Valley.
And with work-from-home in place, it might be convenient too. It doesn’t take very long to drive to San Francisco and less long to Silicon Valley for the twice-a-month meeting, especially now, with work-from-home having cleared up some of the previously infernal congestion.
There are all kinds of anecdotal observations and theories people are spinning at the moment, trying to come to grips with the changes underway. But one thing we can now see: The sellers have come out of the woodwork in San Francisco. Just don’t look for the usual thicket of open-house signs on the sidewalk. The process has gone digital and by appointment only.
On May 29, the office of California Secretary of State Alex Padilla announced that enough signatures were deemed valid for the second version of a ballot initiative to require commercial and industrial properties to be taxed based on their market value. In California, the proposal to assess taxes on commercial and industrial properties at market value, while continuing to assess taxes on residential properties based on purchase price, is known as split roll.
Proposition 13 (1978) requires that residential, commercial, and industrial properties be taxed based on their purchase price. The tax is limited to no more than 1 percent of the purchase price (at the time of purchase), with an annual adjustment equal to the rate of inflation or 2 percent, whichever is lower. According to the state Legislative Analyst’s Office, market values in California tend to increase faster than 2 percent per year, meaning the taxable value of commercial and industrial properties is often lower than the market value.
The first version of the split-roll tax ballot initiative qualified for the November 2020 ballot in October 2018. In August 2019, the campaign Schools and Communities First, which is behind the proposal, announced that signatures would be collected for a revised version of the ballot initiative. Tyler Law, a campaign spokesperson, said that the campaign would not withdraw the qualified initiative from the ballot until the revised initiative qualifies. Law said, “The committee’s got the money. We’re going to get it on the ballot.”
About 1.75 million signatures were filed for the second version on April 2, 2020. At least 997,139 (57.02 percent) of the signatures needed to be valid. Based on a random sample of submitted signatures, 74.60 percent were projected to be valid.
Both versions of the ballot initiative would create a process in the state constitution for distributing revenue from the revised tax on commercial and industrial properties. First, the revenue would be distributed to (a) the state to supplement decreases in revenue from the state’s personal income tax and corporation tax due to increased tax deductions and (b) counties to cover the costs of implementing the measure. Second, 60 percent of the remaining funds would be distributed to local governments and special districts, and 40 percent would be distributed to school districts and community colleges (via a new Local School and Community College Property Tax Fund).
Whereas the first version would have taxed property whose business owners have $2.00 million or more in holdings in California and operate on a majority of the property, the second version eliminated the majority-operation requirement and increased the threshold to $3.00 million.
The second version also redefined the exception for small businesses. The first version would have continued to tax businesses with 50 or fewer full-time employees based on purchase price. The second version would likewise define small businesses as those with 50 or fewer full-time employees but would also require businesses to be independently owned and operated and own real estate in California to be exempted from the change. Other changes involve replacing the state’s existing funding distribution formula for schools and colleges with a new formula for distributing the revenue from the ballot initiative. The second version would also give retail centers, whose occupants are 50 percent or more small businesses, more time before being taxed at market value.
Since the campaign Schools and Communities First will withdraw the first version of the ballot initiative, the qualification won’t change the number of measures on the ballot in California. As of May 31, six citizen-initiated measures have qualified for the ballot (excluding the first version of the split roll tax initiative). Three more ballot initiatives are pending signature verification. The verification deadline is June 25, 2020. June 25 is also the last day that the California State Legislature can place measures on the November ballot.
U.S. equity markets surged this week, buoyed by positive vaccine data and on renewed hopes of a V-shaped economic recovery as countries around the world begin the reopening process.
The S&P 500 ended the week higher by 3.1%, closing nearly 35% above its lows in late March despite another slate of ugly unemployment data that looms over the recovery.
Real estate equities led the gains this week, propelled by a bounce-back in many of the most beaten-down property sectors including retail and hotels that were ravaged by the lock downs.
Home builders continued their recent resurgence as high-frequency housing data has indicated that the housing industry may indeed be leaders of the post-coronavirus economic rebound.
Fresh data from Redfin showed a “stunning” rebound in housing market activity over the last month as home buying demand is now 16.5% above pre-coronavirus levels while home values have seen accelerating growth.
Real Estate Weekly Outlook
(via Hoya Capital) U.S. equity markets surged this week, buoyed by news of positive clinical trial results from Moderna (MRNA) and Inovio Pharmaceuticals (INO) and on renewed hopes of a V-shaped economic recovery as most states and countries around the world have begun the post-coronavirus reopening process. Contrary to the predictions of some experts, the virus has remained on the retreat even in states that were among the first to reopen, while emerging evidence – detailed in a report by JPMorgan – suggests that lock downs may have actually aggravated rather than mitigated the impacts of the disease. Uncertainty remains, however, over how quickly the economic damage can be reversed and the “shape” of the economic recovery in the back half of 2020.
Following a decline of 2.1% last week, the S&P 500 ETF (SPY) ended the week higher by 3.1%, closing nearly 35% above its lows in late March. Real estate equities led the gains this week, reversing almost all of last week’s steep declines, propelled by a bounce-back in many of the most beaten-down property sectors that were ravaged by the economic lock downs. Closing roughly 30% off its lows in March, the broad-based Equity REIT ETFs (VNQ) (SCHH) surged 7.0% with all 18 property sectors in positive territory while Mortgage REITs (REM) jumped 10.8% on the week, closing 55% above its March lows amid clear signs of stabilizing in the mortgage markets.
The more pronounced strength this week was seen in the recently lagging Mid-Cap (MDY) and Small-Cap (SLY) indexes which delivered strong out performance, surging by 7.3% and 8.8% respectively. The gains this week came despite another round of ugly economic data including Initial Jobless Claims data that showed that another 2.43 million Americans filed for unemployment benefits last week, bringing the eight-week total to over 38 million. However, flashes of strength have become increasingly more evident in recent weeks – particularly in the all-important U.S. housing market – and commentary from corporate earnings reports over the last two weeks indicated that the economic rebound is already beginning to take hold in many segments of the economy. The Industrials (XLI), Energy (XLE), and Consumer Discretionary (XLY) sectors joined the real estate sectors as top-performers on the week while Healthcare (XLV) was the lone sector in the red.
Home builders and the broader Hoya Capital Housing Index were among the standouts this week as recent high-frequency housing data has indicated that the housing market may indeed be the leader of the post-coronavirus economic rebound. The gains came following fresh data from Redfin (RDFN) that showed a “stunning” rebound in housing market activity over the last month as home buying demand is now 16.5% above pre-coronavirus levels on a seasonally-adjusted basis, gains which have been “driven by record-low mortgage rates as pent-up demand is unleashed.” This data was broadly consistent with recent commentary from home builders and data released earlier this week from the Mortgage Bankers Association which showed that home purchase mortgage applications rose for the 5th straight week and are now lower by just 1.5% from last year compared to the 35% decline in April.
As goes the U.S. housing market, so goes the U.S. economy. Residential real estate is by far the most significant asset on the aggregate U.S. household balance sheet and the value of the U.S. housing market is larger than the combined market capitalization of every U.S. listed company. As we’ve discussed for many years, it’s impossible to overstate the importance of the U.S. housing market in forecasting macroeconomic trends for the broader economy and just as it was impossible to avoid a deep and lasting economic recession from the sub-prime housing crisis, it is difficult to envision the “depression-like” economic environment forecasted by some analysts without first seeing substantial instability in the housing market. While very early in the economic recovery, we’re so far observing quite the opposite as the combination of favorable millennial-led demographics, record-low mortgage rates, and a substantial under supply of housing units after a decade of historically low levels of new construction continue to be relentless tailwinds.
Real Estate Earnings Season Wrap-Up
While the residential real estate sector may be an area of relative out performance during the post-coronavirus economic recovery, other areas of the commercial real estate sector face a more uncertain future. Real estate earnings season wrapped up this week with a handful of late-reporting stragglers, so the final numbers for rent collection are now in. Rent collection has been largely a non-issue for residential, industrial, and office REITs, as each sector has collected over 90% of April rents. For retailers, if you’re not essential, you’re not probably paying the rent. Collection among mall REITs averaged around 22% while shopping center REITs collected roughly 60% of April rents and net lease REITs collected 73% of rents.
Even among the commercial REIT sectors that reported solid rent collection in April, there are some areas of concern regarding their respective long-term outlook in the post-coronavirus world. Earlier this week, we published Office REITs: Coronavirus Killed Corporate Culture. Office REITs have been pummeled during the coronavirus pandemic amid mounting questions over the long-term demand outlook as businesses become increasingly more comfortable with “remote work” environments as reports surfaced this week that Facebook (FB) and others plan to permanently shift workers to work-from-home arrangements. Zoom (ZM) and “work-from-home” technology suites have emerged as the bigger competitive threat to the office REIT sector as more than half of the companies expect to shrink their physical footprint.
Two more equity REITs were added to the Coronavirus Dividend Cut list this week: net lease REIT VEREIT (VER) and Braemar Hotels (BHR). We’ve now tracked 50 equity REITs in our universe of 165 names to announce a cut or suspension of their dividends, the vast majority of which have come from the retail and hotel REIT sectors. Apart from their sector affiliations, the equity REITs that have cut or suspended their dividends have been almost exclusively companies in the smallest third of market capitalization within the REIT sector and in the highest third in terms of leverage metrics as the “outperforming factors” that we discussed earlier this year in The REIT Paradox: Cheap REITs Stay Cheap have been on full display in 2020.
Among the handful of stragglers to report results this week were four hotel REITs including the aforementioned Braemar Hotels along with Apple Hospitality (APLE), CorePoint (CPLG), and Ashford (AHT). While Q1 occupancy and Revenue Per Available Room (RevPAR) metrics were understandably ugly across the hotel REIT sector, commentary on earnings calls this week suggested that we’ve likely seen the worst of the occupancy declines as Ashford’s management noted that “occupancy continues to increase on a weekly basis. We are seeing pick-up of room nights on a short-term basis and the pace of that pickup is increasing almost daily.”
All 18 REIT sectors finished in positive territory this week as hotel and casino REITs including Gaming & Leisure Properties (GLPI) and VICI Properties (VICI) were among the top performers this week as a growing number of hotels and casino properties across the country have announced plans to re-open over the next several weeks. Shopping center REITs, particularly those focused on the big-box segments like Retail Properties of America (RPAI), Kimco Realty (KIM), and SITE Centers (SITC), were also leaders this week after generally positive commentary on reopening plans from several big-box retailers including Best Buy (BBY). The technology REIT sectors – data centers and cell towers – were among the laggards this week, but remain the only two REIT sectors in positive territory on the year.
This week, published Apartment REITs: No Rent Strike, But Fears Of Urban Exodus. We discussed how apartment REITs reported limit issues with rent collection in April and early-May amid the depths of the pandemic-related shutdowns as more than 95% of rents were collected. Ultra-dense metros like NYC, Chicago, and San Francisco, however, may see lasting pain as residents flee to lower-cost and “safer” semi-urban and suburban markets, including faster-growing Sunbelt metros. Several REITs are more exposed than others from this trend and we detailed the geographical exposure of the nine largest multifamily REITs. As one of the more defensively-oriented and counter cyclical REIT sectors, we remain bullish on long-term rental fundamentals.
Strong housing market data over the last several weeks has been good news for mortgage REITs as well as residential mREITs jumped another 10.6% this week while commercial mREITs gained 12.0%, each rebounding more than 50% from their lows in early April. New York Mortgage REIT (NYMT) was among the leaders this week after reporting solid Q1 results. New Residential (NRZ) was also among the leaders after providing an interim update in which it noted that had bolstered its liquidity position through an additional capital raise and noting that forbearance requests have continued to be lower than previously forecasted.
Helping the residential mREITs this week was news the FHFA has issued temporary guidance that should make it easier for homeowners who have taken advantage of COVID forbearance programs to refinance or buy a new home. Borrowers will be allowed to get a new mortgage three months after their forbearance period ends and they have made three consecutive payments under their repayment plan. Roughly 9% of mortgage loans representing roughly 4.75 million homeowners are now in forbearance, according to data released this week from Black Knight (BK), but a recent survey from LendingTree found that the majority of these borrowers chose to enter forbearance not out of necessity but simply because it was offered and available without any apparent penalty under the CARES Act.
Real Estate Economic Data
Below, we analyze the most important macroeconomic data points over the last week affecting the residential and commercial real estate marketplace.
Housing Recovery Has Already Begun
Home builder Sentiment data released on Monday showed that confidence among home builders – particularly in the Southern region where the majority of publicly-traded home builders are based – has begun to bounce back from the lows in April. The NAHB Housing Market Index climbed to 37 from last month’s reading of 30, driven by a 12-point rebound in Future Sales expectations and an 8 point bounce in Buyer Traffic. Consistent with recent reports from other home builders, Meritage Home (MTH) announced this week that it believes that May orders could be “in line” with last May’s as the strong sales momentum seen during the last two weeks of April has carried over into early May.
The U.S. housing industry was red-hot before the onset of the coronavirus crisis with Housing Starts, Building Permits, and New Home Sales all eclipsing post-cycle highs in early 2020. Backward-looking data released this week by the U.S. Census Bureau showed the magnitude of the decline in construction activity in April amid the worst of the pandemic. On a seasonally-adjusted annualized basis, housing starts and building permits fell to the lowest level since 2015 in April at 891k and 1,074k units, respectively, following a relatively solid March. Single-family starts and permits were actually quite a bit stronger than expected while the always volatile multifamily construction activity showed sharper declines in April.
Existing Home Sales also beat expectations in April, coming in at 4.33 million versus expectations of 4.30 million. Home purchase mortgage applications – a leading indicator of Existing Home Sales – rose for the 5th straight week and are now remarkably lower by just 1.5% from last year compared to the 35% decline in April according to data released this week by the Mortgage Bankers Association. The 30-Year Mortgage rate remains lower by roughly 90 basis points from the same week last year, a level of decline in mortgage rates that has historically been strongly correlated with robust growth in housing market activity under normal conditions.
2020 Performance Check-Up
REITs are now lower by roughly 24.0% this year compared with the 8.2% decline on the S&P 500 and 14.1% decline on the Dow Jones Industrial Average. Consistent with the trends displayed within the REIT sector, mid-cap and small-cap stocks continue to under perform their larger-cap peers as the S&P Mid-Cap 400 and S&P Small-Cap 600 are lower by 17.7% and 23.9%, respectively. The top-performing REIT sectors of 2019 have continued their strong relative performance through the early stages of 2020 as data centers and cell tower REITs remain the real estate sectors in positive territory for the year, while industrial and residential REITs have also delivered notable out performance. At 0.66%, the 10-Year Treasury Yield has retreated by 126 basis points since the start of the year and is roughly 260 basis points below recent peak levels of 3.25% in late 2018.
Next Week’s Economic Calendar
A busy two-week stretch of housing data continues next week with Home Price data from the FHFA and S&P Case-Shiller on Tuesday which is expected to show a steady rise in home prices in March during the early stages of the pandemic. New Home Sales data for April is also released on Tuesday while Pending Home Sales data for April is released on Thursday. Initial Jobless Claims data on Thursday will again be another “blockbuster” report with expectations that we will see another 2.5 million job losses, but we’ll be watching closely to the continuing claims for indications that temporarily-unemployed Americans are returning to work.
One of Cristal Clark’s newest listings is a single-level French Country-style home in Birnam Wood designed by Michael L. Hurst, combining contemporary finishes and amenities with French Country elegance. Ms. Clark has remained busy throughout the pandemic, with an average of 10 or more showings a week.
Despite economy, Santa Barbara agents are busier than ever
When Santa Barbara County was sent into lock down in mid-March to combat the growing coronavirus crisis, the residential real estate industry held its breath and expected the worst. Buyers and sellers faced serious fears as jobs were in jeopardy and the prospect of opening one’s house to strangers kept homes off the market.
“Basically in both directions buyers and sellers backed off. It became a real concern,” said Village Properties owner Renee Grubb.
Now it appears those fears have been alleviated.
Over the last two months, real estate activity has remained strong in the Santa Barbara area, and agents are busier than ever despite the transition to virtual showings.
Natalie Grubb of Village Properties at one of her listings on the Mesa. Village Properties is preparing to reopen their offices after two months, while continuing to utilize virtual tours.
“I would have to say at least for now things are getting better. When I go on my calls for the California Association of Realtors, and they report on all of California, it’s looking better everywhere,” Ms. Grubb told the News-Press.
“I chose not to lay off any of my staff, and I feel fortunate that now the market is doing better and so my losses haven’t been as great as I thought they were going to be, which makes me happy of course.”
At the end of March and going into April, the forecast was bleak. Village Properties saw a significant dip in closings and properties fall out of escrow. Compared to 2019, they saw a 50% decline in business.
“Things started to pick up around mid-April. I think more people had gotten used to what was going on. We’ve been doing this for a month,” said Ms. Grubb.
“You never know until they close of course, but there are showings of high-end properties three, four, five times a week now. That kind of high-end activity actually started maybe two and a half to three weeks ago to where my agents who sell high end have been very busy.”
While the flurry of activity has been surprising, some agents, like Cristal Clark, did not even see business slow.
“For me there was no lag time,” said Ms. Clark.
“It was constant. I mean long hours working. It’s been nonstop.”
Ms. Clark was concerned at first, but soon saw a lot of interest from buyers from Los Angeles and San Francisco, especially in the under $10 million market.
“I think people want to be here. They see the beauty that Montecito and Santa Barbara has to offer and they’re not thinking about ‘I’d love to live there in the future’. They’re really putting it into place now, be it primary homes or secondary homes,” said Ms. Clark.
Kyle Kemp, district manager for Berkshire Hathaway, believes the slowing of activity in the first week was in part due to the uncertainty around using virtual tools to conduct business. Fortunately, many of his agents were already well versed in digital showings, and those that weren’t quickly caught on.
Lorie Bartron of Bartron Real Estate Group, a real estate team under Berkshire Hathaway HomeServices California Properties, shows off a property at 1060 Cieneguitas Road. Despite a short setback, Berkshire Hathaway is back on track for breaking its record for best year ever.
Although they were down 60% in sales in the first week, Mr. Kemp said his agents have rallied and are now only 20% behind, with a 206% increase in property inquiries in California compared to 2019.
“Once that stopped everybody started to feel comfortable, started to get their feet on the ground, realized Santa Barbara wasn’t going anywhere, the sun wasn’t going away, and all of a sudden people started coming back to real estate again,” said Mr. Kemp.
Mr. Kemp said most buyers seem to be in the technology sector, interested in getting out of Los Angeles and San Francisco and into the open spaces of Santa Barbara and Montecito.
“Those buyers don’t seem to be affected. In fact, a lot of them are telling us their businesses are doing better. We’re hit by the service industry for sure, because Santa Barbara is such an escape for everybody, so we tend to have a lot of hospitality, but that hasn’t for some reason affected the real estate,” said Mr. Kemp.
While the majority of interest and sales have been from California, agents are speaking to a lot of buyers from around the country looking to purchase homes in the area as soon as it is safe to travel.
“There are a lot of clients who want to live here, but they live somewhere where they have to take a plane ride, so they’re just kind of waiting until their areas open up more and they feel comfortable coming. I have a lot of clients coming next month in June from different parts of the U.S.,” said Ms. Clark.
“We would be selling houses all day long if people could get here physically,” said Mr. Kemp.
“They can do as much as they can do on a visual tour but if you’re going to spend $3 to $10 million on a property, you kind of want to walk around it.”
The biggest issue for agents has been a lack of inventory. Going into 2020, there was already a shortage of houses on the market, and the number of sellers has not increased to meet the demand seen in April and May.
“I am seeing every agent overloaded with a large number of buyers and not a lot of houses to sell. We haven’t seen anything happen on prices, where I thought for sure we would see some kind of trend downwards because of what was going on, and that was absolutely not happening,” said Mr. Kemp.
Natalie Grubb of Village Properties at one of her listings on the Mesa. Village Properties is preparing to reopen their offices after two months, while continuing to utilize virtual tours.
Natalie Grubb of Village Properties at one of her listings on the Mesa. Village Properties is preparing to reopen their offices after two months, while continuing to utilize virtual tours.
This is especially true with houses on the market for $1 million and under, which agents can’t keep on the shelves. If it’s a good house, priced well and in good condition, agents are fielding multiple offers.
“It’s great for sellers, a little tough for buyers. Ultimately sellers are thinking, ‘Well, should I put my house on the market?’ It’s actually a great time because there’s no competition. If you’re a buyer, buy sooner than later because when this really gets going I think there’s more buyers than sellers, so I think we’re going to have a tough market again,” said Mr. Kemp.
Despite a rocky March, real estate agents are preparing for a surge in interest as more people adjust to home buying during COVID-19 and are anticipating a good year for business.
“I think if we’re down at all it will be single digits. If we’re down by any percentage at all it will definitely be single digits, and it’s very possible that we’ll end up matching or coming very very close to what we did last year, and it was a good year last year. I think these last few months will tell, but if it continues I’m pretty optimistic that we’re going to end up in a good year,” said Ms. Grubb.
Is the real estate market on the brink of collapse? The US economy is headed for a recession if not a depression and as a result, real estate prices may drop. But there are no certainties, only probabilities. These are catalysts that could trigger incredible amounts of selling, which would flood the market with additional supply. IF this type of forced selling takes place, prices could collapse.
Will it play out like 2008-2012? Most likely not, but it could rhyme and the net result would be the same, prices plummeting in real terms (adjusted for inflation). If you’re interested in real estate, the housing market or the future of the economy, George Gammon dives deep into the demographic setup that may foreshadow much of tomorrow’s residential real estate market.
If mortgage demand is an indicator, buyers are coming back to the housing market far faster than anticipated, despite coronavirus shutdowns and job losses.
(CNBC) Mortgage applications to purchase a home rose 6% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Purchase volume was just 1.5% lower than a year ago, a rather stunning recovery from just six weeks ago, when purchase volume was down 35% annually.
“Applications for home purchases continue to recover from April’s sizable drop and have now increased for five consecutive weeks,” said Joel Kan, an MBA economist. “Government purchase applications, which include FHA, VA, and USDA loans, are now 5 percent higher than a year ago, which is an encouraging turnaround after the weakness seen over the past two months.”
As states reopen, so are open houses, and buyers have been coming out in force, if masked. Record low mortgage rates, combined with strong pent-up demand from before the pandemic and a new desire to leave urban down towns due to the pandemic, are driving buyers back to the single-family home market. It remains to be seen if this is simply the pent-up demand or a long-term trend.
Buoying buyers, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of up to $510,400 decreased to 3.41% from 3.43%. Points including the origination fee increased to 0.33 from 0.29 for 80 percent loan-to-value ratio loans.
Low rates are not, however, giving current homeowners much incentive to refinance. Those applications fell 6% for the week but were still 160% higher than one year ago, when interest rates were 92 basis points higher. That is the lowest level of refinance activity in over a month.
“The average loan amount for refinances fell to its lowest level since January — potentially a sign that part of the drop was attributable to a retreat in cash-out refinance lending as credit conditions tighten,” said Kan. “We still expect a strong pace of refinancing for the remainder of the year because of low mortgage rates.”
Federal regulators this week changed lending guidelines for Fannie Mae and Freddie Mac, allowing refinances on loans that were or still are in the government’s mortgage bailout, part of the coronavirus relief package. Those loans can be refinanced once borrowers have made at least three regular monthly payments. Given tough economic conditions and rising unemployment, more borrowers may be looking to save money on their monthly payments.
Weaker refinance demand pushed total mortgage application volume down 2.6% for the week.
The refinance share of mortgage activity decreased to 64.3% of total applications from 67% the previous week. The share of adjustable-rate mortgage activity increased to 3.2% of total applications.
Glenn Kelman, Redfin CEO, discusses the state of the residential home market and where he sees it headed as the coronavirus pandemic continues.
“Nobody was selling in March or April unless they absolutely had to. There was a sign of distress or panic in the market so sellers just withdrew. There weren’t many foreclosures because we’ve got so much forbearance in the lending markets, and that just means there was very little inventory in April”
Glen, where do you see markets that are going to be in trouble and distress potentially, and where do you see the opportunity.
“Yeah, well I’m worried about the big cities.
There will be something close to an exodus from these really large cities where housing is so expensive, to places like Charleston, Madison Wisconsin or Boise Idaho, places where it’s just more affordable and you can still walk around town a little bit. That’s where the search traffic has already shifted on our website. If you look where people are searching on Redfin, it is overwhelmingly people living in big cities, looking into small towns”
(ZeroHedge) Back in March 2017, a bearish trade emerged which quickly gained popularity on Wall Street, and promptly received the moniker “The Next Big Short.”
As we reported at the time, similar to the run-up to the housing debacle, a small number of bearish funds were positioning to profit from a “retail apocalypse” that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators which had fallen victim to the Amazon juggernaut. And as bad news piled up for anchor chains like Macy’s and J.C. Penney, bearish bets against commercial mortgage-backed securities kept rising.
The trade was simple: shorting malls by going long default risk via CMBX 6 (BBB- or BB) or otherwise shorting the CMBS complex. For those who have not read our previous reports (here, here, here, here, here, here and here) on the second Big Short, here is a brief rundown via the Journal:
each side of the trade is speculating on the direction of an index, called CMBX 6, which tracks the value of 25 commercial-mortgage-backed securities, or CMBS. The index has grabbed investor attention because it has significant exposure to loans made in 2012 to malls that lately have been running into difficulties. Bulls profit when the index rises and shorts make money when it falls.
The various CMBX series are shown in the chart below, with the notorious CMBX 6 most notable for its substantial, 40% exposure to retail properties.
One of the firms that had put on the “Big Short 2” trade back in late 2016 was hedge fund Alder Hill Management – an outfit started by protégés of hedge-fund billionaire David Tepper – which ramped up wagers against the mall bonds. Alder Hill joined other traders which in early 2017 bought a net $985 million contracts that targeted the two riskiest types of CMBS.
“These malls are dying, and we see very limited prospect of a turnaround in performance,” said a January 2017 report from Alder Hill, which began shorting the securities. “We expect 2017 to be a tipping point.”
Alas, Alder Hill was wrong, because while the deluge of retail bankruptcies…
… and mall vacancies accelerated since then, hitting an all time high in 2019…
… not only was 2017 not a tipping point, but the trade failed to generate the kinds of desired mass defaults that the shorters were betting on, while the negative carry associated with the short hurt many of those who were hoping for quick riches.
One of them was investing legend Carl Icahn who as we reported last November, emerged as one of the big fans of the “Big Short 2“, although as even he found out, CMBX was a very painful short as it was not reflecting fundamentals, but merely the overall euphoria sweeping the market and record Fed bubble (very much like most other shorts in the past decade). The resulting loss, as we reported last November, was “tens if not hundreds of millions in losses so far” for the storied corporate raider.
That said, while Carl Icahn was far from shutting down his family office because one particular trade has gone against him, this trade put him on a collision course with two of the largest money managers, including Putnam Investments and AllianceBernstein, which for the past few years had a bullish view on malls and had taken the other side of the Big Short/CMBX trade, the WSJ reports. This face-off, in the words of Dan McNamara a principal at the NY-based MP Securitized Credit Partners, was “the biggest battle in the mortgage bond market today” adding that the showdown is the talk of this corner of the bond market, where more than $10 billion of potential profits are at stake on an obscure index.
However, as they say, good things come to those who wait, and are willing to shoulder big losses as they wait for a massive payoffs, and for the likes of Carl Icahn, McNamara and others who were short the CMBX, payday arrived in mid-March, just as the market collapsed, hammering the CMBX Series BBB-.
And while the broader market has rebounded since then by a whopping 30%, the trade also known as the “Big Short 2” has continued to collapse and today CMBX 6 hit a new lifetime low of just $62.83, down $10 since our last update on this storied trade several weeks ago.
That, in the parlance of our times, is what traders call a “jackpot.”
Why the continued selling? Because it is no longer just retail outlets and malls: as a result of the Covid lock down, and America’s transition to “Work From Home” and “stay away from all crowded places”, the entire commercial real estate sector is on the verge of collapse, as we reported last week in “A Quarter Of All Outstanding CMBS Debt Is On Verge Of Default“
Sure enough, according to a Bloomberg update, a record 167 CMBS 2.0 loans turned newly delinquent in May even though only 25% of loans have reported remits so far, Morgan Stanley analysts said in a research note Wednesday, triple the April total when 68 loans became delinquent. This suggests delinquencies may rise to 5% in May, and those that are late but still within grace period track at 10% for the second month.
Looking at the carnage in the latest remittance data, and explaining the sharp leg lower in the “Big Short 2” index, Morgan Stanley said that several troubled malls that are a part of CMBX 6 are among the loans that were newly delinquent or transferred to special servicers. Among these:
Crystal Mall in Waterford, Connecticut, is currently due for the April and May 2020 payments. There has been a marked decline in both occupancy and revenue. This loan accounts for nearly 10% of a CMBS deal called UBSBB 2012-C2
Louis Joliet Mall in Joliet, Illinois, is also referenced in CMBX 6. The mall was originally anchored by Sears, JC Penney, Carson’s, and Macy’s. The loan is also a part of the CMBS deal UBSBB 2012-C2
A loan for the Poughkeepsie Galleria in upstate New York was recently transferred to special servicing for imminent monetary default at the borrower’s request. The loan has exposure in two 2012 CMBS deals that are referenced by CMBX 6
Other troubled mall-chain tenants include GNC, Claire’s, Body Works and Footlocker, according to Datex Property Solutions. These all have significant exposure in CMBX 6.
Of course, the record crash in the CMBX 6 BBB has meant that all those shorts who for years suffered the slings and stones of outrageous margin calls but held on to this “big short”, have not only gotten very rich, but are now getting even richer – this is one case where everyone will admit that Carl Icahn adding another zero to his net worth was fully deserved as he did it using his brain and not some crony central bank pumping the rich with newly printed money – it has also means the pain is just starting for all those “superstar” funds on the other side of the trade who were long CMBX over the past few years, collecting pennies and clipping coupons in front of a P&L mauling steamroller.
One of them is mutual fund giant AllianceBernstein, which has suffered massive paper losses on the trade, amid soaring fears that the coronavirus pandemic is the straw on the camel’s back that will finally cripple US shopping malls whose debt is now expected to default en masse, something which the latest remittance data is confirming with every passing week!
According to the FT, more than two dozen funds managed by AllianceBernstein have sold over $4 billion worth of CMBX protection to the likes of Icahn. One among them is AllianceBernstein’s $29 billion American Income Portfolio, which crashed after written $1.9bn of protection on CMBX 6, while some of the group’s smaller funds have even higher concentrations.
The trade reflected AB’s conviction that American malls are “evolving, not dying,” as the firm put it last October, in a paper entitled “The Real Story Behind the CMBX. 6: Debunking the Next ‘Big Short’” (reader can get some cheap laughs courtesy of Brian Philips, AB’s CRE Credit Research Director, at this link).
Hillariously, that paper quietly “disappeared” from AllianceBernstein’s website, but magically reappeared in late March, shortly after the Financial Times asked about it.
“We definitely still like this,” said Gershon Distenfeld, AllianceBernstein’s co-head of fixed income. “You can expect this will be on the potential list of things we might buy [more of].”
Sure, quadruple down, why not: it appears that there are still greater fools who haven’t redeemed their money.
In addition to AllianceBernstein, another listed property fund, run by Canadian asset management group Brookfield, that is exposed to the wrong side of the CMBX trade recently moved to reassure investors about its financial health. “We continue to enjoy the sponsorship of Brookfield Asset Management,” the group said in a statement, adding that its parent company was “in excellent financial condition should we ever require assistance.”
Alas, if the plunge in CMBX continues, that won’t be the case for long.
Meanwhile, as stunned funds try to make sense of epic portfolio losses, the denials got even louder: execs at AllianceBernstein told FT the paper losses on their CMBX 6 positions reflected outflows of capital from high-yielding assets that investors see as risky. They added that the trade outperformed last year. Well yes, it outperformed last year… but maybe check where it is trading now.
Even if some borrowers ultimately default, CDS owners are not likely to be owed any cash for several years, said Brian Phillips, a senior vice-president at AllianceBernstein.
He believes any liabilities under the insurance will ultimately be smaller than the annual coupon payment the funds receive. “We’re going to continue to get a coupon from Carl Icahn or whoever — I don’t know who’s on the other side,” Phillips added. “And they’re going to keep [paying] that coupon in for many years.”
What can one say here but lol: Brian, buddy, no idea what alternative universe you are living in, but in the world called reality, it’s a second great depression for commercial real estate which due to the coronavirus is facing an outright apocalypse, and not only are malls going to be swept in mass defaults soon, but your fund will likely implode even sooner between unprecedented capital losses and massive redemptions… but you keep “clipping those coupons” we’ll see how far that takes you. As for Uncle Carl who absolutely crushed you – and judging by the ongoing collapse in commercial real estate is crushing you with every passing day – since you will be begging him for a job soon, it’s probably a good idea to go easy on the mocking.
Afterthought: with CMBX 6 now done, keep a close eye on CMBX 9. With its outlier exposure to hotels which have quickly emerged as the most impacted sector from the pandemic, this may well be the next big short.
California Democrats want to give tenants who’ve lost their jobs or had wages cut during the coronavirus outbreak a decade to repay late rent.
The proposal is part of a broader strategy a handful of Senate Democrats announced Tuesday as a way to keep California afloat in the recession caused by COVID-19. It complements a separate proposal in the Assembly that would give mortgage relief for homeowners struggling with payments and another bill that would suspend evictions.
The rent stabilization proposal, said Sen. Steven Bradford, D-Gardena, would use state funds to purchase outstanding rents from tenants. They’d then have 10 years beginning in 2024 to repay the debt, interest free. Repayment plans would hinge on a tenant’s ability to pay and continued hardship can lead to full forgiveness.
Landlords would then receive a tax credit during the same time period to cover financial losses, depending on their commitment not to evict renters. They could also sell their credits.
Bradford said the rent assistance is not a “free ride.” But, he added, the assistance will help the estimated 2.3 million renting households affected by the COVID-19 economy.
“The last thing we want to do is increase our homeless population,” Bradford said. The assistance is “not for large corporate landlords,” he added, but for “mom and pop” property owners.
The recouped payments will fund “most” of the costs of the tax credits for the landlords, Bradford said, through “maximum flexibility” that keeps vulnerable Californians at the center of the state’s economic recovery plan.
Tom Bannon, CEO for the California Apartment Association, said the organization would work to “refine” the proposal with the Senate.
“During these unprecedented times, we appreciate the Senate Pro Tem’s creative effort to help tenants and rental property owners,” said Tom Bannon, chief executive officer for the association. “The California Apartment Association is committed to working with the Senate to refine this voluntary program to ensure tenants can stay in their homes and rental property owners – especially mom and pop owners – are able to continue to pay their bills and their employees.”
Separately, an Assembly proposal, written by Democrat Monique Limón, D-Santa Barbara, would allow financially burdened Californians for 180 days to seek relief from loans and mortgage payments. Another lawmaker has introduced a measure to place a temporary moratorium on evictions and foreclosure.
Nationally, 78 percent of tenants in 11.5 million units paid their rent by the sixth of April, according to data collected by the National Multifamily Housing Council. In May, about 80 percent had met that deadline.
History doesn’t repeat itself, but it often rhymes,” as Mark Twain is often reputed to have said. Before the 2007-2008 GFC, people built real estate portfolios based around renters. We all know what happened there; once consumers got pinched in the GFC, rent payments couldn’t be made, and it rippled down the chain and resulted in landlords foreclosing on properties. Now a similar event is underway, that is, over leveraged Airbnb Superhosts, who own portfolios of rental properties built on debt, are now starting to blow up after the pandemic has left them incomeless for months and unable to service mortgage debt.
Zerohedge described the financial troubles that were ahead for Superhosts in late March after noticing nationwide lock downs led to a crash not just in the tourism and hospitality industries, but also a plunge in Airbnb bookings. It was to our surprise that Airbnb’s management understood many of their Superhosts were over leveraged and insolvent, which forced the company to quickly erect a bailout fund for Superhosts that would cover part of their mortgage payments in April.
The Wall Street Journal has done the groundwork by interviewing Superhosts that are seeing their mini-empires of short-term rental properties built on debt implode as the “magic money” dries up.
Cheryl Dopp,54, has a small portfolio of Airbnb properties with monthly mortgage payments totaling around $22,000. She said the increasing rental income of adding properties to the portfolio would offset the growing debt. When the pandemic struck, she said $10,000 in rental income evaporated overnight.
“I made a bargain with the devil,” she said while referring to her financial misery of being overleveraged and incomeless.
Dopp said when the pandemic lock downs began, “I thought, ‘Holy God. We’re about to lose everything.'”
Market-research firm AirDNA LLC said $1.5 billion in bookings have vanished since mid-March. Airbnb gave all hosts a refund, along with Superhosts, a bailout (in Airbnb terms they called it a “grant”).
“Hosts should’ve always been prepared for this income to go away,” said Gina Marotta, a principal at Argentia Group Inc., which does credit analysis on real estate loans. “Instead, they built an expensive lifestyle feeding off of it.”
We noted that last month, “Of the four million Airbnb hosts across the world, 10% are considered “Superhosts,” and many have taken out mortgages to accumulate properties to build rental portfolios.”
Airbnb spokesman Nick Papas said the decline in bookings and slump in the tourism and travel industry is “temporary: Travel will bounce back and Airbnb hosts—the vast majority of whom have just one listing—will continue to welcome guests and generate income.”
Papas’ optimism about a V-shaped recovery has certainly not been echoed in the petroleum and aviation industry. Boeing CEO Dave Calhoun warned on Tuesday that air travel growth might not return to pre-corona levels for years. Fewer people traveling is more bad news for Airbnb hosts that a slump could persist for years, leading to the eventual deleveraging of properties.
AirDNA has determined that a third of Airbnb’s US hosts have one property. Another third have two and 24 properties and get ready for this: a third have more than 24.
Startups such as Sonder Corp. and Lyric Hospitality Inc. manage properties for hosts that have 25+ properties. Many of these companies have furloughed or laid off staff in April.
Jennifer Kelleher-Hazlett of Clawson, Michigan, spent $380,000 on two properties in 2018. She and her husband borrowed $100,000 to furnish each. Rental income would net up to $7,000 per month from Airbnb after mortgage payments, which would supplement her income as a part-time pharmacist and husband’s work in academia.
Before the virus struck, both were expecting to buy more homes – now they can’t make the payments on their Airbnb properties because rental income has collapsed. “We’re either borrowing more or defaulting,” she said.
Here’s another Airbnb horror story via The Journal:
“That sum would provide little relief to hosts such as Jennifer and David Landrum of Atlanta. In 2016, they started a company named Local, renting the 18 apartments they leased and 21 apartments they managed to corporate travelers and film-industry workers. They spent more than $14,000 per apartment to outfit them with rugs, throw pillows, art and chandeliers. They grossed about $1.5 million annually, mostly through Airbnb, Ms. Landrum said.
They spend about $50,000 annually with cleaning services, about $25,000 on an inspector and $30,000 a year on maintenance staff and landscapers, Ms. Landrum said, not to mention spending on furnishings.
When Airbnb began refunding guests March 14, the Landrums had nearly $40,000 in cancellations, she said. The couple has been able to pay only a portion of April rent on the 18 apartments they lease and can’t fulfill their obligations to pay three months’ rent unless bookings resume. They have reduced pay to cleaning staff and others. Adding to the stress, Georgia banned short-term rentals through April.
“It’s scary,” said Ms. Landrum, who said she has discounted some units three times since mid-March. The Landrums have negotiated to get some leniency from apartment owners on their leases. If not, Ms. Landrum said, they would have to sell their house.”
To make matters worse, and this is exactly what we warned about last month, Airbnb Superhosts are now panic selling properties:
Greg Hague, who runs a Phoenix real-estate firm, said Airbnb hosts are “desperate to sell properties” in April.
“There’s been a flood of people. You have people coming to us saying, ‘I’m a month or two away from foreclosure. What’s it going to take to get it sold now?'” Hague said.
And here’s what we said in March: “We might have discovered the next big seller that could ruin the real estate market: Airbnb Superhosts that need to get liquid.”
Desperate times call for desperate measures. And with the Fed in the process of destroying the monetary system as we know, we can’t say we were surprised to hear that some landlords are attempting to use the age-old system of barter to accept payments.
The problem? They’re reportedly asking their broke tenants for sex, according to BuzzFeed.
Citing the Hawaii State Commission on the Status of Women, the report details several complaints of sexual harassment since the coronavirus outbreak began.
One woman says when she texted her landlord about a more affordable property after being unable to pay her April rent, “he responded with a dick pic.” A different woman claimed that her landlord told her she could come over and “spoon him” instead of paying her April rent.
Khara Jabola-Carolus, the executive director of the commission said: “We’ve received more cases at our office in the last two days than we have in the last two years.”
She thinks the cases are becoming more egregious as tenants become unemployed, broke and more vulnerable. “Of course that’s not the root cause of why it’s happening, but it makes it easier because now [landlords] have access to people at their fingertips,” she said.
Sheryl Ring, the legal director at Open Communities, a legal aid and fair housing agency just north of Chicago said: “We have seen an uptick in sexual harassment. Since this started, they [landlords] have been taking advantage of the financial hardships many of their tenants have in order to coerce their tenants into a sex-for-rent agreement — which is absolutely illegal.”
She says sexual harassment complaints related to housing are up threefold in the last month. Ring was already working on six cases before the epidemic began and says that women of color and trans women are the most likely to be targeted. Ring advises women not to give in to trying to negotiate with landlords at all if the topic comes up.
“You can’t really negotiate how much illegality the landlord is willing to do,” she said. “We’ve heard some landlords are attempting to use the situation where a tenant falls behind to pressure a tenant into exchanging sex for rent,” she continued.
“It’s important to know what your rights are as quickly as possible. Even now, just because courts are closed to most things, it doesn’t mean you do not have recourse right now and can’t be protected,” Ring concluded.
“The conditions are ripe for sexual exploitation,” said Jabola-Carolus, noting that since Hawaii’s tourism industry has fallen apart, many immigrant and native Hawaiians are out of work.
Jabola-Carolus concluded: “The power dynamic goes without saying. All of us feel intimidated by our landlords because shelter is so critical.”
(Bloomberg) — Tension is rising in the messy fight over commercial rent payments.
With stores shuttered, struggling retailers are skipping rent and asking for concessions, while landlords are demanding payment and having their own tricky conversations with lenders.
There are no easy answers as officials ponder how to safely get the economy back open. So far this month, some mall owners and other retail landlords collected as little as 15% of what they were owed, according to one estimate. And it’s expected to get worse, with more than $20 billion in rent payments coming due in May.
“It’s all over the map what’s happening out there,” said Tom Mullaney, a managing director in restructuring at Jones Lang LaSalle Inc. “More and more defaults are coming in every single day.”
Companies across the U.S. — from small mom-and-pop operations to giant corporations — have missed April payments or sent out relief requests citing store closures because of the pandemic.
Landlords have been pitching rent deferment, saying tenants can make reduced payments now as long as they pay the balance at some point. Some businesses are pushing back on that option and asking for rent cuts even after stores are open again.
U.S. retail landlords typically collect more than $20 billion in rent each month, according to data from CoStar Group Inc.So far, April rent collection has ranged from 15% to 30% for landlords with higher concentrations of shuttered businesses, according to an estimate from brokerage firm Marcus & Millichap.
Landlords, who are facing their own debt defaults, are getting frustrated. Some are complaining that large corporations are using the crisis to skip out on rent. Others say they’re not responsible for bailing out tenants and that the federal government or insurance companies should cover the costs instead.
“The landlords are triaging the battlefield,” said Gene Spiegelman, vice chairman at Ripco Real Estate Corp. “The super powerful and strong are not going to get any help and the ones that’ll die anyways, landlords will say why would I help them?”
To be sure, some landlords and tenants are working out deals on a case-by-case basis. And some companies are paying rent for their stores. That includes AT&T Inc. and T-Mobile USA Inc.according to people familiar with the matter. J.C. Penney also said it paid for April.
Ross Stores Inc. and fitness chain Solidcore, meanwhile, are among those standing firm on requests for rent abatements and asking for additional concessions. Williams-Sonoma Inc. is another chain that has stopped paying rent, according to people familiar.
Ross has told landlords that after the shutdown ends their rent on some stores should be cut until sales rebound. Solidcore hasn’t agreed to rent deferral and said it likely won’t be able to pay the same rent as it was before pandemic.
“We’re not going to be bullied by the landlords during this time,” said Anne Mahlum, the fitness company’s founder and chief executive officer said. “We have some leverage here. What are they going to do, say get out and then have vacancy for months on end?”
The firm, which owns more than 1,700 properties, has seen requests for rent relief since the crisis started. But several of those tenants ended up paying, according to Hsieh.
One agreed to pay after getting loans from the government’s relief package, while another did so after being asked to provide financial information. A discount retailer and a company in the auto industry paid after Spirit refused to consider their rent deferral requests.
“If a tenant just says I’m not going to pay, fine, I’ll default you, I’m going to go to the courts, and you have 30 days to pay or quit,” Hsieh said. “I don’t want to be negative, but we own the building.”
Many landlords are rushing to work out deals with lenders to stave off their own defaults. Banks and insurance companies are negotiating deals on a case-by-case basis, but borrowers in commercial mortgage-backed securities have fewer options.
About 11% of U.S. CMBS retail property loan borrowers have been late on April payments so far, according to preliminary analysis by data firm Trepp. If that number holds up, $13 billion worth of CMBS loans could miss payments for the month.
“The banks are a little more fluid and often there’s recourse,” said Camille Renshaw, CEO brokerage firm B+E. “But many large properties have CMBS debt and when there’s a crisis, no one is there to pick up the phone to negotiate.”
It’s just not retail stores that are suffering. Office space is a ghost town thanks to the Wuhan (bat) virus outbreak. But with tools like Zoom, Webex, Microsoft Teams, GotoMeeting, Skype, etc., one wonders if the days of massive office building demand is over. Other than for socializing and monitoring employees (as Bill Lumbergh did in “Office Space.”)
Airbnb CEO Brian Chesky wrote a letter to all hosts informing them that the company is committed to a $250 million bailout to cover some of the cost of COVID-19 cancellations. The canceled check-ins are for March 14 through May 31, Airbnb will pay hosts 25% of what they would’ve received via their cancellation policies, and the “payments will begin to be issued in April.”
Chesky said a separate $10 million Superhost Relief Fund would be designed for “Superhosts who rent out their own home and need help paying their rent or mortgage, plus long-tenured Experience hosts trying to make ends meet. Our employees started this fund with $1 million in donations out of their own pockets, and Joe, Nate and I are personally contributing the remaining $9 million. Starting in April, hosts can apply for grants for up to $5,000 that don’t need to be paid back.”
And here’s where the story gets interesting…
Of the four million Airbnb hosts across the world, 10% are considered “Superhosts,” and many have taken out mortgages to accumulate properties to build rental portfolios.
With the travel industry crashed, many of these Superhosts have seen their rental incomes plunge in March and risk missing mortgage payments in the months ahead. Chesky was forced to bailout Superhosts because some of these folks have overextended their leveraged in building an Airbnb portfolio and risk imminent deleveraging.
Highly leveraged Superhosts could be the first domino to fall that triggers a housing bust this year. Superhosts can have one property and or have an extensive portfolio, usually built with leverage. So when rental income goes to zero, that is when some have to make the difficult decision of missing a mortgage payment or having it deferred or liquidate the property to raise cash. These decessions are all happening all at once for tens of thousands of people not just across the world but all over the US and could trigger forced selling of properties into illiquid housing markets in the months ahead.
Some of the horror stories are already playing out on Twitter:
And just like in 2008, when the rent payments stopped, landlords also felt the crunch and went belly up. What’s happening with highly leveraged Airbnb Superhosts is no different than what happened a decade ago. Again, no one has learned their lesson. And we might have discovered the next big seller that could ruin the real estate market: Airbnb Superhosts that need to get liquid.
If you're an @Airbnb Superhost and pay a mortgage on that property, you're about to take the financial hit of a lifetime.
San Francisco looks like a town expecting a Hurricane, with storefronts boarded up, and people lining up at stores, while others wander around without any apparent destination or plan, as if propelled by Brownian motion.
As a result of the coronavirus outbreak, and the ensuing lock down, the commercial property market has essentially frozen.
Buildings that were used for all types of purposes: offices, diners, restaurants, hotels – they’ve all been shut down. And industries like the travel industry are forgoing $1.4 billion per week in revenue, according to Bloomberg.
The shutdown is also having an effect on apartment buildings and industrial properties. Nothing is off limits, and it’s sending the commercial property market into chaos.
Alexi Panagiotakopoulos, partner at Fundamental Income, a real estate strategy firm, said: “On the investor side, there’s widespread panic. There’s downward pressure on every aspect of every asset class.”
And there’s no way to value a market when you don’t have a bid and an offer – and you’re not sure when the market will “re-open”. Further, there’s no way to try and model the future value of such properties when everyone is unsure of what the real estate landscape will look like when everything is said and done.
Scott Minerd, chief investment officer at Guggenheim Partners said: “There will likely be long-lasting changes.”
It’s estimated that investment activity in the space could fall by 45% this year, which would be further than post-9/11 or the 2008 financial crisis.
Viacom also announced last week that it’s suspending its plans to sell the Black Rock building in Manhattan because potential buyers can’t visit the property. Simon Property Group’s proposed acquisition of Taubman Centers, Inc., is also now up in the air.
More than $13 billion in funds in the UK has been frozen in property funds while appraisers warn that the virus makes it impossible to assess their value. China’s office market has been devastated with plunging rents and spiking vacancy rates, which could climb as high as 28% next year in Shanghai, according to estimates.
REITs in the U.S. have been destroyed. Names like Brookfield Property Partners, which made a $15 billion bet on malls in 2018, expects “severe consequences” in coming weeks. The company’s CEO says it has $6 billion in undrawn credit lines and cash.
Matthew Saperia, an analyst at Peel Hunt, commented on the potential threat to landlords: “The implications could be far-reaching, but quantifying these is highly speculative at present.”
As the uncertainty grows, the level of credit available begins to shrink. Financing has dried up for hotel, mall and senior living projects and it’s estimated that up to 15% of loans on commercial property could default over the next couple of years if the recession continues. The value of commercial mortgage-backed securities is collapsing…
Mark Fogel, CEO of Acres Capital, commented: “Nobody knows where deals will be priced and nobody knows just how long this issue is going to affect the world and how much it’ll affect the underlying collateral.”‘
And Minerd believes there won’t be a “back to normal” once this is all over: “I think there’s going to be a permanent change. People are more comfortable at home. Why do they need to commute?”
We just witnessed a global collapse in asset prices the likes we haven’t seen before. Not even in 2008 or 2000. All these prior beginnings of bear markets happened over time, relatively slowly at first, then accelerating to the downside.
This collapse here has come from some of the historically most stretched valuations ever setting the stage for the biggest bull trap ever. The coronavirus that no one could have predicted is brutally punishing investors that complacently bought into the multiple expansion story that was sold to them by Wall Street. Technical signals that outlined trouble way in advance were ignored while the Big Short 2 was already calling for a massive explosion in $VIX way before anybody ever heard of corona virus.
Worse, there is zero visibility going forward as nobody knows how to price in collapsing revenues and earnings amid entire countries shutting down virtually all public gatherings and activities. Denmark just shut down all of its borders on Friday, flight cancellations everywhere, the planet is literally shutting down in unprecedented fashion.
(Denise Lones) There are many ways to react about the virus breakout. It doesn’t seem to matter where you go – the news is talking about it everywhere. It is completely normal to feel concerned, unsure, nervous, worried, and more.
However, the reality is that there is not a lot that any of us can do about the virus other than be informed and be aware of the things that we can do to keep ourselves and our families safe. From a business perspective it may seem like there is a lot of doom and gloom out there, but there are many things you could be doing to keep yourself busy and productive.
If you find yourself more home bound than usual, there are some things that you can do to make that time productive. You can:
Catch up on your client connections by sending out a mailer or cards,
Work on your Annual Client Reviews which often get put off because you are too busy,
Do custom research for each of your potential clients and send it to them now, while they too may be home bound and have extra time.
While it may feel like the world is slowing down and that real estate may come to a screeching halt, that is just not realistic, and it is not worth worrying about. Stop panicking and start taking action to catch up on projects or to help your potential buyers and sellers plan to do the things that they haven’t had time to do. How many times does a seller tell you that they can’t put their home on the market until they paint a room or put away their belongings or do a deep cleaning? This could be the perfect time for them to complete this project that never seems to make it into their regular schedule.
While the rest of the world may be focusing on only the negative try to keep your mind focused on something more positive and productive. Sit down and make a list of all the projects you would love to complete and then start tackling them.
Don’t spend your time focusing on the “what ifs” of this virus. Focus on what you have control over which is making a huge dent in the things you have been putting off. It is normal to worry, but try to put things into a more positive light.
Rascoff purchased the house in 2016 for $19.7 million
Spencer Rascoff and the property (Credit: Twitter, Zillow, and Google Maps)
Spencer Rascoff, the co-founder and former CEO of Zillow, has put his Brentwood Park estate on the market for $24 million, according to Redfin. The asking price is $7 million over the “Zestimate,” or Zillow’s appraisal of what the home is worth.
Property records show that Rascoff paid $19.7 million for the property in 2016.
The listing states that the 12,700-square-foot home – remodeled by architects Ken Ungar and Steve Giannetti – is located on a half acre in a gated neighborhood. The Zillow Zestimate for the house suggests it’s worth $16.7 million.
Josh and Matt Altman of Douglas Elliman have the listing.
Rascoff purchased the house from investment banker Michael J. Richter, who reportedly paid $9.3 million for the Parkyns Street manse in 2012.
The home has six bedrooms and nine bathrooms, along with a “spectacular” chef’s kitchen, a state-of-the-art theater with stadium seating, a fitness studio and a large master suite with a large balcony. The estate also features a two-bedroom guest wing, a motor court, and a spa, pool and mudroom.
Rascoff is currently launching dot.LA, a news and events company that will cover the tech scene in Los Angeles.
The pain for active investors who have under performed the broader market for over a decade, has claimed its first notable casualty for 2020: according to the WSJ, the flagship real-estate fund of Swiss banking giant UBS has been hit with about $7 billion in redemption requests following a lengthy period of under performance. As a result, UBS has stepped up efforts to stem the bleeding at its $20 billion Trumbull Property Fund flagship real-estate fund amid concerns over its retail holdings, “as some investors move away from more conservative, lower-return funds.”
The UBS woes follow two months after M&G, a London-listed asset manager, said it has been unable to sell properties fast enough, particularly given its concentration on the retail sector, to meet the demands of investors who wanted to cash out. The investor “run” led the fund to suspend any redemption requests in its £2.5 billion ($3.2 billion) Property Portfolio in early December 2019.
While UBS hasn’t followed in M&G’s footsteps yet and gated investors, the Swiss bank has offered to reduce fees for investors who stay in the fund and to charge no management fee for new investments, according to an analyst presentation to the City of Cambridge. Mass., Retirement System. The bank also recently replaced some in the fund’s top leadership, including Matthew Lynch, the head of U.S. real estate, the WSJ reports.
A mall owned by the Trumbull Property Trust
Alas, once a fund faces a rise in redemption requests – and this becomes mainstream knowledge – the redemptions cascade and capital outflows can be hard to stop. If a fund manager doesn’t have enough cash to meet the requests, it has to sell properties. That often takes time, causing a backlog and increasing pressure on the fund to sell; what usually happens next is a “gate” barring investors from withdrawing funds.
“When there is a redemption queue investors often feel they have to get in line so they aren’t the last ones left to turn off the lights,” said Nori Lietz, a senior lecturer of business administration and faculty member at Harvard Business School.
And as in the case of numerous funds discussed previously, analysts believe that is the case with Trumbull, where the withdrawal backlog in June was little more than a third of where it is today, according to a report by consulting firm RVK for the Ohio Bureau of Workers’ Compensation. In one of the more recent redemptions, the board of the Kansas Public Employees Retirement System last month voted to ask for some of its money back from Trumbull.
Some background: started in 1978, Trumbull is one of the oldest and largest real-estate funds. It is known as a core fund, a type that focuses on less risky properties and pursues lower but steadier returns than riskier opportunity funds that aim for annual returns around the midteens. Unlike riskier private-equity style funds, which have stricter rules about investors pulling out money before the end of the fund’s life, most big core funds have open-ended withdrawals and no expiration date.
Trumbull and other core funds performed well after the financial crisis, when investors flocked to safer, more predictable strategies after a number of high-performing but riskier real-estate funds blew up in 2008 and 2009.
In fact, as late as June 2015, Trumbull had a $1.2 billion backlog of funds looking to invest, and no backlog of investors looking to get out, according to a report by consulting firm RVK for the Ohio Bureau of Workers’ Compensation. Core funds “just had incredible market tailwinds,” said Christy Fields, a managing principal at consulting firm Meketa Investment Group, Inc.
But over the past year, real returns have fallen back to their historical average, and now funds which as recently as 5 years ago had a wait list for investors, are suddenly hurting. And while J.P. Morgan’s Strategic Property Fund and other funds are experiencing outflows, Trumbull has been the hardest hit. It has performed worse than the core-fund benchmark index for 11 of the past 12 quarters, according to a December performance review by the City of Burlington, Vt., Employees Retirement System.
Between June 2018 and June 2019, the fund had a negative net return of 0.63% compared with a positive return of 5.46% for the NCREIF NFI-ODCE index, according to the RVK report for the Ohio Bureau of Workers’ Compensation.
To bolster the fund, UBS brought in Joe Azelby, a former professional football player with the Buffalo Bills and veteran of JPMorgan’s asset-management division and Apollo Global Management. He took over UBS Asset Management’s real-estate operations in March.
Meketa’s Ms. Fields said some core funds were losing investors in part because of their exposure to the struggling retail sector.
But the biggest culprit for the fund’s woes: Amazon, which has put countless bricks and mortar retailers out of business, and converted many of America’s malls into ghost towns. Trumbull owns across the U.S., many of them acquired when the outlook for the retail sector looked less dire, property records show. The mall sector is struggling with store closures as online retail expands its market share. These properties still account for nearly 20% of Trumbull’s assets, slightly above the industry average.
One of its largest malls, the Galleria Dallas, is expected to lose one of its department stores, Belk, in late March, according to the company. The fund plans to redevelop some malls in a bid to make them more profitable and sell others, according to a person familiar with the matter. At the CambridgeSide mall in Cambridge, Mass., UBS plans to convert some retail space into offices.
Several months after WeWork’s failed IPO — resulting in a bailout from SoftBank, the international money-losing office-sharing company leased just four new sites for a combined 184,00 sq. Ft. of space in 4Q19, marking a 93% plunge from its quarterly average rate of 2.54 million sq. Ft. over the last four quarters, according to data from real estate firm CBRE shared with CNBC.
The abrupt slowdown in leasing activity comes as the WeWork’s valuation imploded last August after it shelved its IPO and ran out of cash a month later, forcing its largest investor, SoftBank, to conduct an emergency bailout to rescue the company.
With a questionable business model and no plans on turning a profit, WeWork’s valuation plunged from $47 billion in late 2018 to $8 to $10 billion by 4Q19.
In 4Q19, WeWork had to cut costs, lay off workers, and scale back operations across the world to avoid going bankrupt. In return, the company lost the top spot in the flexible office leasing space to Regus, which in 4Q19, increased lease footprint by 11% to 284,916 sq. Ft.
CBRE showed that industrywide, there was a significant pullback in office space leasing, mainly due to WeWork’s implosion.
Data shows office sharing operators declined to 1 million sq. Ft. in 4Q19 from 4 million sq. ft. in 3Q19.
Manhattan was the top city for office sharing space, even though new space leased dropped 82% to 187,078 sq. Ft., on average, the prior four quarters. Activity in Chicago, Boston, and Los Angeles also saw notable declines over the period.
“We had seen this coming right after the IPO news,” said Julie Whelan, senior director of research at CBRE, who warned it could be a bumpy ride for WeWork and other office space sharing companies in 2020.
(Ryan McMaken) Not every square inch of the planet earth is suitable for a housing development. Flood plains are not great places to build homes. A grove of trees adjacent to a tinder-dry national forest is not ideal for a dream home. AndCalifornia’s chaparral ecosystemsare risky places for neighborhoods.
This is nothing new. While people many Americans who live back East may imagine that something must be deeply wrong when they hear about fires out West, the fact is things are different in North Americawest of the hundredth meridian. The West is more prone to extreme temperatures, hundred-year droughts, and fires in the wilderness. Many of these ecosystems evolved with this fire risk.
It’s also not enough to blame the growing devastation of recent wildfires solely on climate change, researchers said. While drier, warmer conditions have lengthened the fire season and likely increased the severity of the blazes, wildfires are only destroying more homes today than decades before because of rapid growth in rural areas.
It’s not that fires are more devastating in the natural sense. The problem is that human beings insist on putting their property in places where fires have long destroyed the landscape, over and over again.
The Bee continues:
[T]he fires aren’t getting closer to us — we’re getting closer to the fires. “We’re seeing wildfires that have always been a part of the landscape that are now interacting more and more with us…”
Strader studied wildfire history in the western United States going back three decades, then mapped population growth in areas where fire activity had ranged from medium to very high. His research determined there were 600,000 homes in fire prone areas in the West in 1940. Today, that number is around 7 million.
So, why do people keep building homes in these places? Part of it is natural populations growth, of course. But the manner and rapidity with which this development expands out into the fringes of metro areas is also partly due to government policy and infrastructure.
In an unhampered market, it would be very expensive to extend a new neighborhood out into ever-further-out regions near metro areas. In order to reach these places, housing developers would need to find a way to finance both the new housing construction and the roads that give access to them. Certainly, developers often provide part of the funding through development fees demanded by governments. But these roads are often also subsidized by state and local governments, especially in the form of ongoing maintenance. Once a road to a new semi-rural community is built, governments will often maintain it, while spreading the cost across all the jurisdiction’s taxpayers.
This system of subsidy allows more rapid and more dispersed development. Unsubsidized roads would tend to force more close-in and more dense development.
The federal development also subsidizes the construction of larger and more sprawling residential property through the FHA insurance programs and government-sponsored enterprises like Fannie Mae. By purchasing home loans on the secondary market, the GSEs push more liquidity into the home loan market, making loans cheaper, and pushing up demand for larger, sprawling developments.
Many conservatives often speak of density in residential and commercial development as if it were some kind of left-wing conspiracy. It is assumed that few people would opt for density were there not left-wing urban planners to force it on everyone.
But the reality is that in an unhampered market, density levels would be higher than they are now, because sprawl would be (all else remaining equal) much more costly to consumers than is now the case.
In light of the increasing fire danger to homes, many left-wing advocates favor changing California’s housing development patterns. But they can only point toward more restrictive government regulations. The Los Angeles Times editorial board, for example, complains that “Land-use decisions are made by local elected officials and they’ve proven themselves unwilling to say no to dangerous sprawl development …”
But government prohibitions aren’t necessary. If people insist on building and selling homes in fire-prone areas, let them be the ones to cover all the costs. This includes the cost of fire mitigation and rebuilding after fire. This in itself would limit development in these areas.
And yet, while California pundits are complaining that policymakers aren’t doing enough, California politicians are actively taking steps to keep the market from correcting the excessive building in fire-prone areas.
The state said its moratorium applies to about 800,000 homes, and more areas are expected to be added.
A state law passed last year allows the California Department of Insurance to require insurers to renew residential policies for one year in ZIP Codes that have been affected by declared wildfire disasters.
Previously, insurers had to renew policies for homeowners who suffered a total loss. The current law extends to all policyholders in an affected area, regardless of whether they experienced a loss.
Not surprisingly, many homeowners in fire-prone areas of the state are having problems finding fire insurance for their homes. And they often pay handsomely when they do find it. That’s too bad for the owners, but this fact doesn’t justify handing down state mandates that insurance companies continue to cover people who have taken on unacceptably high risk.
By stepping in to force insurance companies to cover these homeowners, California politicians are doing two things:
They’re continuing the cycle of encouraging home buyers to buy homes in areas likely to fall victim to wildfires.
At the same time, regulators are increasing the costs incurred by insurance companies, and this will likely have the effect of driving up the price of fire insurance for homeowners who more prudently declined to purchase a house in fire-prone areas.
We’re now seeing a similar type of moral hazard at work in California.
In a more sane political environment, however, those who insist on living in the way of wildfires would have to assume the risk of doing so, rather than demanding politicians force the cost on insurance companies and taxpayers.
A darkening outlook for China’s economy continues to materialize week by week.
New data from commercial property group CBRE warns the country’s office vacancy rate has just surged to the highest since the financial crisis of 2007–2008, first reported by Bloomberg.
CBRE said the vacancy rate for commercial office space in 17 major cities rose to 21.5% in 3Q19, a level not seen since the global economy was melting down in 2008.
Sam Xie, CBRE’s head of research in China, said the recent “spike” in vacancies is one of the worst since the last financial crisis.
Catherine Chen, Cushman & Wakefield’s head of research for Greater China, toldFinancial Timesthat soaring commercial office vacancies in China was mainly due to dwindling demand, but not oversupplied conditions.
“Contributing factors included slower expansion of co-working operators and financial services companies, and a general cost-saving strategy adopted by most tenants given ongoing trade tensions and economic growth slowdown,” she added.
Henry Chin, head of research for Asia Pacific at CBRE, told Financial Times that macroeconomic headwinds relating to the trade war between the US and China were also a significant factor in rising office vacancies.
As shown in the Bloomberg chart below, using CBRE data, Shanghai and Shenzhen had the highest office vacancies than any other city, and both had around 20% of office spaces dormant.
And with the global economy in a synchronized slowdown, global growth estimates are now printing at 3%, the slowest pace since the financial crisis. The Chinese economy will likely continue to slow, and could see domestic growth under 6% this year. This suggests that China’s office space vacancies will continue to rise through year-end.Office Vacancies In China Hit Decade High Amid Economic Turmoil
We are living in an age of records in the financial world. The stock market is in its longest bull market in history and near all-time highs. The world has more debt than ever before while interest rates are near record lows, and some are negative in many countries for the first time ever. Nick Barisheff, CEO of Bullion Management Group (BMG), is seeing a dark ending for the era of financial records. Barisheff explains,
“I have been in the business for 40 years, and this is the first time we have had a simultaneous triple bubble, a bubble in real estate, stocks and bonds all at the same time. In 1999, it was a stock bubble. In 2007, it was a real estate bubble. This time, we’ve got a triple simultaneous bubble. So, when we have the correction, it’s going to be massive. Value calculations on equities say it’s worse than 1999, and in some cases worse than 1929. The big problem is this triple bubble is sitting on a mountain of debt like never before.”
What is going to be the reaction to this record bubble in everything crashing? Barisheff says, “I think you are going to be getting riots in the streets. It’s already happening in California. CalPERS is the pension fund administrator for a lot of the pension funds in California. So, already retired teachers, firefighters and policemen that are sitting in retirement getting their pension checks all got letters saying sorry, your pension checks from now on are going to be reduced by 60%. How do you get by then?”
What happens if the meltdown picks up speed and casualties? Barisheff says,
“I think the only option will be for the government is to print more money and postpone the problem yet a little bit longer, but that leads to massive inflation and eventually hyperinflation. Every fiat currency that has ever existed has always ended in hyperinflation, every single one. Since 1800, there have been 56 hyper inflations. Hyperinflation is defined as 50% inflation per month. That’s where we are going and what other choice is there?”
So, what do you do? Barisheff says,
“In the U.S. dollar since 2000, gold is up an average of 9.4% per year. In some countries, it’s up 14% and so on. If you take the overall average of all the countries, the average increase is 10% a year. Every time Warren Buffett is on CNBC, he seems to go out of his way to disparage gold, but if you look at a chart of Berkshire Hathaway and gold, gold has outperformed Berkshire Hathaway. . . Everybody worships Warren Buffett as the best investor in the world, and gold has outperformed his fund in U.S. dollars. I would not disparage gold if I were him. I’d keep quiet about it.”
There is a first for Barisheff, too, in this financial environment. He says for the first time ever, he’s “100% invested in gold” as a percentage of his portfolio. He says the bottom “is in for gold,” and “the bottom is in for silver, too.”
Barisheff contends that with the record bubbles and the record debt, both gold and silver will be setting new all-time high records as well in the not-so-distant future.
Join Greg Hunter of USAWatchdog.com as he goes One-on-One with Nick Barisheff, CEO of BMG and the author of the popular book“$10,000 Gold.”
(ZeroHedge) In a stunning rebuke, echoing very closely our own concerns, Boston Fed President Eric Rosengren has – without naming-names – called out the WeWork business model as being a systemic risk to the US economy.
Two weeks ago we asked (rhetorically)…
What happens to the US CRE market when We files for bankruptcy
While the collapse and/or bankruptcy of WeWork would hardly lead to a personal finance disaster – SoftBank’s Masayoshi Son is already Japan’s richest man and with a net worth of over $20 billion can easily stomach losing billions on WeWork (and Uber) – it would send shockwaves across US commercial real estate, as the company is already the single biggest tenant in New York City, as well as Chicago, Denver and central London.
In fact, with over $47 billion in lease liabilities, WeWork is already one of the world’s largest lessees, trailing only oil exploration giants Petrobras and Sinpec, an astonishing feat for the flexible office space provider “which was founded less than a decade ago, bleeds cash, and doesn’t plan to become profitable any time soon.”
As Bloomberg recently noted, “anyone weighing whether to buy shares in WeWork’s IPO cannot ignore the fact that the company will have to find $47 billion from somewhere in coming years to meet its contractual obligations – including about $10 billion in just the next five years. Right now, its own very negative cash flows won’t cut it.”
Mr. Rosengren noted the risks posed by commercial real estate, which have long been a concern of his, as a possible vector to amplify trouble.
Without naming any firms, Mr. Rosengren noted the particular concerns posed by co-working companies. He made this comment as the parent of office-sharing firm WeWork postponed its initial public offering amid investor doubts about its valuation and concerns about its corporate governance.
Office-sharing firms are particularly exposed to risks should the economy run into trouble, and could wound landlords in the process, Mr. Rosengren said.
“In a downturn the co-working company would be exposed to the loss of tenant income, which puts both them and the property owner at risk if they cannot make lease payments to the owner of the building,” he said.
“I am concerned that commercial real estate losses will be larger in the next downturn because of this growing feature of the real estate market, which could ultimately make runs and vacancies more likely due to this new leasing model,” Mr. Rosengren said.
“The fact that the shared office model relies on small-company tenants with short-term leases, combined with the potential lack of recourse for the property owner, is potentially problematic in a recession. This also raises the issue of whether bank loans to property owners in cities with major penetration by co-working models could experience a higher incidence of default and greater loss-given-defaults than we have seen historically.”
Of course, he is right.As we concluded more explicitly,in a bankruptcy, all those obligations would be frozen and squeezed among all the other pre-petition claims, which of course means that the commercial real estate market of cities where WeWork is especially active – like New York and London (and Rosengren’s Boston) – would suddenly find itself paralyzed, as a deflationary tsunami is unleashed among one of the strongest performing markets since the financial crisis.
(Nathanael Johnson) California is facing yet another real estate-related crisis, but we’re not talking about its sky-high home prices. According to newly released data, it’s simply become too risky to insure houses in big swaths of the wildfire-prone state.
Last winter whenwe wrote about home insurance rates possibly going upin the wake of California’s massive, deadly fires, the insurance industry representatives we interviewed were skeptical. They noted that the stories circulating in the media about people in forested areas losing their homeowners’ insurance was based on anecdotes, not data. But now, the data is in and it’s really happening: Insurance companies aren’t renewing policies areas climate scientists say are likely to burn in giant wildfires in coming years.
If governments don’t step in, that kills mortgages, so what comes next? Only all cash buys? Seller financing? And if property values in these areas decline, as they ought to, bye bye local government budgets.
In some ways, this news is not surprising. According to a recent survey of insurance actuaries (the people who calculate insurance risks and premiums based on available data), the industry ranked climate change as the top risk for 2019, beating out concerns over cyber damages, financial instability, and terrorism. While having insurance companies on board with climate science is a good thing for, say, requiring cities to invest in more sustainable infrastructure, it’s bad news for homeowners who can’t simply pick up their lodgings and move elsewhere.
“We are seeing an increasing trend across California where people at risk of wildfires are being non-renewed by their insurer,” said California Insurance Commissioner Ricardo Lara in a statement. “This data should be a wake-up call for state and local policymakers that without action to reduce the risk from extreme wildfires and preserve the insurance market we could see communities unraveling.”
A similar dynamic is likely unfolding across many other Western states, according toreportingfrom the New York Times.
To understand the data coming out of California we can use my own family as an example: A few months after Grist publisheda story about how my parent’s neighborhoodis trying to fortify itself against future forest fires, my mom’s insurer informed her and my stepfather that they’d need to get home insurance elsewhere. For two months they called one insurer after another, but no company would take their premiums. So they turned to thestate program as the insurer of last resort— which costs about three times more than they’d been spending under their previous, private insurer.
My folks have spent a lot of money clearing trees and brush from around their house. They’ve covered the walls in hard-to-burn cement panels, and the roof with metal. But insurance risk maps don’t adjust for these improvements. Instead, insurance companies seem to have made the call that the changing climate, along with years of fire suppression, have made houses in the midst of California’s dry forests a bad bet, and therefore uninsurable.
“For us, because we’ve done good financial planning and our house is paid off, it’s just an extra expense,” said my mom, Gail Johnson Vaughan. “But we have friends who have no choice but to leave.”
Global real estate consultancy firmKnight Frank LLPhas warned that the global synchronized decline in growth coupled with an escalating trade war has heavily weighed on luxury home prices in London, New York, and Hong Kong.
According to Knight Frank’s quarterly index of luxury homes across 46 major cities, prices expanded at an anemic 1.4% in 2Q19 YoY, could see further stagnation through 2H19.
Wealthy buyers pulled back on home buying in the quarter thanks to a global slowdown, trade war anxieties, higher taxes by governments, and restrictions on foreign purchases.
Mansion Globalsaid Vancouver was the hottest real estate market on Knight Frank’s list when luxury home prices surged 30% in 2016, has since crashed to the bottom of the list amid increased taxes on foreign buyers. Vancouver luxury home prices plunged 13.6% in 2Q19 YoY.
Financial hubs like Manhattan and London fell last quarter to the bottom of the list as luxury home prices slid 3.7% and 4.9%, respectively.
Hong Kong recorded zero growth in the quarter thanks to a manufacturing slowdown in China, an escalating trade war, and protests across the city since late March.
However, European cities bucked the trend, recorded solid price growth in 2Q19 YoY, though the growth was muted when compared to 2017-18.
Berlin and Frankfurt were the only two cities out of the 46 to record double-digit price growth for luxury homes. Both cities benefited from a so-called catch-up trade because prices are lower compared to other European cities. Moscow is No. 3 on the list, saw luxury home prices jump 9.5% in 2Q19 YoY.
The downturn in luxury real estate worldwide comes as central banks are frantically dropping interest rates. The Federal Reserve cut rates 25bps for the first time since 2008 last month, along with Central banks in New Zealand, India and Thailand have all recently reduced rates.
The main takeaway from central banks easing points to a global downturn in growth, and resorting to sharp monetary policy action is the attempt to thwart a global recession that would ultimately correct luxury home prices.
“Sluggish economic growth explains the wave of interest rate cuts evident in the last three months as policymakers try to stimulate growth,” wrote Knight Frank in the report.
* * *
As for a composite of all global house prices, Refinitiv Datastream shows price trends started to weaken in 2018, and in some cases, completely reversed like in Australia.
House price growth for OECD countries shows the slowdown started in 2016, a similar move to the 2005 decline.
If it’s luxury real estate or less expensive homes, the trend in price has peaked and could reverse hard into the early 2020s.
Central banks are desperately lowering interest rates as the global economy turns down. Likely, the top is in, prepare for a bust cycle.
Hamptons, the beachfront playground for New York City’s financial elite, just recorded the worst second quarter for sales in eight years, according to a report from Douglas Elliman and Miller Samuel,and first reported by CNBC.
Real estates sales and prices in the Hamptons extended lower through 2Q19, indicating the luxury home market continues to stagnate for the last six quarters, the report said.
The weakness in the Hamptons was confusing for CNBC, considering they said real estate in the region should have been positive because the stock market is higher. But as Zerohedge readers know, the stock market has remained extremely disconnected from fundamentals this year, if not the last decade.
The Hamptons is experiencing the same pressures as many luxury markets across the country: an oversupply of mansions, dwindling demand from foreign buyers, changes to SALT deductions, and sellers who have become delusional that real estate prices can still hold 2014 values.
With no end in sight, the bust of the Hamptons real estate market could become more severe through 2020.
Miller Samuel said the number of homes listed in the region doubled in 2Q19, to 2,500. This is the highest level the research firm has recorded since it started gathering data in 2006.
According to the report, there is a 5-month supply of listings, with more than a three-year supply of luxury properties.
“I think it’s premature to talk about a turnaround until the inventory growth slows down,” said Jonathan Miller, CEO of Miller Samuel, the appraisal firm.
“There is just not a sense of urgency. The buyers are just waiting it out.”
Brokers told CNBC that demand is showing up for more affordable homes but not for +$5 million.
“You might look at Zillow and see nine properties on the oceanfront in Southampton, which looks like a lot,” said Cody Vichinsky of Bespoke Real Estate in the Hamptons.
“But then you dig into it, and you see that six of them are in places where you’d never want to live, with constant helicopter noise or a triple dune or encumbrances. And then the others, the price is ridiculous. When a property is priced decently, it goes.”
Glancing at Zillow Hamptons, hundreds of homes are for sale ranging from $625k to $60 million.
In a recent listing, the family of James Evans, the former chairman of the Union Pacific railroad empire, put their waterfront estate in East Hampton on the market for $60 million. The 5,500-square-foot home sits on 5.4 oceanfront acres, has an estimated mortgage payment of $362k per month.
A $49 million mansion on 4.5 acres with 430 feet of direct oceanfront has been on the market for 850 days.
The pullback in Hamptons real estate is a sobering reminder that inventory is building to levels that are making sellers uncomfortable, could unleash panic selling and metastasize into a full-blown market rout with implications beyond New York City.
A massive pullback in international buyers purchasing US real estate has been seen in the last few years, resulting in the softening of housing markets across South Florida,reported The Palm Beach Post.
Foreign buyers purchased $153 billion in US homes from April 2016 to March 2017, total sales of homes to international buyers dropped to $121 billion for the year ending in March 2018, then plunged to $77.9 billion for the year ending on March 2019, the National Association of Realtors (NAR) said in its latest report.
Florida transactions involving foreign buyers fell to 36,000 in the year ending in March 2019, down from 50,000 the previous year, and 60,000 in the year ending March 2017.
“The magnitude of the decline is quite striking, implying less confidence in owning a property in the US,” NAR Chief Economist Lawrence Yun said in a statement.
South Florida is a top destination for foreign buyers, accounting for 20% of the 183,100 international transactions nationwide over the past year.
Capital flight from Latin America over the past decade has driven at least a quarter of Florida’s real estate market, but new trends today suggest foreigners are abandoning US markets with home prices in bubble territory.
“It takes a lot more pounds to buy an American property than it did a few years ago,” said John Mike, an agent at RE/MAX Prestige Realty in Royal Palm Beach.
Mike said a stronger dollar that stated to rise in 2014 had deterred many buyers from Britain and Europe who are now increasingly buying vacation homes in Spain and the Bahamas rather than Florida.
Mike said President Trump’s crackdown on immigration and a dangerous trade war with China had hampered demand. He added that international buyers “don’t feel welcome” in America anymore because of President Trump’s policies – so they are going elsewhere.
The exodus of foreign buyers and crashing sales explains why homes in South Florida are experiencing the most significant percentage of price cuts in some time, that has led to properties staying on the market for longer, and has tipped the overall market to buyers. All of this suggests that a top could be near.
Unhappy with its market share in the US real estate market, the largest online retailer in the world and global commercial monopolist, Amazon, announced a deal on Tuesday morning with the largest US residential real estate brokerage company, Realogy, in a strategy designed to boost sales for both.
AsCNBC reports, Realogy – whose stock soared 25% on the news – and Amazon will now offer TurnKey, a horizontally and vertically integrated program meant to streamline and optimize the home- and furniture-buying process, by taking potential homebuyers through the Amazon portal and connects them to a Realogy agent. Once they purchase a home, they then get complimentary Amazon Home Services and products worth up to $5,000.
Realogy, which is the largest real estate broker in the US and which owns such brands as Coldwell Banker, Century 21, Sotheby’s International Realty, Corcoran, ERA and Better Homes and Gardens Real Estate, has been facing stiff online competition from newcomers like Compass and Redfin, which rely heavily on high-tech, online platforms. As CNBC’s Diana Olick writes, “partnering with Amazon gives Realogy a platform unlike any other, not to mention access to more buyer data.”
“We’re the market leaders in this industry and we like that position, but you always have to be innovating to stay ahead, you’ve got to be willing to cannibalize yourself, you’ve got to do all the things that a big successful company needs to do to stay on the forefront,” said Realogy CEO Ryan Schneider.
“In a world that is awash with low quality lead generation out there, where you can get real estate leads from millions of online websites, giving an agent and franchisees high-quality leads from a source like Amazon and Realogy together is a real differentiator that’s going to be very powerful for the group.”
The group’s simple strategy for success: Always Be Closing... and then get the buyer to purchase a whole lot of additional stuff as well.
Here’s how it will work: a potential buyer will go to the TurnKey portal on Amazon and put in information on the type of home they’d like to purchase, the location and price. Amazon then matches them with a Realogy agent. Once the buyer closes on the home, Amazon connects them with services and experts in the area. The buyer not only gets a selection of Amazon Home Services, like painting or hanging a large TV, but they also gain access to smart home products, like a Ring doorbell, to be installed by Amazon professionals. The value of the free products and services can range from $1,000 to $5,000 depending on the purchase price of the home.
“Customers can be overwhelmed when moving, and we’re excited to be working with Realogy to offer homebuyers a simplified way to settle into a new home,” said Pat Bigatel, director of Amazon Home Services. “The Amazon Move-In Benefit will enable homebuyers to adapt the offering to their needs — from help assembling furniture, to assisting with smart home device set up, to a deep clean, and more.”
As CNBC notes, one of the nation’s largest homebuilders, Lennar, previously partnered with Amazon in 2018, introducing smart-home “experience showrooms.” Amazon outfitted Lennar model homes with smart-home technology available for purchase on its site. In something of a show-and-sell strategy, Lennar then offered 90 days of free Amazon home services with the purchase of a home.
“Amazon, Google, Apple, most of the technology-centric companies are starting to think about the home as a centerpiece for the way they think about the future of how their products work and how they interact with them, ” said Stuart Miller, executive chairman of Lennar, in an interview in May 2018. “Home automation is a point of attraction. It’s a proxy for a lot of other things.”
The new TurnKey service will first launch in 15 major metropolitan housing markets, including Seattle, San Francisco, Los Angeles, Atlanta, Dallas, Chicago and Washington, D.C., and will then expand into more markets. However Realogy CEO Ryan Schneider did not suggest that this is a stepping stone to putting Realogy brokerages’ listings on Amazon.
“We’ve never had that conversation with Amazon,” he said.
Of course, when Amazon decides to simply eliminate the middleman, it will do so without holding such a conversation in advance. For now, however, Realogy shares are enjoying the added exposure and the stock has soared over 25% this morning on the Amazon news.
Have you ever had a problem with a Homeowners Association? After having enough of his HOA, this homeowner took matters into his own hands.
It may come as no surprise, but Homeowners Associations have a bit of a bad reputation. While there are good HOAs out in the wild, you typically only read about the worst offenders, and it’s usually for a good reason.
Just ask Alec, whose friend, Hal, inherited his grandparents’ house in a neighborhood with a tenacious HOA helmed by a group of power hungry, greedy busy bodies who made it their mission in life to get the entire neighborhood under their control.
When Hal first moved into the house his late grandparents’ built and lived in for decades, the HOA assumed they could take advantage of a seemingly young and inexperienced first-time homeowner.
But the group would soon find out that not only did Hal not have any intention of joining their association, he also wasn’t going to go down without a fight.
So buckle up and prepare for one wild ride…
There Was The First Encounter
It didn’t take long for the HOA board members to show up and start pestering Hal with lists of demands, rules, and random searches.
Shortly after he moved in, Hal received a knock at the door, and when he opened it, he was greeted by a group of the HOA members shoving papers in his face, demanding he sign them right away.
If that wasn’t bad enough, one of the board members demanded that he be allowed entry into Hal’s garage to see “if everything there is in order.”
This essentially meant that the HOA had the “right to do this bi-weekly,” and denying any of the members access would result in a fine.
Hall was appalled by the “audacity” of the HOA for thinking that they had any right forcefully entering people’s homes to randomly dig through their property.
Having enough of the HOA, Hal promptly kicked them out of his garage and off his property, refusing to sign the membership papers in the process.
It seemed like the HOA was banking on the idea that since Hal was young and naive, he would probably back down.
Little did they know, Hal’s grandfather had written his grandson a letter detailing the years of abuse by the HOA, preparing him for the fight that would be coming his way.
“It turns out they were wrong on both accounts, since his grandpa left him a letter pointing out what his rights exactly were, what they would possibly try, what else they might try, how hard it is to fight what, when he needs to react and how, so he prepared him really well for this,” Alec wrote.
Then Came The List Of Demands
With the HOA gone, Hal looked through the HOAs list of guidelines, which sounded more like a list of demands from an occupying force than a neighborhood association.
“They had, for example, a right to visit your home bi-weekly to check things like that you do not use the garage for storage or don’t have gasoline in containers in your garage,” Alec wrote.
“You had to mow your lawn every week, snow had to be shoveled every two hours when it snowed (starting at 5 o’clock in the morning).
You could not park more than one car on your grounds (except inside the garage).”
Three days went by and Hal still hadn’t signed the contract, so the group came back by like some geriatric mafia trying to get him to comply with their rules.
When the group said they wanted to check Hal’s garage again, he said no and kicked them off his property.
“To them, that meant war,” Alec wrote.
Within a week of the confrontation, Hal received received fines upwards of $1,000 for simply not allowing them to enter his home.
Hal was neither impressed nor intimidated and used the “stupid letters to help fire his grill.”
But this only fanned the flames of discontent…
But Then It Went Too Far
Hal went on with his life, but would you be shocked to hear that the HOA board wasn’t so willing to forgive and forget?
Because they did neither.
One day, Hal came home to find one of the HOA members had broken into his his garage, writing down things on a notepad.
It didn’t take long for Hal to realize the zealous HOA board was willing to take any step necessary to keep tabs on him, even if that meant using bolt cutters to bust up a lock on the garage door.
Hal quickly called out the intruder, but he soon realized that the intrusion was just part of the HOA’s plan.
As he was trying to figure out what the man was doing breaking into his home and prying through his personal belongings, he heard what sounded like demolition of some sort coming from his front yard.
In front of his house stood two oak trees that his grandparent’s planted with seeds from their home country when they first built the home all those years ago, and now a tree removal company was in the process of tearing them down.
Those trees had stood there for decades, serving as a reminder of where they had come from, a reminder of their heritage, and a reminder of their love.
Hal stood there in disbelief as something that had meant so much to his family was being ripped away.
“They had called a professional crew for this,” Alec wrote.
“One was already so damaged (basically all twigs were already down, it was just a stump that was left).
The other one they had just started with.”
It only got worse when Hal was informed that the HOA told the crew that Alec had given them permission to cut down the trees because they were in violation of HOA rules.
But what kind of rule would give an HOA member the right to walk onto someone’s property and cut down decades-old trees?
It All Came Crashing Down
Hal would find out that there was a rule (which he didn’t sign off on) where if a garden produces more than a 40-liter sack of leaves within two weeks, the garden owner needs to take down the “offending trees” within two weeks of the violation.
Having had enough of the HOA, its members, and its rules, Hal decided it was time to get back at the people who had made his first weeks of being a homeowner a living nightmare.
He struck up a deal with the tree crew where he would overlook the trespassing if they would agree to be witnesses if he filed charges against the HOA.
Having the crew’s word that they would back him up, Hal did what he had to do.
“Then he called the cops on the board members for trespassing, breaking and entering (they actually had used a bolt cutter to get into the garage; he had it always closed with a big bike lock after they had tried to get in it twice before),” Alec wrote.
And believe it or not, this thing actually went to trial…
That’s When This Thing Went To Court And Got A Lot More Real
Alec didn’t provide details on the ins and outs of the criminal trial, but he said it must have been “glorious,” because not only did the HOA have to repay Hal for the broken lock and damage to the trees (which ended up being close to $50,000), they also fought the charges which cost them another $15,000 in legal fees.
“All in all, this trial must have cost them over $120,000,” Alec recalled.
But it didn’t end there. Not having enough of his revenge, Hal decided to take the HOA and its members to civil court where he sued them for “emotional damage.”
You might be asking, “but what’s this business about ’emotional damage?'”
Well, Hal laid it on as thick as he could when he was pleading his case.
“He told them how much these trees meant to him, since his grandparents had planted them, with seeds from the home country,” Alec wrote.
“Plus, he felt threatened by the HOA, and can hardly sleep because he always fears they try to get into his house.”
Neither of which were lies, and so the court bought Hal’s story and ordered the HOA to pay $500,000 plus the cost of a state of the art home alarm system so he could “feel safe again in his own home.”
But that wasn’t all…
What It Cost
The HOA’s actions ended up costing the board around $750,000 before everything was said and done, but it would only get worse for some of the board members.
“They had to file for bankruptcy and get a person to check the books so my friend would get his money,” Alec wrote.
“But the best for last… The mediator found out that these three pricks had been defrauding the HOA for well over 10 years and were giving out as many fines as they possibly could so they could use it to bolster their income.”
Through their research, the mediator discovered that the HOA methodically tried to get rid of the people that they did not want there, and then they would buy their houses on the cheap.
The HOA would use the fines from their ridiculous rules to create enough money for the down payment on these homes.
With that being said, everyone wanted a piece of these crooks.
And that’s not even the best part…
Now That They’re Gone…
Due to the astronomical settlement, the three board members who had been waging a private war on Hal were left with no choice but to sell their homes in order to pay Hal’s settlement.
And with the three leaders of the HOA out of the neighborhood, Hal became somewhat of a local hero after freeing his neighbors from the abuse and extortion of the HOA board members.
“You see, most people never wanted the HOA in the first place, but the board member practically forced them to sign the contract, claiming it would not be optional, and if they did not sign before moving in it would be a $500 fine,” Alec recalled.
“Only six of the 50 members actually wanted this HOA (and people think they did get part of the action, as reward for spying on their neighbors to find violations).”
With his newfound fame, Hal found himself constantly being invited over to his neighbors’ for parties and BBQ’s while the former HOA board became nothing but a distant memory.
A Lesson To Be Learned
And so that concludes our story about the young homeowner who had enough of a tyrannical HOA and its board members and decided to get his own form of revenge.
It wasn’t pretty and it wasn’t sweet, but Hal did what had to be done. He couldn’t stand on the sidelines and watch as the group of extortionists and petty crooks continued to reign over a neighborhood who wanted no part in being subjected to the rules of a neighborhood association.
Hal did what so many before him had failed to do…
he stood up, he made a stand, and he got his voice heard.
While the HOA’s former leaders are selling their homes, draining their bank accounts, and looking for any possible way to pay back one of their victims, Hal and the rest of his neighbors are enjoying the sweet taste of freedom and some of that BBQ his new friends keep offering him.
After piling in when the market was hot, investors are facing losses from homes that take too long to sell.
(Bloomberg / Businessweek) Sean Pan wanted to be rich, and his day job as an aeronautical engineer wasn’t cutting it. So at 27 he started a side gig flipping houses in the booming San Francisco Bay Area. He was hooked after making $300,000 on his first deal. That was two years ago. Now home sales are plunging. One property in Sunnyvale, nearApple Inc.’s headquarters, left Pan and his partners with a $400,000 loss. “I ate it so hard,” he says.
Single family home prices in Orange, Los Angeles and San Diego counties changed course, climbing up in April after falling year over year in March.
Sales volume was down statewide, but the median resale home price set a record high in California in April, hitting $602,920. (File photo by Marilyn Kalfus/SCNG)
Riverside County had the biggest price gain of five Southern California Counties, at 5.8%, with the median resale of a home up to $423,000 from $400,000 in April 2018. San Bernardino saw a 5.2% hike, with the price at $305,000 compared with $289,900 the prior year.
Orange County had the smallest uptick – 0.9% – but the heftiest price: It rose to $825,000 in April from $818,000 last year. Los Angeles, with a 3% increase, saw prices go to $544,170 from $528,550 last April. San Diego rose 2.2% to $649,000 from $635,000.
The analysis comes from the California Association of Realtors, which reports on the resale of houses around the state. Sales of existing houses account for just over two-thirds of all home sales in Southern California.
In March, CAR’s numbers reflected the first year-over-year price drop for Los Angeles and San Diego counties in seven years and the third in Orange County in the previous four months.
Statewide, demand weakened and sales were down, but the median home price set a record high in April, reaching $602,920 and passing the $602,760 high set in the summer of 2018. April’s price was up 3.2% from $584,460 in April 2018, CAR said.
“While we started off the spring homebuying season on a down note, home sales in the upcoming months may fare better than the top-level numbers suggest,” said Leslie Appleton-Young, CAR’s senior vice president and chief economist. “The year-over-year sales decrease was the smallest in nine months, and pending home sales increased for the second straight month after declining for more than two years.”
She said a sharp sales rebound is not expected, but neither is an acceleration of declines.
Sales volume dipped in Los Angeles (-0.1%), Riverside (-6.5%) and San Bernardino counties (-7.7%), but was up in Orange (0.5%) and San Diego counties (2.4%).
“Weak buyer demand, largely prompted by elevated home prices, is playing a role in the softening housing market,” said CAR president Jared Martin. “However, with low-interest rates, cooling competition and an increase in homes to choose from, buyers can take advantage of a more balanced housing market.”
Mortgage rates fell to 4.06%, in March, a 14-month low. The 30-year fixed-rate mortgage averaged 4.07% for the week ending May 16, down from last week’s rate of 4.10%, according to Freddie Mac.
One of the largest real-estate developers in Israel revealed plans for the soon-to-be tallest building in Israel that looks surprisingly similar to images of what the Tower of Babel may have looked like. But a closer look reveals the new building may be much more, what one rabbi thinks could be adry-run for building the Third Temple.
The Azrieli Group, an Israeli real estate and holding company, announced their plan to build Israel’s tallest building as an addition to their already impressive Azrieli Center Complex in Tel Aviv. Topping out at 91 stories and reaching 1,150 feet toward the heavens, it is estimated that the Spiral Tower will take six years to complete at an estimated cost of $666 million. The new tower will take its place next to the iconic circle, square and triangle towers that make up the Azrieli Complex. By building the Spiral Tower, the Azrieli Group will outdo itself as they built the current tallest building in Israel, The Azrieli Sarona Tower which stands 782 feet high with 53 floors, just two years ago.
The plans are ambitious, with around 150,000 square meters containing commercial space, offices, residences, and a hotel. Six underground parking levels, covering an area of 45,000 square meters, will be built at the base of the structure, in addition to a commercial floor connected directly to the light rail. The tower’s peak will include space for conferences and meetings, recreational space, and a 360-degree view of Tel Aviv and the surrounding area. it is predicted that approximately 100,000 people will pass through the center every day.
The unique design was produced by Kohn Pedersen Fox Associates (KPF), a New York-based architecture firm which is responsible for five of the 10 tallest skyscrapers in the world. According to the press release, the architects took their inspiration from nature as well as Jewish heritage.
“The tower was planned and developed in a unique geometric shape, never before seen in Israel, which captures the eye and the imagination. The main challenge for the initiators and architects was to create harmony between the three iconic towers that form Azrieli Center and the new tower, an impressive, one-of-a-kind structure which stands on its own. The tower’s design takes inspiration from the twists of a snail’s shell, attempting to imitate their natural form. The design also draws inspiration from ancient biblical scrolls and the way they unfurl upwards.”
More cynical critics of the design might draw a comparison between the elegant design presented by the developers and certain depictions of the Biblical Tower of Babel. Though the Biblical account contains no details other than it builders aspirations for it to reach great heights.
And they said, “Come, let us build us a city, and a tower with its top in the sky, to make a name for ourselves; else we shall be scattered all over the world.”Genesis 11:4
Traditional Jewish sources provide additional details. Midrash (homiletic teachings) described “an idol on the top holding a sword, so that it may appear as if it intended to war with God.” The Midrash also described a structure built on tall columns designed to protect the tower from another divine flood.
Some modern scholars have associated the Tower of Babel with known structures, notably the Etemenanki, a ziggurat dedicated to the Mesopotamian god Marduk built by Babylonian King Nabopolassar in 610 BCE. Indeed, the Spiral Tower Design closely resembles a ziggurat, an ancient structure from the Middle East built as a terraced compound of successively receding stories or levels. at the top of each ziggurat was a shrine. Also, similar to the Azrieli Towers, each ziggurat was part of a larger complex that included a courtyard, storage rooms, bathrooms, and living quarters, around which a city was built.
Yisrael Rosenberg is an author who has a powerful connection to the spiritual implications of construction. His daytime job is as a tour guide for theWestern Walltunnels.
“The main sin connected to the Tower of Babel was not in their action but in their intention. The bottom line is that the intent of the builders and the architects of the Azrieli tower is l’shem shamayim (in the name of heaven). The fact that they envisioned a Torah scroll while designing the building is remarkable. Even if it was just for beauty, beauty can be to praise God’s creation.”
Rosenberg noted that the builders of the Tower of Babel came together to challenge heaven, hence their punishment was to be divided and scattered.
“Tel Aviv needs high towers since it is becoming densely populated,” he said. “This is a Tikkun (fixing) for what happened after the Tower of Babel. It allows people to be together in Israel.”
He also noted that for the 2,000 years of exile, Jews excelled in many fields but were less represented in architecture and land development.
“Everything we learn about construction in Israel is just one step away from the Beit Hamikdash,” Rosenberg said. “Just like Solomon’s Temple, the Third Temple will be with the agreement and blessings of every nation in the world and it will be the greatest construction project ever seen. We need to learn how to lead the world in this project.”
A larger volume of CMBS loans are being issued with interest-only (IO) structures, but this rise may put the CMBS market in a dicey position when the economy reaches its next downturn. To put things in perspective, interest-only loan issuance reached $19.5 billion in Q3 2018, six times greater than fully amortizing loan issuance. In comparison, nearly 80% of all CMBS issued in the FY 2006 and FY 2007 was either interest-only or partially interest-only loans.
In theory, the popularity of interest-only loans makes sense, because they provide lower debt service payments and free up cash flow for borrowers. But these benefits are partially offset by some additional risks in the interest-only structure, with the borrower’s inability to deleverage during the loan’s life perhaps being the biggest concern. Additionally, borrowers who opt for a partial interest-only structure incur a built-in “payment shock” when the payments switch from interest-only to principal and interest.
Why are we seeing a spike in interest-only issuance if the loans are inherently riskier than fully amortizing loans? Commercial real estate values are at all-time highs; interest rates are still historically low; expectations for future economic and rent growth are fundamentally sound, and competition for loans on stabilized, income-producing properties is higher than ever. Furthermore, the refinancing pipeline is miniscule compared to the 2015-2017Wall of Maturities, so more capital is chasing fewer deals. This causes lenders to augment loan proceeds and loosen underwriting parameters, including offering more interest-only deals.
Then and Now: Why the Rise in 10 Debt Has Raised Concerns
Between Q1 2010 and Q1 2012, fully amortizing loans dominated new issuance, with its market share amassing as much as 80.4% (Q1 2012). Interest-only issuance was nearly equal to the fully amortizing tally by Q3 2012, as interest-only debt totaled $5.10 billion, only $510 million less than fully amortized loans. Interest-only issuance would soon overtake fully amortizing loan issuance by Q2 2017, as its volume skyrocketed from $5.3 billion in Q1 2017 to $19.5 billion in Q3 2018.
Prior to the 2008 recession, the CMBS market experienced a similar upward trend in interest-only issuance. By 02 2006, interest-only loans represented 57.6% of new issuance, outpacing fully amortizing notes by 38.86%. The difference in issuance between interest-only and fully amortizing loans continued to widen as the market approached the recession, eventually reaching a point where interest-only debt represented 78.8% of new issuance in 01 2007. Even though the prevalence of interest-only debt is mounting, why would this be a concern in today’s market?
IO Loans Are More Likely to Become Delinquent
Interest-only loans have historically been more susceptible to delinquency when the economy falters. Immediately following the recession, delinquency rates across all CMBS loans moved upward. Once the economy began to show signs of recovery, the delinquency rate for fully amortized loans began to decline, while interest-only and partially interest-only delinquencies continued to rise. In July 2012, the delinquency rate for fully amortizing loans was sitting at 5.07% while the interest-only reading reached 14.15%. The outsized delinquency rate for interest-only loans during this time period is not surprising, since many of the five-year and seven-year loans originated in the years prior to the recession were maturing. Many of the borrowers were unable to meet their payments due to significant declines in property prices paired with loan balances that had never amortized.
Over time, the stabilization of the CMBS market led to subsequent declines in the delinquency rates for both the interest-only and partial interest-only sectors. The delinquency rate for interest-only loans clocked in at 3.17% in December 2018, which is down nearly 11 % from its peak. Delinquency rates across all amortization types have failed to return to pre-crisis levels.
Just because a large chunk of interest-only debt became delinquent during the previous recession does not mean the same is destined to happen in the next downturn.
Measuring the likelihood of a loan turning delinquent is typically done by calculating its debt-service coverage ratio (DSCR). Between 2010 and 2015, the average DSCR across all interest-only loans was a relatively high 1.94x. Since 2016, the average DSCR for interest-only debt has fallen slightly. If the average DSCR for interest-only loans continues to decline, the inherent risk those loans pose to the CMBS market will become more concerning.
The average DSCR for newly issued interest-only loans in March 2019 registered at 1.61 x, which is about 0.35x higher than the minimum DSCR recommended by the Commercial Real Estate Finance Council (CREFC). In 2015, CREFC released a study analyzing the impact of prudential and securities regulation across the CRE finance sector. In the study, CREFC cited a 1.25x-DSCR as the cutoff point between relatively healthy and unhealthy loans. The value was chosen through loan-level analysis and anecdotal information from conversations with members.
The figure below maps the DSCR for both fully amortizing and interest-only loans issued between 2004 and 2008. Notice that toward the end of 2006, the average DSCR hugged the 1.25x cutoff level recommended by CREFC. Beyond 2006, the average DSCR for interest-only loans oscillated between healthy and concerning levels.
The second figure focuses on CMBS 2.0 loans, where a similar trend can be spotted. After roughly converting interes-tonly loan DSCRs to amortizing DSCRs using underwritten NOI levels and assuming 30-year amortization, the average DSCR for interest-only loans issued between 2010 and mid- 2014 (2.04x) is much greater than that for fully amortizing issuance (1.78x). While part of this trend can be attributed to looser underwriting standards and/or growing competition, the other driver of the trend is due to selection bias. Lenders will typically give interest-only loans to stronger properties and require amortization from weaker properties, so it makes sense that they would also require less P&I coverage for those interest-only loans on lower-risk properties.
What Lies Ahead for the IO Sector?
Rising interest-only loan issuance paired with a drop in average DSCR may spell for a messy future for the CMBS industry if the US economy encounters another recession. At this point, CMBS market participants can breath a little easier since interest-only performance has remained above the market standard. However, this trend is worth monitoring as the larger volume could portend a loosening in underwriting standards.
Signa Holding, Austria’s largest privately owned real estate company, has reached an agreement to purchase the iconic Chrysler Building in New York City in partnership with property firm RFR Holding for about $150 million, according to Reuters.
The price is at a steep discount compared to the $800 million the Abu Dhabi Investment Council paid for a 90% stake in the building right before the 2008 financial crisis. Shortly after the investment arm of the Government of Abu Dhabi bought the property, commercial real estate prices crashed.
Sources told Reuters that the deal includes both the office building and the pyramid-topped Trylons on the land between the tower and 666 Third Avenue.
The Art Deco–style skyscraper, was completed in 1930 on the East Side of Midtown Manhattan in New York City. It is a recognizable symbol of Manhattan’s skyline, was for a short time in the early 1930s the tallest building in the world, only to be surpassed by the Empire State Building.
The most significant factor weighing on the price is out of control expenses tied to the building’s ground lease. The land under the tower is owned by the Cooper Union school, which raised the rent to $32.5 million last year from $7.75 million in 2017.
“The ground lease is a glaringly obvious negative,” Adelaide Polsinelli, a broker at New York City-based Compass, told Bloomberg. “The other negatives are that the space is not new and it is landmarked, therefore it’s twice as hard to get anything done.”
Tishman Speyer Properties and the Travelers Insurance Group bought the Chrysler Building in 1998 for about $230 million. In 2001, a 75% stake in the building was sold, for $300 million to TMW, the German arm of an Atlanta-based investment fund. Abu Dhabi bought the German fund’s share as well as part of Tishman’s in June 2008. Reuters said Signa and RFR were extremely close to a deal to purchase the tower.
Signa has an extensive portfolio of landmark buildings in prime locations. Its holdings include KaDeWe and the Upper West Tower in Berlin, Goldenes Quarter with the Park Hyatt Hotel in Vienna, Alte Akademie in Munich, and Alsterhaus and Alsterarkaden in Hamburg.
RFR has also made a name for itself in commercial real estate by owning and managing some of Manhattan’s most prestigious commercial properties, including the Seagram Building and Lever House, which are located on Park Avenue.
Signa and RFR had completed several deals together in the past, including in 2017, when Signa bought five landmark properties from RFR in Berlin, Hamburg, Frankfurt, and Munich for about 1.5 billion euros.
A lethal combination of rising property taxes and stagnant incomes has forced many Illinoisans to rethink their relationship with their state. More than 1.5 million net residentshave already fled the state since 2000 – and you can’t blame others for thinking about joining them.
Property taxes have become punitive in Illinois. We’ve written about how these taxes have destroyed the equity in people’s homes across the state. Many familieshave done the math, and whether they’re in thestruggling south suburbsof Chicago or theaffluent North Shore, they’ve decided to leave Illinois behind.
The traditional method for measuring the burden of property taxes is to look at a household’s property tax bill and compare it to a home’s value. Under this method, Illinoisans pay the highest property taxes in the nation.At 2.7 percent, Illinoisans pay far more than residents in neighboring states – twice more than those in Missouri and three times more than residents in Indiana.
That fact is outrageous on its own.
But to really understand the pain that these taxes inflict on Illinoisans, it’s important to compare property tax bills to household incomes. After all, those bills are paid straight from people’s earnings.
The unfortunate reality is that Illinois incomes have been stagnant for years – and falling when you consider the impact of inflation.
Between 2000 and 2017, Illinois median household incomes increased just 34 percent, far short of inflation. In contrast, household property tax bills are up 105 percent,according toIllinois Department of Revenue data.
The net result: Property tax bills per household have grown three times faster than household incomes since 2000.
That means more of Illinoisans’ hard-earned incomes are going toward property taxes and less towards groceries, college tuition, and retirement savings. In 2017, 6.73 percent of household incomes went toward property taxes, up from 4.3 percent in 2000.
That’s a 55 percent increase in the effective tax rate.
The detailed data is below:
Property taxes, county by county
Residents of Lake County pay the highest property taxes in Illinois when measured as a percentage of household incomes. In 2000, Lake County residents paid 6.5 percent of their household incomes toward property taxes. Today, residents pay 9.1 percent. That’s a 40 percent increase. The average Lake County property tax bill is now over $7,500 per household.
Meanwhile the residents of the other collar counties and Cook pay more than 7 percent of their incomes to property taxes, with average bills ranging from $4,500 to $6,200 a year.
Overall, the collar counties pay the highest taxes as a percent of income in the state. But it’s not just the Chicago suburbs that are taking a hit. Taxpayers statewide have seen their taxes rise.
In fact, most of the counties that have had the biggest tax growth, in percentage terms, are found downstate. Hardin County residents, though they pay low rates, have seen them jump 97 percent since 2000. Residents in Pulaski County, have seen their rates go up by 78 percent.
Cook County comes next at 75 percent, but after that it’s all deep downstate again: Calhoun (70 percent), Greene (66 percent), Jersey (65 percent), and Pope County (62 percent).
Taxes too high
Any way you cut it, Illinoisans are being punished by property taxes.
That’s prompted some, including new Gov. J.B. Pritzker, to propose a reduction in property taxes by increasing income taxes.
But that would do Illinoisans no good. Illinoisansalready paythe nation’s 6th-highest rates when you lump all state and local taxes together.
Shifting them around won’t help when the total tax bill is too high to begin with. What Illinoisans need is tax cut, not a tax shift.
Gov. Jerry Brown, left, with Proposition 13 co-author Howard Jarvis at a news conference in July 1978, one month after California voters passed the measure. Photo: ROBBINS / AP
Proposition 13 Is Untouchable.
(San Francisco Chronicle) That’s been the thinking for 40 years in California. Politicians have feared for their careers if they dared suggest changes to the measure that capped property taxes, took a scythe to government spending and spawned anti-tax initiatives across the country.
However, that is beginning to change. With Republican influence in California on the wane and ascendant Democrats making tax fairness an issue, advocates are confident that the time is right to take a run at some legacies of the 1978 measure.
High on their list: making businesses pay more and ending a sweetheart deal for people who inherit homes and their low tax bills, then turn a profit by renting them out.
Legislative Democrats hold so many seats that they don’t have to worry about the GOP blocking such ideas from going before voters. Gov.-elect Gavin Newsomhas said that “everything would be on the table,”including Prop. 13, as he formulates a plan to reform the state’s tax structure.
Perhaps most important, Prop. 13’s age is becoming an advantage to would-be reformers: California’s voting demography is changing. The generation of homeowners that grew up with Prop. 13 is well into retirement now, and some younger Californians blame flaws in the measure for everything from the under funding of public schools to growing wealth inequality.
Bracy, 38, moved to the state six years ago from Chicago. “For newcomers (to California) like me, who were born after Prop. 13, we want to experience the California dream, too,” she said. “But we don’t have the opportunity to, because all the goodies have been locked up by the older generations.”
Prop. 13 was a remedy for a side-effect of one of California’s first housing bubbles — spiking property taxes. Moved by their own tax bills and horror stories of longtime homeowners being forced to sell because of skyrocketing assessments, voters overwhelmingly passed the measure. It rolled back assessments for homes and businesses to 1976 levels and capped annual tax increases at 2 percent.
Jon Coupal is president of Prop. 13’s fiercest defender — theHoward Jarvis Taxpayers Association,named after the initiative’s co-author. He agreed that “the number of homeowners who were around in 1978 is shrinking. And many younger people don’t remember the fear and anger about losing your home.”
But Coupal said that “notwithstanding the leftward movement of politics in California,” his organization’s internal polling shows support for Prop. 13 remains strong. And a survey in March by a nonpartisan group unaffiliated with Coupal’s organization, the Public Policy Institute of California, found that 65 percent of likely voterssurveyed said Prop. 13 “turned out to be mostly a good thing for the state.”
Under Prop. 13, residential and commercial property alike is reassessed only when it is sold. But while homes often change hands every few years, many large businesses remain in the same ownership for a long time. Some businesses are paying property taxes based on assessments that haven’t changed in 40 years.
That’s one main target of people who want to tweak Prop. 13. The League of Women Voters of California says it has gathered enough signatures for a 2020 ballot measure that would create a so-calledsplit rollsystem, under which businesses’ property would be reassessed every three years. Agricultural land and businesses with 50 or fewer employees would be exempt. Residential property would not be affected.
The change could raise $11 billion in tax revenue statewide, including $2.4 billion for Alameda, Contra Costa, Marin, San Francisco and San Mateo counties, according to aJanuary studybythe USC Program for Environmental and Regional Equity. The study found that 56 percent of all Bay Area commercial properties had not been reassessed for 20 years, and 22 percent had assessments dating back to the 1970s.
Could a split-roll measure pass? It might be close. Forty-six percent of likely voters surveyed by the Public Policy Institute of California in January said they supported the idea, while 43 percent were against it. Support was far higher among likely voters under 35 (57 percent) than with those over 55 (41 percent).
However, the split-roll concept has actually been growing less popular over the years, the institute said: Six years ago, 60 percent of likely voters backed it.
Helen Hutchison, president of the League of Women Voters of California, acknowledged that changing the law will be difficult because “Prop. 13 still has some kind of magical pull. But we think the time is right to do this.”
State Sen. Jerry Hill has introduced a ballot initiative that would limit a tax break for heirs of residential property. Photo: Max Whittaker / Getty Images 2009
So does state Sen. Jerry Hill, D-San Mateo. He has introduced a ballot initiative that would tweak a different part of Prop. 13’s legacy.
Hill’s proposal, Senate Constitutional Amendment 3,takes aim at Proposition 58, which voters approved in 1986. The measure allowed parents to give their residential property to their heirs without triggering a tax reassessment. The intent of the measure was to insulate children from absorbing a huge spike in property taxes and help them stay in the family home. California is the only state to offer this tax break.
The proposed ballot measure would require people who inherit property in this way to move into the home within a year if they wanted the property tax break. The change would apply to future heirs, not those who have already inherited homes.
Getting this measure on the ballot in 2020 requires Hill to corral a two-thirds majority from both houses of the Legislature. If it makes it to the ballot, it could be passed by a simple majority of voters.
Hill is mindful of the politics around property taxes.
“We’re not touching Prop. 13. We’re touching Prop. 58,” Hill said. “The goal is to get people to pay their fair share.”
Coupal, head of the Howard Jarvis Taxpayers Association, doesn’t think Hill’s measure is the biggest threat to Californians concerned about taxes.
After being one of the most steadfast buyers of American real estate for years, large Chinese firms continueddumpinghigh-profile US real estate in the third quarter, the Wall Street Journal reports, selling more than $1 billion of property as Beijing forced insurers, conglomerates, and other big investors into debt-reduction programs.
Chinese investors dumped $1.05 billion worth of prime US real estate in the third quarter while purchasing only $231 million of property, according to data firm Real Capital Analytics. This marks the second consecutive quarter where investors were net sellers of US commercial real estate, and the first time investors sold more US property than they bought since the 2008 crash.
In the last decade, Chinese investors plowed tens of billions of dollars into US real estate, with a concentration in major metro areas like New York, Los Angeles, San Francisco, and Chicago. The Journal notes that Chinese buyers “never represented more than a fraction of the buying power in any U.S. market,” however they made headlines for paying massive premiums.
Now, the party has unexpectedly ended.
Rising corporate debt levels and concerns over currency stability has forced the Chinese government to tighten capital outflows and clamp down on overseas acquisitions.
As ZeroHedgediscussed last month, total Chinese Credit Creation unexpectedly collapsed, resulting in shock waves of weakness across the domestic and global economy. Amid speculation that Beijing is engineering a “slow landing” through a significant slowdown in credit issuance, investors – hungry for liquidity – are unloading US properties at a rapid clip. In global markets, this will likely create a deflationary chill and lead to a further slowdown in 2019.
Trade tensions between Beijing and the Trump administration have not helped the situation, as more Chinese firms sold properties amid worries the trade war could deepen in the coming quarters, and potentially lead to more aggressive blow back at Chinese investors.
“This has to do more with a change in how capital is permitted to behave rather than Chinese investors saying ‘I don’t like the U.S.’,” said Jim Costello, senior vice president at Real Capital Analytics.
“Ping An Insurance Group Co. of China and partners in August sold a 13-story Boston office building for $450 million, the largest sale by a Chinese investor during the third quarter, Real Capital Analytics said. Its U.S. partner Tishman Speyer said it was the one that drove the decision to sell the building.
China’s retreat showed signs of continuing in the fourth quarter. Dalian Wanda Group sold a glitzy development site in Beverly Hills, Calif., last month for more than $420 million. The Chinese conglomerate purchased the eight-acre parcel in 2014 for $420 million and had planned to develop luxury condominiums and a boutique hotel on the site, but feuds with a local union and contractors stalled progress.
Anbang recently engaged Bank of America Corp. to help it sell a portfolio of luxury hotels that it acquired two years ago for $5.5 billion, though the Waldorf isn’t part of that sale, according to a person familiar with the matter,” said the Journal.
“Anbang is reviewing the company’s U.S. real estate portfolio after seeing price recovering in local property market due to strong recovery of the U.S. economy,” said Shen Gang, a spokesman for Anbang.
Still, some strategists believe that Chinese selling may slow in the months ahead.
“I do not think it will be a tidal wave of sales,” said Jerome Sanzo, managing director and head of U.S. Real Estate Finance for Industrial & Commercial Bank of China. “Some of them are not able to move forward for various reasons and will take gains now while waiting for future changes.”
In a highly leveraged economy such as China’s, growth is a lagged result of changes in the supply of credit. And withcredit creation waning in China, it is less of a mystery why local corporations are rushing to “liquify” as fast as possible: the Chinese credit squeeze is well underway. Prepare for a global slowdown in 2019, one which has already hit the US housing market hard.
As US home sales begin to cool off, homebuilders have begun to panic – offering price cuts of more than $100,000 along with free upgrades such as media rooms, cabinets and blinds – reportsBloomberg.
That’s not all, real estate brokers are being enticed with free vacations such as trips to Lake Tahoe, Santa Barbara, Cabo San Lucas and even a dude ranch in Wyoming – all in the hopes that they will steer buyers towards houses in slowing markets.
This generosity flows from increasingly desperate home builders. Hot markets are cooling fast as interest rates rise. In the greathousing slowdownof 2018, shoppers are reclaiming the upper hand, after years of soaring prices that placed most inventory out of reach for many families. “Everybody is hungry for the buyers,” Konara says. –Bloomberg
Builders are definitely feeling the heat right now, as new home purchases dropped in September to the weakest pace since December 2016. Meanwhile, previously owned home sales dropped for a sixth straight month – the worst streak since 2014, according to Bloomberg. Investors in home building stocks are also feeling the pain, as the sector has lost more than a third of its value this year.
There are pockets of robust housing activity still, however – as rising wages have put more homes in reach; starter homes are still in demand, while some smaller and more affordable markets – such has Grand Rapids, MI and Columbus, Ohio remain strong. Still, the overall trend does not look good.
On top of interest rates, sellers in some regions face added challenges. President Trump’s tax overhaul places caps on tax deduction for mortgage interest and property taxes, hurtinghigh-tax regionssuch as New York’s suburbs. In Manhattan, added supply is about to hit the market, with 4,000 new condo units to be listed for sale in 2019, almost twice as many as this year, according to brokerage Corcoran Sunshine Marketing Group. –Bloomberg
Another factor hindering home sales, according to Bloomberg, are restrictions on immigration which have made high-skilled workers in places like San Jose and Austion hesitant to buy, while a strengthening dollar has made US investment properties less appealing to wealthy buyers in South America, and Chinese buyers snapping up homes up and down the West Coast.
In Seattle, where home prices have doubled since 2012, builders are offering cash for customers to “buy down” mortgage rates—that is, pay to get a lower interest rate. “Builders are calling us,” says Andy McDonough, senior vice president at HomeStreet Bank, which works with the companies on such promotions. “They weren’t doing this earlier because buyers were lining up.” –Bloomberg
The shifting real estate tide is perhaps most noticeable in previously sizzling markets – such as Fricso, Texas. Located 30 miles north of Dallas and full of newly constructed master planned communities, its population nearly doubled over the past decade to 177,000, while its jump of 8% last year made it the fastest-growing city in America.
All is not well in Frisco, however, as home sales have all but ground to a screeching halt.
On a recent weekday, Konara, the real estate broker, drives his Dodge minivan along Highway 380, a builder battleground, where national giants such as Lennar, Toll Brothers, and PulteGroup go head to head with Texas companies. He stops at sales offices, where balloons festoon posts in a vain effort to spur sales. He points to empty houses that he says were completed six months ago.
His own sales are half what they were in 2016. In many cases, he’s rebating to customers all but $1,000 of his commission on each home sale. He walks into an Indian restaurant for lunch and looks up at the television screen. A competitor, the “Maximum Cash Back Realtor,” says he’ll take only $750. “You know what that means,” Konara says. “I’ll have to do the same.” –Bloomberg
Konara received a call from Raj Patel, a 35-year-old pharmacist with two young children. Weeks away from finalizing a purchase of a $699,000 new home with “four bedrooms, a grand staircase, two patios, a balcony, a game room, a media room, and a three-car garage,” the buyer is paying $90,000 less than the advertised price – and still has reservations considering that a builder in the same community is selling a similar house with the same “bells and whistles” for $75,000 less than that.
Konara tells Patel “the market is getting soft,” to which the pharmacist replies “Hopefully the market doesn’t dip much more than this.”
Nearby, Jennifer Johnson Clarke relaxes on a couch in the living room of a model home in Frisco. There’s a wet bar to her right, a 23-foot ceiling above and an indoor Juliet balcony. Not long ago, the $1.2 million house would have been a hot commodity. Clarke, director of sales for Shaddock Homes, a 50-year-old family-owned builder, will have to work harder to sell homes based on this model. –Bloomberg
“We have an oversupply. Too many lots came on the market in the last 12 to 16 months, and demand has fallen off a cliff,” says Clarke. “I’ve not offered incentives on any scale like I’ve offered this year.”
For years, traditional malls around the United States have been in a state of partial or full collapse thanks to “the Amazon effect”: deteriorating conditions, bankrupt or cash-bleeding tenants, with some eventransforming into homeless sheltersas the retail industry “evolves”.
In other words, asBloombergwrites, “things are getting worse for malls across America.” So much worse, in fact, that their owners are simply walking away early from struggling properties, a trend that has sparked fears of material losses among mortgage bond investors.
Investors in and lenders to malls across America are bracing for the fallout from the disappearance of the brick and mortar sub-sector of the industry. With the recent bankruptcy of retail giant Sears, mall operators are continuing to see accelerating defaults in the wake of numerous other retail bankruptcies from stores like Bon-Ton, Wet Seal and RadioShack, and many others, resulting in abrupt declines in rental and lease payments.
And amid the ongoing collapse in what was once a staple source of shopping and entertainment for “middle America”, many mall owners are simply turning over the keys to lenders even before their lease is over, according toBloomberg. That puts the loan servicing companies in a position to either try to run the properties themselves or turn around and sell them. If they can’t make the debt payments, the new owners of the commercial mortgage backed securities in turn end up facing the consequences themselves.
While much of the noise surrounding the “big mall short” which dominated the 2017 airwaves has faded, the number of mall loans issued since the financial crisis that identified as “highest risk” has almost tripled to 29 this year. And the consequences are becoming painfully visible. The Washington Prime Group REIT last month simply gave up on two malls in Kansas where the loans had either defaulted or were close to default. This month, Pennsylvania REIT announced that it left a mall in Wilkes-Barre that also had a loan ready for default. The PA REIT is considering abandoning another mall in Wisconsin for the same reason.
Ben Easterlin, head of commercial lending at Atlanta-based Angel Oak Companies, told Bloomberg that many small town malls are no longer being included in CMBS packages. “It’s easier to value a mall in L.A. than it is in Sheboygan,” he said. “We talk about these malls all day long. We have not seen any of these malls in a CMBS lately and don’t expect to, frankly.
Meanwhile, even though the delinquency rate right in the commercial mortgage backed securities market is at post-crisis lows now, the pain will likely take a couple of years to show up due to maturities that won’t occur for several years.
Adding to the pain, stores leaving these malls often cause a waterfall effect because of co-tenancy clauses that are included in many small mall leases. These clauses mean that if there aren’t enough tenants in a mall at a given time, other tenants have the option to leave. So when a “major” anchor-store company – like Sears – closes a bunch of stores, it can triggers clauses releasing other stores from their contractual leases, further hitting the mall and its creditors.
Still, not all investors see this as Armageddon.
The Galleria at Pittsburgh Mills was seen as an investment opportunity by New York-based Namdar Realty Group and Mason Asset Management, who bought the property for $11.35 million earlier this year after it was once valued at $190 million in 2006, before it was packaged into a commercial mortgage backed securities pool.
Steve Plenge, managing principal of Pacific Retail, is another optimist who sees today’s climate as opportunistic. His firm has taken over at least two malls that have been returned to lenders after defaults. He told Bloomberg: “we think this sector, the servicing business, will get bigger for us. There will be more defaults, more foreclosures.”
We agree. In fact, at the beginning of October wenoted that mall vacancieshad hit 7 year highs. And, according to a WSJreport, the average rent for malls in the third-quarter fell 0.3% to $43.25 a square foot. This is down from $43.36 in the second quarter and is the first time this number has fallen sequentially since 2011, according to research firm Reis, Inc.
At the same time, vacancy rates are on the ascent, rising to 9.1% in the third quarter from 8.6% in the second quarter, and the highest they’ve been since the third quarter of 2011, when these rates hit 9.4%.
Barbara Denham, senior economist with Reis, told the Journal: “The retail sector is still correcting”. And, as long as ever more people continue to migrate to online retailers (or buying less stuff in general), it will be for years.
Yet another shopping mall project looks to have fallen victim to “the Amazon effect”, serving as evidence that brick and mortar retail, in the conventional sense, is doomed.
The latest victim is the New Horizon Mall in Calgary. The construction of the “multicultural mega-mall” is nearly complete, but tepid interest forced its developer to push back its planned grand opening to next year. The mall was initially set to open in October of this year. Only 9 of the 517 spaces in the mall have opened for business since May, when owners were first allowed to take possession according to a newreportby Global News.
“It’s surreal. It’s not normal – we’re in the Matrix,” one shopper told Global News.
The developer, Eli Swirsky, president of The Torgan Group of Toronto, told Global News:
“I love the mall. I think the mall will be fine,” he said in an interview. “I wish it was faster, of course, but every time I go there I’m awed by its size and potential and I think we’ll get there.
Swirsky told Global News that he expects 20 stores will be open by the end of September, but he still wouldn’t commit to a final grand opening date. Instead, he said that it will likely happen when 80 to 100 stores have opened. That is seen to push back the grand opening well into spring of next year.
The optimistic outlook stands in the face of eerie reality of the project, which shows “For Lease” signs and empty glass spaces traditionally reserves for stores.
Those who have already taken up shop in the mall, including Rami Tawil of Silk Road Importers, think that pushing the grand opening off until there are more tenants is a good idea: “I think now it’s better if we push it a couple of months because we need more stores here to open. We need the people coming to see more stores.”
The mall style is based on a similar mall that the developer opened in the Toronto area – about 20 years ago. The mall is different from traditional malls in the sense that it doesn’t exclusively lease to tenants. Rather, investors can purchase retail space and then have the option of leasing it to others or operating it themselves. The developer also holds large chunks of space in hopes of enticing anchor tenants. None of these have been announced yet.
The few tenants of the mall are at varying stages of readiness. Some are still trying to figure out what type of product or service may be best to offer at the location. Others are trying to re-sell or lease their spaces, according to the mall’s general manager, Jason Babiuk.
The mall was a $200 million project that broke ground in June 2016. Some believe that the difficulty in filling the mall has to do with its condominium-like ownership model, which could attract the wrong type of investors to such a project.
Retail analyst Maureen Atkinson, a senior partner at J.C. Williams Group stated: “The challenge with the condo model is that the people who run the stores are typically not the people who own them. So they would have sold these to investors … who see it as an investment and they may have trouble finding somebody who wants to run a business.”
Earlier this week we learned that mall rents in the United States were plunging as vacancies were shooting toward record highs. According to a WSJ report, the average rent for malls in the third-quarter fell 0.3% to $43.25 a square foot. This is down from $43.36 in the second quarter and is the first time this number has fallen sequentially since 2011, according to research firm Reis.
At the same time, vacancy rates are on the ascent, rising to 9.1% in the third quarter from 8.6% in the second quarter.
Our take? Instead of trying to re-invent an industry that is already on its deathbed by opening a “multi-cultural” mall, maybe Canada should have, at very least, taken a page out of the United States’ once successful mall playbook: bankrupt retail brands and greasy Asian food court samples.
Home buyers may soon get at least a little relief. After years of steadily worsening housing shortages, more homes are finally going up for sale.
The number of new listings onrealtor.com®in September shot up 8% year over year, according to a recent report fromrealtor.com. That’s the biggest jump since 2013, when the country was still clawing its way out of the financial crisis. And it gives eager buyers a lot more options to choose from.
“It’s a key inflection point,” says Chief Economist Danielle Hale ofrealtor.com. “There are still more buyers in the market than homes for sale. But in some [parts of the country], the competition is among sellers to attract buyers.”
That’s a big shift from a year ago, when bidding wars and insane offers over asking price were par for the course. But it doesn’t mean the housing shortage has suddenly dissipated.
Nationally, the total inventory of homes for sale was essentially flat compared with the year before—moving down 0.2%. Hale expects the bump in new listings to buoy that inventory.
And while the median home price, at $295,000, was up 7% in September compared with a year ago, the increase in homes hitting the market helped to slow that rise. The median home price in September 2017 was a 10% increase over the previous year.
The new inventory tended to be a little cheaper, by about $25,000, and about 200 square feet smaller than what was already on the market. That could be due to the 3% rise in condo and town home listings.
The influx of homes on the market is partly due to sellers betting that we’ve reached the peak of the market. So they’re rushing to list their homes and get top dollar while they can. But those owners are learning that their home, particularly if it’s priced high, may no longer sell immediately for that price. And homes need to be staged and in tiptop shape.
The increase in inventory is likely to slow wild price growth as well, although prices aren’t likely to fall anytime soon. It all comes back to supply and demand. Folks will pay a premium for something if there’s not enough of it to go around. So while this is fantastic news for buyers, there are bound to be some disappointed sellers who were hoping to get a little more for their abodes.
But make no mistake: Prices are still rising, and there aren’t enough homes to go around. Still, the uptick in homes going up for sale “will eventually shift the market from a seller’s market … to a buyer’s market,” says Hale.
Bank of America is ringing the proverbial bell on the US real estate market, saying existing home sales have peaked, reflecting declining affordability, greater price reductions and deteriorating housing sentiment. In the latest weekly report from chief economist Michelle Meyer, the bank warned that “the housing market is no longer a tailwind for the economy but rather a headwind.”
“Call your realtor,” the BofA note proclaimed: “We are calling it: existing home sales have peaked.”
BofA’s economists believe the peak was seen when existing home sales hit 5.72 million, back in November 2017. From this point on, sales should trend sideways, as this moment in time is comparable to the rate the economy witnessed in the early 2000s before the bubble inflated.
And while BofA believes existing home sales have plateaued, they do not think the same for new home sales. The reason: new home sales have lagged existing in this “economic recovery” – leaving home builders some room to flood the market with new single-family units before a turning point in the entire real estate market is realized.
The deterioration in affordability can mostly explain the peak in existing home sales. This is due to the Federal Reserve reinflating real estate prices back to levels last seen since before the 2008 crash. The National Association of Realtors (NAR) affordability index prints 138.8, the lowest since August 2008.
Chart 1 (below) shows there is a leading relationship between the trend in affordability and in home sales — a simple regression suggests the lead is about three months. In major cities, affordability continues to be a significant problem for many Americans amid a rising interest rate environment and elevated home prices, existing home sales should remain under pressure for the foreseeable future.
Chart 2 (above right) indicates that the share of properties with price discounts is on the rise, suggesting that sellers are unloading into weakening demand. The data from Zillow reveals that 15 percent of listings have price reductions, the highest since mid-2013 when home sales tumbled last.
The University of Michigan survey (Chart 3 below) reveals a worsening mood in the perception of buying conditions for homes. Respondents noted that home prices have become too high while rates have become restrictive.
BofA said that existing home sales were quick to recover post-crisis given motivated sellers – the lenders who were sitting with millions of distressed properties.
Distressed properties made up between 30 and 40 percent of sales in the early stages of the recovery.
Home prices were discounted until they reached the market clearing price and buyers entered.
The recovery for new homes sales began one year after existing, as homebuilders stayed idol waiting for the dust to settle.
“We are now looking at a market where existing home sales have returned to a solid pace but new home sales are still below normal levels. We think that builders will continue to selectively add inventory in markets where there is demand, allowing new home sales to glide higher. Ultimately we think new home sales will peak around 1mn saar based on the historical relationship between existing and new home sales,” said BofA.
BofA asks the difficult question: If existing home sales have peaked, does it mean the rate of growth of home prices will as well?
Their answer: In the last cycle, existing home sales peaked at 6.26mn saar on September 2005, coinciding with peak home price growth of 14.4 percent the same month (Chart 5). The pre-boom historical data are generally supportive as well, as are the recent data-single family existing home sales peaked at 4.9mn saar in March this year, as did home price appreciation at 6.5 percent. The result, well, existing home sales are pressured by declining affordability, home price growth should slow from here. BofA said a contraction in home prices seems unlikely at the moment, however, if demand is not stoked soon that can all change.
While BofA makes clear the housing market is starting to stall, the Federal Reserve is conducting quantitative tightening and rapidly increasing interest rates to get ahead of the next recession. In other words, liquidity is being removed from the system and the cost of borrowing is headed higher – an environment that is not friendly to real estate, and could be the key factor explaining the weakness in housing.
Which brings up another important question: while financial assets continue to rise, these have largely benefited the Top 10% of the population; meanwhile the bulk of the US middle class net worth has traditionally been allocated to such fixed assets as real estate. And if that is now rolling over, what is the outlook for the US consumer, which remains the dynamo behind the US economy?
There is another, potentially more troubling observation. According to TS Lombard, the current period is now only the third time in US history – after 1968 and 1999 – in which equities have made up a larger percentage of net worth than real estate.
While this may be good news for holders of stocks, it may not last: as TS Lombard observes, sharp bear markets followed shortly after 1968 and even sooner after 1999. And with housing peaking – if BofA is correct – share prices remain the only driver behind continued economic growth, prompting TSL to conclude that “the US economy can not afford a bear market.”
(Forbes) Despite the volatility and brief correction earlier this year, the U.S. stock market is back to making record highs in the past couple weeks. To many observers, this market now seems downright bulletproof as it keeps going higher and higher as it has for nearly a decade in direct defiance of the naysayers’ warnings. Unfortunately, this unusual market strength is not evidence of a strong, organic economy, but of an extremely unhealthy, artificial bubble economy that will end in a crisis that will be even worse than we experienced in 2008. In this report, I will show a wide variety of charts that prove how unsustainable the current bull market is.
Since the Great Recession low in March 2009, the S&P 500 stock index has gained over 300%, taking it nearly 80% higher than its 2007 peak:
The small cap Russell 2000 index and the tech-heavy Nasdaq Composite Index are up even more than the S&P 500 since 2009 – nearly 400% and 500% respectively:
The reason for America’s stock market and economic bubbles is quite simple: ultra-cheap credit/ultra-low interest rates. AsI explainedin a Forbes piece last week, ultra-low interest rates help to create bubbles in the following ways:
Investors can borrow cheaply to speculate in assets (ex: cheap mortgages for property speculation and low margin costs for trading stocks)
By making it cheaper to borrow to conduct share buybacks, dividend increases, and mergers & acquisitions
By discouraging the holding of cash in the bank versus speculating in riskier asset markets
By encouraging higher rates of inflation, which helps to support assets like stocks and real estate
By encouraging more borrowing by consumers, businesses, and governments
The chart below shows how U.S. interest rates (the Fed Funds Rate, 10-Year Treasury yields, and Aaa corporate bond yields) have remained at record low levels for a record period of time since the Great Recession:
U.S. monetary policy has been incredibly loose since the Great Recession, which can be seen in the chart of real interest rates (the Fed Funds Rate minus the inflation rate). The mid-2000s housing bubble and the current “Everything Bubble” both formed during periods of negative real interest rates. (Note: “Everything Bubble” is a term that I’ve coined to describe a dangerous bubble that has been inflating in a wide variety of countries, industries, and assets – pleasevisit my websiteto learn more.)
TheTaylor Ruleis a model created by economist John Taylor to help estimate the best level for central bank-set interest rates such as the Fed Funds Rate. If the Fed Funds Rate is much lower than the Taylor Rule model (this signifies loose monetary conditions), there is a high risk of inflation and the formation of bubbles. If the Fed Funds Rate is much higher than the Taylor Rule model, however, there is a risk that tight monetary policy will stifle the economy.
Comparing the Fed Funds Rate to the Taylor Rule model is helpful for visually gauging how loose or tight U.S. monetary conditions are:
Subtracting the Taylor Rule model from the Fed Funds Rate quantifies how loose (when the difference is negative), tight (when the difference is positive), or neutral U.S. monetary policy is:
Low interest rates/low bond yields have enabled a corporate borrowing spree in which total outstanding non-financial U.S. corporate debt surged by over $2.5 trillion, or 40% from its peak in 2008. The recent borrowing boom caused total outstanding U.S. corporate debt to rise to over 45% of GDP, which is even worse than the level reached during the past several credit cycles. (Read my recentU.S. corporate debt bubblereport to learn more).
U.S. corporations have been using much of their borrowed capital to buy back their own stock, increase dividends, and fund mergers and acquisitions – activities that are known for boosting stock prices and executive bonuses. Unfortunately, U.S. corporations have been focusing on these activities that reward shareholders in the short-term, while neglecting longer-term business investments – hubristic behavior that is typical during a bubble. The chart below shows how share buybacks and dividends paid increased dramatically since 2009:
Another Federal Reserve policy (aside from the ultra-low Fed Funds Rate) has helped to inflate the U.S. stock market bubble since 2009: quantitative easing or QE. When executing QE policy, the Federal Reserve creates new money “out of thin air” (in digital form) and uses it to buy Treasury bonds or other assets, which pumps liquidity into the financial system. QE helps to push bond prices higher and bond yields/interest rates lower throughout the economy. QE has another indirect effect: it causes stock prices to surge (because low rates boost stocks), as the chart below shows:
As touched upon earlier, low interest rates encourage stock speculators to borrow money from their brokers in the form of margin loans. These speculators then ride the bull market higher while letting the leverage from the margin loans boost their returns. This strategy can be highly profitable – until the market turns and amplifies their losses, that is.
There is a general tendency for speculators to use margin most aggressively just before the market’s peak, and the current bull market/bubble appears to be no exception. During the dot-com bubble and housing bubble stock market cycles, margin debt peaked at roughly 2.75% of GDP.In the current stock market bubble, however, margin debt is nearly at 3% of GDP, which is quite concerning. The heavy use of margin at the end of a long bull market exacerbates the eventual downturn because traders are forced to sell their shares to avoid or satisfy margin calls.
In the latter days of a bull market or bubble, retail investors are typically the most aggressively positioned in stocks. Sadly, these small investors tend to be wrong at the most important market turning points. Retail investors currently have the highest allocation to stocks (blue line) and the lowest cash holdings (orange line) since the Dot-com bubble, which is a worrisome sign. These same investors were the most cautious in 2002/2003 and 2009, which was the start of two powerful bull markets.
The chart below shows the CBOE Volatility Index (VIX), which is considered to be a “fear gauge” of U.S. stock investors. The VIX stayed very low during the housing bubble era and it has been acting similarly for the past eight years as the “Everything Bubble” inflated. During both bubbles, the VIX stayed low because the Fed backstopped the financial markets and economy with its aggressive monetary policies (this is known as the “Fed Put“).
The next chart shows the St. Louis Fed Financial Stress Index, which is a barometer for the level of stress in the U.S. financial system. It goes without saying that less stress is better, but only to a point – when the index remains at extremely low levels due to the backstopping of the financial markets by the Fed, it can be indicative of the formation of a dangerous bubble. Ironically, when that bubble bursts, financial stress spikes. Periods of very low financial stress foreshadow periods of very high financial stress – the calm before the financial storm, basically. The Financial Stress Index remained at extremely low levels during the housing bubble era and is following the same pattern during the “Everything Bubble.”
High-yield (or “junk”) bond spreads are another barometer of investor fear or complacency. When high-yield bond spreads stay at very low levels in a central bank-manipulated environment like ours, it often indicates that a dangerous bubble is forming (it indicates complacency). The high-yield spread was unusually low during the dot-com bubble and housing bubble, and is following the same pattern during the current “Everything Bubble.”
In a bubble, the stock market becomes overpriced relative to its underlying fundamentals such as earnings, revenues, assets, book value, etc. The current bubble cycle is no different: the U.S. stock market is as overvalued as it was at major generational peaks. According to the cyclically-adjusted price-to-earnings ratio (a smoothed price-to-earnings ratio), the U.S. stock market is more overvalued than it was in 1929, right before the stock market crash and Great Depression:
Tobin’s Q ratio (the total U.S. stock market value divided by the total replacement cost of assets) is another broad market valuation measure that confirms that the stock market is overvalued like it was at prior generational peaks:
The fact that the S&P 500’s dividend yield is at such low levels is more evidence that the market is overvalued (high market valuations lead to low dividend yields and vice versa). Though dividend payout ratios have beendeclining over timein addition, that is certainly not the only reason why dividend yields are so low, contrary to popular belief. Extremely high market valuations are the other rarely discussed reason why yields are so low.
The chart below shows U.S. after tax corporate profits as a percentage of the gross national product (GNP), which is a measure of how profitable American corporations are. Thanks to ultra-cheap credit, asset bubbles, and financial engineering, U.S. corporations have been much more profitable since the early-2000s than they have been for most of the 20th century (9% vs. the 6.6% average since 1947).
Unfortunately, U.S. corporate profitability is likely to revert to the mean because unusually high corporate profit margins are typically unsustainable, as economist Milton Friedmanexplained. The eventual mean reversion of U.S. corporate profitability will hurt the earnings of public corporations, which is very worrisome considering how overpriced stocks are relative to earnings.
During stock market bubbles, the overall market tends to be led by a smaller group of high-performing “story stocks” that capture the investing public’s attention, make early investors rich, and light the fires of greed and envy in practically everyone else. During the late-1990s dot-com bubble, the “story stocks” were tech stocks like Amazon.com, Intel, Cisco, eBay, etc. During the housing bubble era, it was home builder stocks like Hovanian, D.R. Horton, Lennar, mortgage lenders, and alternative energy companies like First Solar, to name a few examples.
In the current stock market bubble, the market is being led by a group of stocks nicknamed FAANG, which is an acronym for Facebook, Apple, Amazon, Netflix, and Google (now known as Alphabet Inc.). The chart below compares the performance of the FAANG stocks to the S&P 500 during the bull market that began in March 2009. Though the S&P 500 has risen over 300%, the FAANGs put the broad market index to shame: Apple is up over 1,000%, Amazon has surged more than 2,000%, and Netflix has rocketed over 6,000%.
After so many years of strong and consistent performance, many investors now view the FAANGs as “can’t lose” stocks that will keep going “up, up, up!” as a function of time. Unfortunately, this is a dangerous line of thinking that has ruined countless investors in prior bubbles. Today’s FAANG phenomenon is very similar to the Nifty Fifty group of high-performing blue-chip stocks during the 1960s and early-1970s bull market. The Nifty Fifty were seen as “one decision” stocks (the only decision necessary was to buy) because investors thought they would keep rising virtually forever.
Investors tend to become most bullish and heavily invested in leading stocks such as the FAANGs or Nifty Fifty right before the market cycle turns. When the leading stocks finally fall during a bear market, they usually fall very hard, as Nifty Fifty investors experienced in the 1973-1974 bear market. The eventual unwinding of the FAANG stock boom/bubble is going to burn many investors, including institutional investors who have gorged on these stocks in recent years.
How The Stock Market Bubble Will Pop
To keep it simple, the current U.S. stock market bubble will pop due to the ending of the conditions that created it in the first place: cheap credit/loose monetary conditions. The Federal Reserve inflated the stock market bubble via its record low Fed Funds Rate and quantitative easing programs, and the central bank is now raising interest rates and reversing its QE programs by shrinking its balance sheet. What the Fed giveth, the Fed taketh away.
The Fed claims to be able to engineer a “soft landing,” but that virtually never happens in reality. It’s even less likely to happen in this current bubble cycle because of how long it has gone on and how distorted the financial markets and economy have become due to ultra-cheap credit conditions.
I’m from the same school of thought as billionaire fund manager Jeff Gundlach, who believes that the Fed will keep hiking interest rates until “something breaks.” In the last economic cycle from roughly 2002 to 2007, it was the subprime mortgage industry that broke first, and in the current cycle, I believe that corporate bonds are likely to break first, which would then spill over into the U.S. stock market (please read my corporate debt bubble report in Forbes to learn more).
The Fed Funds Rate chart below shows how the last two recessions and bubble bursts occurred after rate hike cycles; a repeat performance is likely once rates are hiked high enough. Because of the record debt burden in the U.S., interest rates do not have to rise nearly as high as in prior cycles to cause a recession or financial crisis this time around. In addition to raising interest rates, the Fed is now conducting its quantitative tightening (QT) policy that shrinks its balance sheet by $40 billion per month, which will eventually contribute to the popping of the stock market bubble.
The 10-Year/2-Year U.S. Treasury bond spread is a helpful tool for determining how close a recession likely is. This spread is an extremely accurate indicator, having warned about every U.S. recession in the past half-century, including the Great Recession. When the spread is between 0% and 1%, it is in the “recession warning zone” because it signifies that the economic cycle is maturing and that a recession is likely just a few years away. When the spread drops below 0% (this is known as an inverted yield curve), a recession is likely to occur within the next year or so.
As the chart below shows, the 10-Year/2-Year U.S. Treasury bond spread is already deep into the “Warning Zone” and heading toward the “Recession Zone” at an alarming rate – not exactly a comforting thought considering how overvalued and inflated the U.S. stock market is, not to mention how indebted the U.S. economy is.
Although I err conservative/libertarian politically, I do not believe that President Trump can prevent the ultimate popping of the U.S. stock market bubble and “Everything Bubble.” One of the reasons why is that this bubble istruly globaland the U.S. President has no control over the economies of China, Australia, Canada, etc. The popping of a massive global bubble outside of the U.S. is enough to create a bear market and recession within the U.S.
Also, as the charts in this report show, our stock marketbubble was inflating years before Trump became president. I believe that this bubble was slated to crash to regardless of who became president – it could have been Hillary Clinton, Bernie Sanders, or Marco Rubio. Even Donald Trump called the stock market a “big, fat, ugly bubble” right before the election. Concerningly, even though the stock market bubble is approximately 30% larger than when Trump warned about it, Trump is no longer calling it a “bubble,” and is actually praising it each time it hits another record.
Many optimists expect President Trump’s tax reform plan to result in a powerful boom that creates millions of new jobs and supercharges economic growth, which would help the stock market grow into its lofty valuations. Unfortunately, this thinking is not grounded in reality or math. As my boss Lance Roberts explained, “there will be no economic boom” (Part 1, Part 2) because our economy is too debt-laden to grow the way it did back in the 1980s during the Reagan Boom or at other times during the 20th century.
As shown in this report, the U.S. stock market is currently trading at extremely precarious levels and it won’t take much to topple the whole house of cards. Once again, the Federal Reserve, which was responsible for creating the disastrous Dot-com bubble and housing bubble, has inflated yet another extremely dangerous bubble in its attempt to force the economy to grow after the Great Recession. History has proven time and time again that market meddling by central banks leads to massive market distortions and eventual crises. As a society, we have not learned the lessons that we were supposed to learn from 1999 and 2008, therefore we are doomed to repeat them.
The purpose of this report is to warn society of the path that we are on and the risks that we are facing. I am not necessarily calling the market’s top right here and right now. I am fully aware that this stock market bubble can continue inflating to even more extreme heights before it pops. I warn about bubbles as an activist, but I approach tactical investing in a slightly different manner (because shorting or selling too early leads to under performance, etc.). As a professional investor, I believe in following the market’s trend instead of fighting it – even if I’m skeptical of the underlying forces that are driving it. Of course, when that trend fundamentally changes, that’s when I believe in shifting to an even more cautious and conservative stance for our clients and myself.
Investors taking on more risk in US commercial real estate are now receiving the lowest return since the housing crisis. The premium spread for buying BBB- tranches of commercial mortgage backed securities versus AAA is the lowest its been since May 2007, according to a new report from analytics company Trepp, theFT reports.
The euphoria associated with the US economy even as the overall global economy is rolling over means that those bearing the brunt of risk for commercial mortgage backed securities are getting paid the least. This also comes as a result of investors chasing yield, which could be another obvious canary in the coal mine that the now record bull market could be reaching an apex.
“As you get toward the latter innings of the credit cycle, people have money they need to put to work and they take on more risk for less return,” said Alan Todd, a CMBS analyst at Bank of America Merrill Lynch.
Commercial mortgage backed securities are made up of a combination of types of mortgages which are then divided up by risk. Traditionally, as with any financial instrument, the more risk that investors bear, the more they get paid. But now, investors are looking more and more like they’re “picking up pennies in front of bulldozers” as demand for AAA tranches of CMBS’ has fallen. Meanwhile BBB- slices of CMBS continue to see an influx of demand. The conclusion?
“You are probably not getting paid for the risk you are taking and that definitely concerns us,” Dushyant Mehra, co-chief investment officer at Hildene,toldthe Financial Times.
The Federal Reserve’s tightening could be another potential cause for the shift: higher quality fixed rate investments like AAA tranches of CMBS, have fallen in price as a result of Fed policy. This, in turn, has caused investors to seek out riskier products, like floating rate company loans, to juice returns.
Meanwhile, the boom in commercial housing has resulted in a significant amount of CMBS supply. $49 billion in new issuance between January and July of this year eclipses the $45 billion that was sold throughout the same period of time last year.
The credit premium between AAA and BBB-, which is as low as you can go without hitting a junk rating, has fallen to 2.1% in August from 2.2% in July, according to the report. While this is below the 2014 low of 2.3%, it still is nowhere near the pre-financial crisis lows of just 0.67%, which printed in May 2007 when everyone was long, and just before RMBS and CMBS blew up, catalyzing the financial crisis.
“It is something everyone frets over,” Gunter Seeger, a portfolio manager at fund manager PineBridge, said of the evaporating premium investors are demanding. “You are always concerned that the pendulum swings too far but the reach for yield is still there.”
Everyone may be “fretting” but it has yet to stop them from buying.
As is the case during any euphoric period, few are paying attention and taking the data as a warning. Perhaps once the numbers start to move closer to May 2007 levels, it will catch people’s attention, although considering that even the Fed has repeatedly warned about “froth” in commercial real estate with no change in behavior, it is safe to say that no lessons from the financial crisis have been learned.
All it takes is one complaint to HUD? Wow! Really?
“HUD filed a complaint against Facebook last week.
“HUD claimed the social network’s advertising platform allowed users to discriminate against prospective renters and buyers by being able to limit who saw their ads based on the users’ race, color, religion, sex, family status, national origin, disability, ZIP code, and other factors.” ( From REALTOR® Magazine)
This is interesting because I don’t know even one REALTOR® who uses Facebook ads to discriminate.
Every single person I know who is a member of NAR and runs ads, runs ads to reach their niche audience, their targets- this is called advertising. This has nothing to do with discrimination.
I doubt any of the employees of the HUD department have ever had to make a living selling products, services, or real estate.
My team was starting an ad campaign for an agent this week and we could not target:
Homeowners have been removed.
Tell me, HUD and NAR—-
If you are a listing agent how in the world is it discriminating to target ONLY homeowners. After all, if we are running a home value ad, why would I want to waste our money on getting our ad in front of 20 years olds who are first time home buyers??? Or renters? It makes no sense to offer home values on your property to those who don’t own property!
You have to pay for impressions. This means that your ads just got a lot more expensive becuase of the ignorance of the powers that be at NAR who so quickly run to support these complaints. I highly doubt they have asked any of us what we are doing with our ads.
Why are they jumping so fast to say they love that Facebook deleted all our targeting??
We are running another ad campaign for another agent — and guess what— yep! The Zipcode targeting is gone!!!
Now, I know that some people say that zip code advertising is discriminating but then why oh why… does the U.S. own government company the United States Postal Service allow us all to target our direct mailing by zip codes??????
I am so tired of NAR speaking for all of us but not talking to all of us before they speak!!!
If we have a million dollar listing we don’t want to waste money on ads going to people who only make $20,000! It is not discrimination, it is common sense marketing. We want to put our listing in front of the best possible buyers who can afford this listing.
How did Facebook respond?
Of course, they did not take our backs. They went back with their tail between their legs and got rid of over 5,000 targets we all use in Facebook advertising. Facebook already makes you agree that you are obeying the Fair housing laws when you run real estate ads. Why did they not just fight on this?
I then went to the NAR website and see the title to their article about this and the title is:
Realtors® Applaud HUD Decision to Target Online Housing Discrimination
Interesting title since there was NOTHING In the article listing ANY realtor who was applauding this decision except for the NAR President:
‘National Association of Realtors® President Elizabeth Mendenhall, a sixth-generation Realtor® from Columbia, Missouri and CEO of RE/MAX Boone Realty, issued the following statement in support of HUD’s aggressive enforcement of the Fair Housing Act:
“In 2018, as America recognizes the 50th anniversary of the Fair Housing Act, the National Association of Realtors® strongly supports a housing market free from all types of discrimination. However, as various online tools and platforms continue to transform the real estate industry in the 21st Century, our understanding of how this law is enforced and applied must continue to evolve as well. Realtors® commend the Department of Housing and Urban Development and Secretary Ben Carson for taking decisive action to defend fair housing laws, and for working to ensure its intended consumer protections extend to wherever real estate is marketed.” ‘
So where in this article are the many realtors who are so applauding wasting money on needless impressions… and making our ad cost go up way higher!
What needs to happen in cases like this, is for NAR to do an investigation, survey, round tables, etc. with local agents around the country and find out what kinds of ads they run on Facebook, how they target, and why. Then take that data to HUD, and explain to HUD, about marketing and advertising.
Take our backs; will you!!!!
Because in actuality how many of those NAR presidents and committees on those higher levels are running Facebook ads daily to get listings and buyers?
Chinese leaders know that their country suffers from massive over-investment in construction and manufacturing, that its real-estate market is a bubble that makes the Dutch tulip frenzy look restrained, that both conventional debt and debt in the shadow-banking system are too large and growing too rapidly.
But even as the Communist Party centralizes power and clamps down on dissent, it dithers when it comes to the costly and difficult work of shifting China’s economic development onto a sustainable track.
Chinese authorities have tried to tackle some of these problems, but often retreat when reforms start to bite and powerful interests push back.
China is the 800-pound gorilla of global infrastructure. Its building prowess has permeated popular culture, as in the disaster movie “2012” where China constructs giant ships to help humankind escape rising seas.
Recently, however, China’s infrastructure build has all but ground to a halt.
The central government last year started to crack down on unregulated, opaque – so-called ‘shadow-bank’ borrowing – alarmed at its vast scale, and potential for corruption.
For five straight months, the shadow banking system has contracted under this pressure, sucking the malinvestment lifeblood out of economic growth and construction booms as Chinese local governments, which account for the bulk of such investment, set up as so-called local-government financing vehicles (off balance sheet), or LGFVs, and have seen an unprecedented net $19 billion outflow in recent months.
As WSJ’s Talpin notes,these days Beijing prefers that local governments borrow on-the-books, through the now legal municipal bond market. The problem is that lower-rated and smaller cities are mostly shut out, even though they do most actual capital spending. As a result, investment has kept slowing even though China’s net muni bond issuance in July was three times higher than it was in March. Infrastructure investment excluding power and heat was up just 5.7% in the first seven months of 2018 compared with a year earlier, down from 19% growth in 2017.
Eventually, all the cash big cities and provinces are raising through muni bonds will start filtering down. Meanwhile, the investment drought will likely worsen, raising pressure on Beijing to ease credit conditions further – making the incipient rally in the yuan hard to sustain.
That also means China’s debt-to-GDP ratio, which fell marginally in 2017, could start rising again next year.
Simply put, as with water and wine, China’s leaders haven’t figured out how to crack down on local governments’ dubious infrastructure spending during good times without severely damaging growth – or how to loosen the reins during bad times without creating lots more bad debt.
Unless they can square that circle, it bodes ill for the nation’s long-term prospects.
Beijing is reportedly urging Chinese real-estate investors to divest their U.S. commercial real estate holdings, a cunning strategy reflecting China’s efforts to deleverage debt and stabilize the yuan ahead of future market shocks created by President Trump’s trade war.
Taiwan Newsquoted Liberty Times, a newspaper published in Taiwan, suggested that a significant liquidation of U.S. commercial real estate by Chinese companies could be in the near term, as the catalyst for such an event would be explained by policymakers cracking down on bad debt.
According to theWall Street Journal, Real Capital Analytics has noted that Chinese real-estate investors have already started dumping U.S. commercial real estate for the first time in a decade. Chinese companies have sold more real estate assets in a single quarter (US$1.29 billion) than they have purchased (US$126.2 million).
“This marked the first time that these investors were net sellers for a quarter since 2008. The more than $1 billion in net sales reflects how much the Chinese government’s attitude toward investing overseas has changed in recent months,” said WSJ.
Chinese investors began acquiring US commercial real estate a few years after the 2008 financial crisis. More recently, Beijing officials loosened restrictions on foreign investment, which spurred investments in numerous US cities like Los Angeles, San Francisco, and Chicago with high-profile acquisitions—including the $1.95 billion acquisition of the Waldorf Astoria, the highest price ever paid for a U.S. hotel.
The Waldorf Astoria hotel in New York, which was purchased by China’s Anbang Insurance Group in 2014. (Source: Kathy Willens/AP/WSJ)
The Waldorf Astoria hotel in New York, which was purchased by China’s Anbang Insurance Group in 2014. (Source: Kathy Willens/AP/WSJ)
Chinese companies like HNA Group and Greenland Holding Group have been offloading assets and potentially could create headwinds for real estate markets. The Wall Street Journal suggests that Beijing is currently pressuring companies to decrease their debt levels to lower the default risk ahead of the next credit crunch.
“I was shocked,” said Jim Costello, senior vice president at Real Capital Analytics. “They [Chinese real estate firms] really curtailed their buying and stepped up sales.”
Analysts told WSJ that increasing tensions over trade and national security between Washington and Beijing could have triggered the pullback.
“The China-US outbound cross-border real estate climate has been negatively impacted by the geopolitical climate,” said David Blumenfeld, a Hong Kong-based partner at Paul Hastings LLP.
WSJ notes that Anbang Insurance Group is considering shrinking its U.S. hotels book, but has yet to settle on any deals.
“The company is still in the process of reviewing overseas assets,” said Shen Gang, an Anbang spokesman. “We currently do not have specific asset optimization plan, nor a specific timetable.”
In June, the Green Street Commercial Property Price Index was unchanged. The index, which measures values across five major property sectors, has stalled over the past eighteen months and could come under pressure as Chinese investors have turned to net sellers.
For many Chinese firms, the long-term investment plan in the US has been abandoned after Beijing has pressured companies to reduce their debt levels amid the escalating geopolitical tensions and trade war.
However, not every Chinese investor is pressured to liquidated US real estate holdings. Lawyers for these developers told WSJ that investors of smaller residential projects, including warehouses and senior living centers, are holding tight.
Chinese investors said the government has allowed firms to dispose of properties that have increased in value to avoid taking a loss.
Earlier this year, HNA group and a partner sold 1180 Sixth Avenue in Manhattan to Northwood Investors for around $305 million. The conglomerate, which is headquarters in Haikou, a city in southern China’s Hainan province, bought a 90 percent stake in the office tower for $259 million in 2011.
HNA Group also sold a stake in 245 Park Avenue to SL Green Realty Corp. HNA bought the tower for $2.2 billion last year.
“HNA Group has long said it will be disciplined and thoughtful about its asset dispositions as it realigns its strategy,” said an HNA spokesman. Late last year, HNA Group outlined a plan to sell $6 billion worth of properties, according to an insider.
Last month, Taiwan News said a document intended for financial think tanks in China was leaked to the press that said China was “very likely to see financial panic” and the government should prepare financial institutions, industries, and also be ready for possible social unrest. Critics suggest that China’s financial difficulties have been in development for some time, however, the U.S.-China trade war exacerbated the problem and had brought the coming credit crisis forward.
Could the US commercial real estate market be the next indirect victim of President Trump’s trade war?
Counter to the national trend, several housing markets saw foreclosure starts rise year over year last month, according to a new report from ATTOM Data Solutions, a real estate data firm.
Forty-three percent of local markets saw an annual increase in May in foreclosure starts. Foreclosure starts were most on the rise in Houston, which saw a 153 percent jump from a year ago. Hurricane Harvey struck the Houston metro area in August 2017, tying with Hurricane Katrina as the costliest tropical cyclone on record, and has contributed to many recent foreclosures in the area. Other areas that are seeing foreclosure starts rise: Dallas-Fort Worth (up 46% year over year); Los Angeles (up 14 percent); Atlanta (up 7 percent); and Miami (up 4 percent).
A total of 33,623 U.S. properties started the foreclosure process in May, which is down 6 percent from a year ago. But a number of states—23 states and the District of Columbia—posted a year-over-year increase in foreclosure starts in May.
Overall, the metro areas with the highest foreclosure rates in May were: Flint, Mich.; Atlantic City, N.J.; Trenton, N.J.; Philadelphia; and Columbia, S.C.
View the chart below to see foreclosure starts by metro area.
An audible gasp went out in the breakout room I was in at last month’spension eventcosponsored by The Civic Federation and the Federal Reserve Bank of Chicago. That was when a speaker from the Chicago Fed proposed levying, across the state and in addition to current property taxes, a special property assessment they estimate would be about 1% of actual property value each year for 30 years.
Evidently, that wasn’t reality-shock enough. This week the Chicago Fed published that proposal formally. It’slinked here.
It surely ranks among the most blatantly inhumane and foolish ideas we’ve seen yet.
Homeowners with houses worth $250,000 would pay an additional $2,500 per year in property taxes, those with homes worth $500,000 would pay an additional $5,000, and those with homes worth $1 million would pay an additional $10,000.
Is the Chicago Fed blind tohuman consequences? Confiscatory property tax rates have already robbed hundreds of thousands, maybe millions, of Illinois families of their home equity — probably the lion’s share of whatever wealth they had.
In south Cook County theyalready average over 5%. Most of those communities are working class, often African-American. The Fed says maybe you could make the tax progressive by exempting lower values, but that’s very difficult to do and, if you did somehow exempt the poor and working class, the bill pushed to the others would be astronomical.
Those rates have already plunged many communities intodeath spirals, demanding an immediate solution, but the Chicago Fed apparently wants to pour on more of the accelerant.
Don’t they understand that people won’t build on or improve property when property taxes are that high? When taxes are 3 percent to 6 percent, any value you add to your home is going to be taxed at that high rate forever. Have they never been to our communities with countless dis-repaired, abandoned homes and commercial properties, which are the result?
Get this, which is part of the Fed’s reasoning: “New taxes wouldn’t affect people thinking of moving to Illinois. While they would have to pay higher property taxes, that would be offset by not having to pay as much for their new homes. In addition, current homeowners would not be able to avoid the new tax by selling their homes and moving because home prices should reflect the new tax burden quickly.”
In other words, just confiscate wealth from current owners because they will pay, whether they stay or not, through an immediate reduction in home value.
This proposed tax would only address the five state pensions. What about the other650-plus pensionsin Illinois, particularly those for overlapping jurisdictions in Chicago which are grossly underfunded? The Fed was asked that at last month’s seminar and they, without explanation, said they didn’t bother to cover that.
I’ve earlier met Rick Mattoon, one of the Chicago Fed authors of the proposal. He’s a smart, likeable guy who I thought had lots of interesting information. For the life of me, however, I can’t understand how he would put his name on this proposal.
Real Property can’t leave, so seize more of it. That’s the basic idea.
As we anticipatedearlier this year, the first the signs of the coming implosion of the US real-estate bubble are emerging in the high end of the nation’s most overcrowded and expensive housing markets (Manhattan and San Francisco are two salient examples).
And in the latest confirmation of this trend,the Wall Street Journalpublished a report this week highlighting how the business environment for commercial landlords in New York City’s most densely populated borough is growing increasingly dire, as landlords who had left storefronts vacant in the hope of courting the next Bank of America or CVS have inadvertently turned trendy downtownManhattan neighborhoods like SoHointo a“shopping wasteland”.
Thanks in large part to their intransigence, commercial landlords who catered to retail tenants are being hit twice as hard as they otherwise would’ve been, as tenants, no longer able to afford rents higher than $600 per square foot, are now demanding concessions and rent reductions, a phenomenon that has seen average rents in certain neighborhoods plummet on a year-over-year basis.
According to CBRE Group, a real estate services firm that pays close attention to commercial rents in Manhattan, some of the hardest-hit neighborhoods are also some of the borough’s most trendy, including the Meatpacking District, and SoHo.
The average asking rent on Washington Street between 14th and Gansevoort streets in the Meatpacking District dropped to $490 a square foot from last year’s $623, a 21.3% decrease and the largest percentage drop in asking rents among the shopping corridors CBRE tracks.
Average asking rents tumbled 18.1% on both SoHo’s Broadway Avenue and the Upper East Side’s Third Avenue, where asking rents were $556 and $280 a square foot, respectively.
Availability remained flat compared with last year, with 209 ground-floor spaces marketed for direct leasing. The report noted, however, that landlords looking to directly lease space also will have to compete with sublease space, which has increased according to anecdotal reports. Some space available for sublease comes as retailers leave behind old quarters for better locations, Ms. LaRusso said.
Conditions are favorable for tenants, said Andrew Goldberg, vice chairman at CBRE. Landlords are more open to shorter-term leases and provisions allowing tenants to get out of leases if a retail concept doesn’t work.
“I think we will start to see some more of the savvier tenants of companies realize we’re starting to get to a point where they can drive some good deals for themselves,” Mr. Goldberg said.
The problem when rents enter free-fall territory is that it’s a self-reinforcing phenomenon (not unlike the blowup that triggered thedemise of the XIV,but over a much longer period of time). As rents fall, retailers start wondering if they can procure a better deal, possibly in a better neighborhood. All of a sudden, landlords must now essentially compete with themselves as the number of subleases climbs.
Of course, Manhattan is Manhattan. There will always be hoards of boutique merchants, big-name brands and – well, Walgreens – clamoring for commercial rental space.
But after nearly a decade of soaring real-estate valuations, it appears one of America’s hottest housing markets is heading for a “gully.”
On the other end of the property market, a drop in valuations and transaction volumes has inspired some observers to proclaim that“this is the breaking point.”
In short, we wish the Kushner Cos the best of luckas they prepare to buy outthe remaining stake in 666 Fifth Ave. Because overpaying for commercial real-estate in Manhattan in 2018, nine years into one of the longest economic expansions on record sounds like a fantastic plan.
Amid rising trade and political tensions, US equities dipped nearly 6% this week, the worst weekly performance in two years. REITs fell 5% while home builders declined 3%.
A flurry of headlines reignited volatility this week including a Fed rate hike, retaliatory tariffs from China, a major data breach at Facebook, and a $1.3 trillion spending bill.
Investors are increasingly anxious that protectionism threatens to upend the best period of global economic growth in a decade. Real estate sectors are relatively immune from these negative effects.
Yield-sensitive equity sectors, including REITs and home builders, have outperformed during the past month as interest rates and inflation expectations have retreated.
The effects of tax reform and rising mortgage rates are beginning to impact housing markets. Existing home sales are higher by just 1% as first-time buyers remain on the sidelines.
Real Estate Weekly Review
2017 was a year of remarkable tranquility in financial markets, but 2018 has been quite the opposite. After going an entire year without a 2% weekly move, the S&P 500 (SPY) has recorded eight such weekly moves through the first twelve weeks of 2018. This week, volatility was reignited by a flurry of headlines centering around US trade policy, a political “data breach” at Facebook (NASDAQ:FB), a “hawkish hike” by the Federal Reserve, and a $1.3 trillion spending bill.
This week, the S&P 500 (SPY) dipped nearly 6%, which was the worst week for US stocks in more than two years. Investors are increasingly anxious that rising protectionism threatens to upend the best period of global economic growth in a decade. Others, however, remain confident that the Trump administration’s hard-line stance on trade is a negotiating tactic that will inevitably result in lower overall trade barriers. Real estate sectors are relatively immune from these effects. REITs (VNQ andIYR) and home builders (XHBandITB) outperformed this week, dropping 5% and 3%, respectively. Yield-sensitive equity sectors, including REITs and home builders, have outperformed over the past month as interest rates and inflation expectations retreated.
(Hoya Capital Real Estate, Performance as of 4pm Friday)
The 10-Year Yield ended the week 2bps lower at 2.83% after climbing to 2.90% following the Federal Reserve’s “hawkish hike.” The Fed hiked short-term rates by 25bps, as expected, but compared to the last meeting, more Fed officials now expect four rate hikes in 2018. Since inflation remains relatively subdued, investors fear that a rate-hike plan this aggressive may be unnecessarily restrictive and slow the US economy, indicated by the flattening yield curve.
Across other areas of the real estate sector, mortgage REITs (REM) declined by nearly 4% while international real estate (VNQI) fell roughly 3%. Within the Equity Income categories, we note the performance and current income yield of the Utilities, Telecom, Consumer Staples, Financials, and Energy. Within the Fixed Income categories, we look at Short-, Medium-, and Long-Term Treasuries, as well as Investment Grade and High Yield Corporates, Municipal Bonds, andGlobal Bonds.
Cell towers, manufactured housing, malls, self-storage were the best performing sectors of the week. Winners this week included Washington Prime (WPG), Crown Castle (CCI), SBA Communications (SBAC), Tanger (SKT), American Homes (AMH), and Taubman (TCO). Growth REIT sectors including hotels, office, and industrials were among the weakest-performing. DiamondRock (DRH), Brandywine (BDN), Pebblebrook (PEB), and QTS (QTS) each dropped more than 9% this week.
REITs are now lower by nearly 12% YTD, under performing the 4% rise in the S&P 500. Home builders are off by 11%. REITs remain more than 20% off their all-time highs in 2016. The 10-Year Yield has climbed 43 basis points since the start of the year.
REITs ended 2017 with a total return of roughly 5%, lower than the 20-year average annual return of 12%. Going forward, absent continued cap-rate compression, it is reasonable to expect REITs to return an average of 6-8% per year with an annual standard deviation averaging 5-15%. This risk/return profile is roughly in line with large-cap US equities.
Real Estate Economic Data
(Hoya Capital Real Estate, HousingWire)
New and Existing Home Sales Continue to Be Soft
Last week, we analyzed February housing starts data, which indicated that housing construction activity has slowed in recent quarters, dragged down by a sustained pullback in multifamily building. Single-family construction remains relatively solid, but rising mortgage rates and changes to the tax code threaten to stall the plodding housing recovery. Total housing starts have grown just 2.0% over the past twelve months, the slowest rate of growth since 2011.
This week, new and existing home sales data was released. Both new and existing home sales were strong in early 2017 but faded into year-end, likely due to rising mortgage rates, unaffordability issues, and continued tight supply levels. Existing homes were sold at a 5.54m seasonally adjusted annualized rate in February, slightly missing expectations. Existing sales have risen just 1% over the past year, the weakest rate of growth since early 2015.
New homes were sold at a 618k rate, which was roughly in line with expectations after upward revisions to past months. New home sales, which are primarily comprised of single-family homes, have been the relative bright spot, growing 7.5% on a TTM basis. This rate of growth, however, is also the second slowest since early 2015.
At roughly 600k per year, the rate of new home sales remains well below pre-recession levels and remains low by historical standards. The period between 1970 and 2000 saw an average of 650k home sales per year while the average population during that time was 30-40% below current levels. The rate of existing home sales, however, remains relatively healthy. At around 7% per year, the turnover rate of existing homes is roughly in line with pre-2000 levels. A number of factors have contributed to the “wide bottom” in new single-family housing construction: the lingering effects of overbuilding in the run-up to the housing bubble, a generational shift to renting, restrictive zoning restrictions, and lower investment returns from home building.
Existing home inventory remains near historically low levels, primarily a result of this “wide bottom” in new single-family housing construction. Existing housing supply was just 3.4 months in February, down from 3.8 months in February 2017. Other effects are at play, too, including the increased institutional presence in the single-family rental markets and the rising rate of home ownership among the older demographics. First-time home buyers made up 29% of total existing home sales, down from the 32% in February 2017. The rate of first-time home buyers remains stubbornly below the pre-bubble level of 40-45% and the bubble-peak of 52%. We have yet to see the younger demographics enter the home ownership markets in any significant numbers.
Real Estate Earnings Update
Last week, we published our Real Estate Earnings Review for 4Q17. Earnings season concluded last week in the real estate sector. Overall, 4Q17 results were slightly better than expected (80% beat or met estimates), but REITs raised caution heading into 2018. As supply growth has intensified, fundamentals continue to moderate across the real estate sector as rental markets approach supply/demand equilibrium after nearly a decade of above-trend rent growth. Same-store NOI grew 2.6% in 2017, the slowest rate of growth since 2011. Occupancy levels remain near record highs, however, as real estate demand growth continues to be robust.
Amid rising trade and political tensions, US equities dipped nearly 6% this week, the worst weekly performance in two years. REITs fell 5% while home builders declined 3%. A flurry of headlines reignited volatility this week including a Fed rate hike, retaliatory tariffs from China, a major data breach at Facebook, and a $1.3 trillion spending bill. Investors are increasingly anxious that protectionism threatens to upend the best period of global economic growth in a decade. Real estate sectors are relatively immune from these negative effects.
Yield-sensitive equity sectors, including REITs and home builders, have outperformed during the past month as interest rates and inflation expectations have retreated. The effects of tax reform and rising mortgage rates are beginning to impact housing markets. Existing home sales are higher by just 1% as first-time buyers remain on the sidelines.
Last week, we published our quarterly update on the cell tower sector:Cell Tower REITs Shrug Off SpaceX Launch. Cell towers were the best performing REIT sector in 2017. After strong 4Q17 earnings results, cell towers remain the lone REIT sector in positive territory so far in 2018. The enormous spectacle of the SpaceX launch and the grand ambitions of Elon Musk to launch a competing satellite-based internet service temporarily jolted investor confidence in the sector. Despite potential competition from small-cells and satellite, macro towers continue to be the most economical way to provide comprehensive coverage. The risk of technological obsolescence is often overstated. Positive catalysts are on the horizon for 2018.
We also published our quarterly update on the industrial sector:Industrial REITs: Only A Trade War Can Spoil The Good Times. Over the past five years, industrial REITs have emerged as the hottest real estate sector. Booming global trade and the growth of e-commerce have boosted demand for warehouse distribution space. While supply growth has picked up in recent years, markets remain tight. Occupancy is near record highs, rent growth is relentless, and demand indicators suggest that there’s further room to run. Fears of a “trade war” have escalated after the US enacted tariffs on steel and aluminum imports. Uncertainty over trade policy could disrupt supply chains and weaken industrial REIT fundamentals.
Please add your comments if you have additional insight or opinions. We encourage readers to follow our Seeking Alpha page (click “Follow” at the top) to continue to stay up to date on our REIT rankings, weekly recaps, and analysis on the real estate and income sectors.
Yesterday ZeroHedge explainedthat one of the reasons why Deutsche Bank stock had tumbled to the lowest level since 2016, is because its top shareholder, China’s largest and most distressed conglomerate, HNA Group, had reportedly defaulted on a wealth management product sold on Phoenix Finance according to thelocal press reports. While HNA’s critical liquidity troubles havebeen duly noted here and have been widely known, the fact that the company was on the verge (or beyond) of default, and would be forced to liquidate its assets imminently, is what sparked the selling cascade in Deutsche Bank shares, as investors scrambled to frontrun the selling of the German lender which is one of HNA’s biggest investments.
Now, one day later, we find that while Deutsche Bank may be spared for now – if not for long – billions in US real estate will not be, and in a scene right out of the Wall Street movie Margin Call, HNA has decided to be if not smartest, nor cheat, it will be the first, and has begun its firesale of US properties.
According to Bloomberg, HNA is marketing commercial properties in New York, Chicago, San Francisco and Minneapolis valued at a total of $4 billion as the indebted Chinese conglomerate seeks to stave off a liquidity crunch. The marketing document lists six office properties that are 94.1% leased, and one New York hotel, the 165-room Cassa, with a total value of $4 billion.
One of the flagship properties on the block is the landmark office building at 245 Park Ave., according to a marketing document seen by Bloomberg.
245 Park Avenue, New York
HNA bought that skyscraper less than a year ago for $2.21 billion, one of the highest prices ever paid for a New York office building. The company also is looking to sell 850 Third Ave. in Manhattan and 123 Mission St. in San Francisco, according to the document. The properties are being marketed by an affiliate of brokerage HFF.
This is just the beginning as HNA’s massive debt load – which if recent Chinese reports are accurate the company has started defaulting on – is driving the company to sell assets worldwide.
According to Real Capital Analytics estimates, HNA owns more than $14 billion in real estate properties globally. The problem is that the company has a lot more more debt. As of the end of June, HNA had 185.2 billion yuan ($29.3 billion) of short-term debt — more than its cash and earnings can cover. The company’s total debt is nearly 600 billion yuan or just under US$100 billion. Which means that the HNA fire sale is just beginning, and once the company sells the liquid real estate, it will move on to everything else, including its stake in all these companies, whose shares it has already pledged as collateral.
So keep a close eye on Deutsche Bank stock: while HNA may have promised John Cryan it won’t sell any time soon but companies tend to quickly change their mind when bankruptcy court beckons.
Finally, the far bigger question is whether the launch of HNA’s firesale will present a tipping point in the US commercial (or residential) real estate market. After all, when what until recently was one of the biggest marginal buyers becomes a seller, it’s usually time to get out and wait for the bottom.
The disaster in Montecito was a rare event, statistically speaking – but it could happen again, geologists say
A boulder field surrounds a Montecito home after the Jan. 9 storm that triggered deadly flooding and debris flows. (Mike Eliason / Santa Barbara County Fire Department photo)
The surging river of mud and boulders that engulfed swaths of Montecito from the mountains to the sea last week, killing 20, was a rare disaster – so rare, geologists say, that it may happen only once in a few hundred to a thousand years at that location.
But that doesn’t mean it couldn’t happen again this winter, said Ed Keller, a professor of earth science atUC Santa Barbara.
All of the communities below the scorched slopes of the Thomas Fire are at risk, he said.
“These areas are very vulnerable in the next two years to debris flows,” Keller said. “We could get another one right down Montecito Creek this year, if we get another big rainfall, depending on how much debris is left up in the basin. It’s not impossible.”
The catastrophic debris flow of Jan. 9 in Montecito is the deadliest disaster to hit the South Coast since a magnitude 6.8 earthquake struck Santa Barbara on the morning of June 29, 1925, leveling the downtown area and killing 13.
Debris flows launch massive quantities of rocks, boulders, trees and mud downhill. They are typically triggered after wildfires on steep mountainsides, when heavy rains wash away the soil.
“Big debris flows are relatively rare,” said Keller, who is applying for national funding to study the footprint and volume of the Jan. 9 event.
“They don’t occur after every fire in any one stream. The Thomas Fire was huge, and there are only a couple of places with really damaging debris flows. Montecito and San Ysidro creeks were primed for one.”
In catastrophic debris flows such as the one in Montecito, narrow canyons chock full of boulders start to flood and landslides may occur. Rocks and brush form temporary dams, then break through and roar downhill on thick slurries of mud. Car-sized boulders bob along like corks.
In Montecito, the wall of mud and debris was 15 feet high in some locations.
“You may get pulses of flows rushing out of canyons in the mountains,” said Larry Gurrola, a Ventura-based consulting geologist who is on Keller’s research team. “That material reaches the base of the foothills, chokes the streams, flows out over the banks and moves towards the ocean, dragging trees, brush, cars, utility poles and parts of homes along with it.”
Through the millennia, debris flows have shaped the terrain of the South Coast.
Almost all of Montecito and most of Santa Barbara is built on top of flows that occurred here over the past 125,000 years, Keller said: just look at the boulder field at Rocky Nook Park. That’s evidence of a catastrophic flow out of Rattlesnake Canyon in prehistoric times, he said.
During the past 50 years, the South Coast has seen a few destructive but not catastrophic debris flows.
On Jan. 3 this year, county emergency preparedness officials showed the Board of Supervisors photos of damage from the debris flows that followed the Coyote and Romero fires of 1964 and 1971, respectively. Both years, San Ysidro, Olive Mill and Coast Village roads in Montecito were choked with mud.
This year, the stage was set for catastrophe after the Thomas Fire burned 440 square miles in December, largely in the backcountry of Ventura and Santa Barbara counties, becoming the largest fire in California history.
It scorched the chaparral that anchors the soil to the bedrock and created a “hydrophobic” layer in the ground – a kind of crust that repels water like glass.
In an era of year-round fire seasons, the Thomas Fire had not been fully contained when the rainy season got underway in earnest.
“It was just kind of the perfect storm, when all the bad factors line up together,” said Jon Frye, Santa Barbara County engineering manager. “There was no time whatsoever between the fire and the winter.”
The trigger for the catastrophic debris flow in Montecito, geologists say, was several bursts of extreme rainfall, beginning at 3:34 a.m. One of these was a 200-year event – more than half an inch of rain falling in 5 minutes. That’s a quarter of the total amount of rain, 2.1 inches, that was recorded in Montecito during the nine-hour storm.
A U.S. Geological Survey (USGS) debris flow hazard map that was widely circulated before the Jan. 9 storm showed the high probability of debris flows originating in the mountains above Mountain Drive in Montecito on the heels of the Thomas Fire.
The slopes there are on a “hair trigger,” said Dennis Staley, a USGS research geologist who helped prepare the map. The harder the rainfall, the bigger the flow, he said.
“We knew that if it rained very hard, there could be very significant debris flows,” Staley said. “If you plug in the intensities that were received, our prediction aligns with what we saw.”
In any given year, there is only a half-percent chance that half an inch of rain will fall on Montecito in five minutes, said Jayme Laber, a senior hydrologist with the National Weather Service in Oxnard.
“It was a typical winter storm, but five-minute rainfall was extreme, something that you don’t see very often,” he said.
The 5-minute, half-inch downpour began at 3:38 a.m. near Casa Dorinda, at Olive Mill and Hot Spring roads, county records show.
Between 3:34 a.m. and 3:51 a.m., three additional bursts of extreme rainfall – 50-year events with a 2 percent chance of occurring in any given year – were recorded on gauges near Gibraltar Peak and in downtown Carpinteria.
These were the heaviest short-term, high-intensity rainfalls recorded during the entire storm from Redding to San Diego, Laber said.
“It was horrible that it was right on top of the Thomas Fire burn area,” he said.
The first reports of the debris flow came in to the National Weather Service shortly before 4 a.m.
Meanwhile, there was no major damage in Ventura County during the Jan. 9 storm. Ventura County took the brunt of the Thomas Fire, but was not pounded on Jan. 9 with the short-term, high-intensity deluge that overwhelmed Montecito, Laber said.
The historical record shows that previous debris flows on the South Coast closed Highway 101 and caused a lot of damage to property but did not kill anyone.
In 1964, a few months after the Coyote Fire burned 100 square miles above Santa Barbara, Montecito, Summerland and Carpinteria, records show, a debris flow destroyed 12 homes and six bridges on Mission Creek in Santa Barbara.
Eye-witness accounts told of “20-foot walls of water, mud, boulders, and trees moving down the channels at approximately 15 miles per hour.”
During heavy rains following the 1971 Romero Fire, which burned 20 square miles in the mountains behind Santa Barbara, Montecito, Summerland and Carpinteria, Highway 101 was blocked for eight hours near Carpinteria. A wall of mud and water three feet high pushed across the freeway toward the ocean.
“Looking back, there is clear evidence that this type of thing happens in Santa Barbara with some regularity,” Staley, the USGS geologist, said.
Keller and Gurrola will be participating in a free panel discussion on wildfire and debris flows at the Santa Barbara Public Library Faulkner Gallery, 40 E. Anapamu St., in Santa Barbara at 6:30 p.m. Jan. 25.
Disaster strikes again in Southern California before it can recover from devastating wildfires
The real estate community of Montecito, California, is in the heart of catastrophic mudslides burying Southern Santa Barbara County with an onslaught of flooding and debris — another crisis on the heels of the devastating Thomas Fire that scorched the area just weeks before.
“We had time to prepare with the fires,” said Realtor Cynthia (Cindy) York Shadian, head of Coldwell Banker’s Montecito and Santa Barbara operations. “We saw them coming. With landslides, you don’t have the luxury of even 15 minutes — it’s massive.”
Following heavy rainfall, the deadly mudslides began pouring into the area early Tuesday morning, so far claiming 15 lives, trapping around 300 people in their homes, and destroying 100 homes, according to the New York Times. “A number of homes were ripped from their foundations,” the LA Times reported, “with some pulled more than a half-mile by water and mud before they broke apart.”
Coast Village Road, where a number of Montecito real estate offices are based, was one of the hardest hit. The road has been closed off, though intrepid brokers were still making their way to check on the premises today.
Shadian’s office at 1290 Coast Village Road, across from the Montecito Inn, was at the “epicenter” of the mudslide but was miraculously saved from flooding thanks to being on slightly higher ground, Shadian said. “We are completely impacted,” she told Inman. “It’s scary, you put your toe in the mud and you don’t know how deep it is to get out of.”
The Montecito Inn on Coast Village Road (Photo courtesy of Gary Goldberg)
Working from Coldwell Banker’s Santa Barbara office today, Shadian was keeping close tabs on her 128 agents in Montecito and Santa Barbara, who so far were all OK. But yesterday she had spoken to one of her Montecito agents whose own house flooded. He had saved several lives, she said, and was recovering from the trauma of enduring a living nightmare.
Another real estate pro with an office on Coast Village Road is Gary Goldberg, broker-owner of Coastal Properties, who spoke to Inman while he was en route to the office from a borrowed guest home. This was the second time he had evacuated in recent months, first from the fires, now the mudslides.
Goldberg spent Monday filling and putting down sandbags for clients. He helped one family — formerly buyer clients — who had just welcomed a new baby before the mudslides hit, along with one of his elderly clients.
On Tuesday, Goldberg was inundated with Facebook messages from concerned friends and colleagues.
“Being a local Realtor, clients call. My CPA called; you don’t talk to your CPA the first week of January!” Goldberg said. But his house and office emerged unscathed.
“My office is on the western half of Coast Village Road but the eastern half is lower lying and has tons of damage,” Goldberg said. He described the mudslide like “an avalanche of mud and water.”
Keller Williams’ top producer in Montecito, Louise McKaig, meanwhile, was staying put in her part of town and away from her office on Coast Village Road, fortunately located on the second floor.
“They [TV news outlets] keep showing the building we are in, but we are upstairs. Everything around us — over by the Montecito Inn — looks bad, there is mud in the lobby,” she said.
Some of McKaig’s clients had been affected by the mudslide. “Everything is at a standstill, people are just stunned,” she said. “You know people, you know they are missing — we see clients on TV — it’s sad … everybody has a connection here.”
And they said bitcoin would never work as a currency ツ
While that might be true for small transactions – for now – real-estate markets across the US are increasingly demonstrating that bitcoin is a viable medium of exchange. Case in point: the seller of a luxury Miami condo will only accept payment in bitcoin. The asking price –according to real-estate listings site Redfin-33 bitcoins, or about $550,000 at bitcoin’s present valuation.
According to Redfin, this is the first time a seller is exclusively accepting payment in bitcoin. The seller’s identity wasn’t immediately clear.
It begins: Miami condo on sale for 33 bitcoins – seller won't accept any other currency. First time that's happened in U.S., per Redfin https://t.co/hAvnpcL5zX
But while this might be the first time that Redfin has noticed the phenomenon, home sellers have been asking to be paid in bitcoin since at least 2013, when an anonymous seller of a luxury condo in the Trump Soho of all places listed the price as 24,700 bitcoin, according to theDaily News.While this sale was the first that was documented in the media, it’s also notable that it occurred before the first bitcoin bubble burst.
Also over the summer, a realtor in Texas revealed that one of her clients had accepted payment for their home in bitcoin. The number of coins – and the identity of the seller and buyer – weren’t disclosed.
And as we recently reported, more realtors in hot markets like New York City and Miami are demanding to be paid in cryptocurrency, sometimes exclusively.
This trend in broader crypto acceptance – contrary to mainstream media reports – is undoubtedly a factor behind the unprecedented price appreciation which has seen bitcoin soar from $1,000 to $19,000 in 2017.
Meanwhile, any buyer who has accepted bitcoin as payment and kept it, has so far managed to generate a staggering profit, given the digital currency’s aggressive appreciation. The real test will come after the digital currency inevitably tanks again.
Every industry tracks innovations in its field, and housing is no different. As a real estate pro, here are the need-to-know products and services promising to transform homes and your clients’ lifestyles over the next year or so.
The big-picture view on housing trends in 2018 center around integrating technology and creating healthy and connected living environments. That’s why building materials, systems, and products that speak to these concerns are expected to generate greater buzz in the coming year. And with more generations living under the same roof, home-related features that provide an extra pair of hands or calming—even spiritual—influence are also being enthusiastically embraced. Here’s a sampling of coming trends that are important to understand and share with clients.
The Rise of the Tech Guru
Why now: Smart homes are getting smarter, with homeowners increasingly purchasing devices and apps that perform tasks such as opening blinds, operating sprinkler systems, and telling Alexa what food to order. But not all these helpers speak the same language, nor do they always work together harmoniously. “Even plugs and chargers aren’t necessarily universal for different appliances and phones,” says Lisa Cini, senior living designer and author ofThe Future is Here: Senior Living Reimagined(iUniverse, 2016). Also, with more devices competing for airtime, Wi-Fi systems may not be strong enough to operate throughout a home, which results in dead spots, she says. “What many homeowners need is a skilled tech provider who makes house calls, assesses what’s needed, and makes all the tech devices hum effortlessly at the same time.”
What you should do: More buyers want to see listings updated to take advantage of all technological possibilities from the moment they move in. Add a home technology source to your list of trusted experts. You might even be able to offer a free first visit as a closing gift.
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Smart Glass Adds Privacy, Energy Savings
Why now: As more homes feature bigger and more numerous windows, homeowners will naturally look for ways to pare down the energy costs, lack of privacy, and harmful ultraviolet rays that can accompany them. Next year, glass company Kinestral will begin offering a residential option to their line of windows and skylights. Called Halio, the technology allows users to tint glazing electronically up to 99.9 percent opacity. The company claims this can eliminate the need for blinds, shades, and curtains. “You’ll be able to tell Alexa to tint your windows, which will also provide privacy,” says Craig Henricksen, vice president of product and marketing for Halio. He notes that previously, the commercial version only offered the choice between yellow, brown, or blue casts, but that they’ll now add in an appealing gray tint to the mix. Windows come in a variety of sizes, and contractors can install the cable and low voltage system required to change the tinting. Homeowners can control the tint by voice command through an app, manual operation with switch, or with preset controls. Henricksen says Halio can save homeowners up to 40 percent off their energy bill, and that while the initial cost is around five to six times greater than similar low-E glass, the fact that traditional window treatments won’t be needed means the investment gap narrows.
What you should do: This is an important option to keep in mind if buyers are unsure about big, long runs of windows in a listing. It may make sense to price out options for your particular listing to help home shoppers understand how much it might cost to retrofit the space with such technology.
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Spiritual Gardens That Lift the Soul
Why now: Homeowners have long seen their gardens as a place for quiet reflection, so choosing plants and designs that have a physical tie to spirituality is a natural next move. The trend may have started with Bible gardens, which use any number of the more than 100 plants mentioned in the Christian text to populate a restful repose. “So many are good choices because they are hardy, scented, edible, and can withstand harsh climates and environments,” says F. Nigel Hepper, with the Herbarium at the Royal Botanic Gardens in Kew, England, and author of Illustrative Encyclopedia of Biblical Plants (Inter-Varsity Press, 1992). But people of all faiths, or even those simply drawn to botanical history, can appreciate such spaces. “Around for generations, they feed the body and the soul,” says landscape designer Michael Glassman, who designed such a garden in the shape of a Jewish star as a meditative spot at one of Touro University’s campuses. He filled it with mint, pomegranate trees, sage, and other plants that are mentioned in ancient religious texts. Hepper says labeling and providing detailed context to plantings can transform a miscellaneous, obscure collection into an instructive experience.
What you should do: Find out if your local area has a peace garden that could provide examples of this trend. Homeowners might also find inspiration on the grounds of hospitals and assistance care facilities, which often create healing gardens for patients and family members.
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Kitchens That Do More Than Just Look Pretty
Why now: An emphasis on eating fresh, healthy foods may mean more frequent trips to grocery stores and farmers markets, but it could also change the architecture of our kitchens. Portland, Ore.–based designer Robin Rigby Fisher says many of her higher-end clients want a refrigerator-only column to store their fresh foods, installing a freezer or freezer drawer in a separate pantry or auxiliary kitchen. The container-gardening industry is vying for counter space with compact growing kits that often feature self-watering capabilities and grow lights. Fisher is also getting more requests for steam ovens that cook and reheat foods without stripping them of key nutrients, though she notes that these ovens can cost $4,000 and have a steeper learning curve than conventional ones. Homeowners also want to be able to use their kitchen comfortably, which means having different or variable counter heights that work for each member of the family, ample light for safe prepping, easy-to-clean counter tops, and flooring that’s softer underfoot, such as cork.
What you should do: Be able to point out the beneficial elements of appliances and features in your listing, such as the antimicrobial nature of surfaces like quartzite and copper.
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Home Robots to the Rescue
Why now: With lifestyles that seem busier by the day and many families inviting elders who require assistance to live with them, robots that can perform multiple services are gaining in popularity. IRobot’s Braava robots mop and vacuum floors, while Heykuri’s Kuri robot captures short videos of key life moments, including pets’ antics when owners are away. Some robots offer health benefits that mimic real pets, which the U.S. Centers for Disease Control and Prevention says can lower blood pressure and cholesterol, says Cini. She says Hasbro’s Joy for All line of furry robot dogs and cats can provide companionship for the elderly with dementia.
What you should do: Ask buyers about pain points in their current homes that might be mitigated by these new interactive technologies.
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Black Is the New Gray
Why now: Palettes change all the time, and some feel the interest in black is a welcome contrast after years of off-whites, grays, and beiges. The hue is coming on strong in every category—appliances, plumbing fixtures, lighting, metal finishes, hardware, and soft goods, according to commercial interior designer Mary Cook of Mary Cook Associates. She appreciates black’s classic, neutral, sophisticated touch and notes it can be a universal mixer. “Black is a welcome accent in any palette,” she says. Marvin Windows and Doors launched its Designer Black line this year, incorporating a hip industrial vibe. Designer Kristie Barnett, owner of the Expert Psychological Stager training company in Nashville, loves how black mullions draw the eye out toward exterior views more efficiently than white windows can. Kohler has released its popular Numi line and Iron Works freestanding bath in black. Even MasterBrand cabinets are available in black stains and paints. For homeowners who prefer to step lightly into the trend, Chicago designer Jessica Lagrange suggests painting a door black.
What you should do: Suggest black accents as an option for sellers looking to update their homes to appear more modern.
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Air Locks Preserve Energy, Increase Security
Why now: Incorporating two airtight doors has become a popular way for homeowners to cut energy costs. The double barrier helps keep outside air from entering the main portion of the house and provides a better envelope seal. “We rarely design a house nowadays without one,” says Orren Pickell, president of Orren Pickell Building Group in Northfield, Ill. It’s not just energy homeowners save, though; Pickell says it also supports the trend of more people shopping online. “It keeps packages safer than being left in full view” because delivery services can leave them inside the first door. Homeowners will need a minimum area of five feet squared in order to make this work. Costs vary by project size but it could run homeowners as much as $10,000 to add a small space beyond a front or back door. This usually costs less in new construction or as part of a larger remodeling project, Pickell says.
What you should do: If homeowners are thinking about making changes to their main entryway, be sure to alert them to this trend so they can decide if it makes sense to incorporate it. It may be expensive, but it’s not likely to go out of fashion anytime soon.
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Maximized Side Yards
Why now: As a nationaltrend toward smaller lot sizescombines with surging interest in maximizing outdoor space, one area that’s often neglected is the side yard. But designers are beginning to pay attention, transforming these afterthoughts into aesthetically pleasing, functional places that buffer a home from neighbors, says Glassman. He suggests growing plants such as star jasmine, climbing roses, and clematis vertically along the siding or a fence. He has created a pleasant pass-through to a backyard, with meandering walkways flanked by ornamental grasses or honeysuckle. Homeowners who have extra space here might consider adding a small recirculating water feature or a tiny sitting area.
What you should do: Pay special attention to side yards when evaluating a home that’s about to go up on the market. Sellers don’t need to spend much to make this space stand out, and any little thing is better than the feeling that the space has been “thrown away, since real estate is so valuable,” Glassman says.
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Battery Backup Systems Offer Resilience
Why now: Any home owner who’s experienced a weather-related disaster, such as hurricanes, forest fires, and torrential downpours, understands the peace of mind that comes from having systems in place to help withstand Mother Nature’s worst punches. One example of this is a battery backup that integrates into a home’s electric system and operates during power outages, says architect Nathan Kipnis of Kipnis Architecture + Planning in Chicago. The backup batteries can store either electricity from the grid or renewable energy generated onsite by solar panels or other means. A key advantage is that the system doesn’t create the noise and pollution you get with an old-school generator, because it doesn’t use natural gas or diesel fuel. While they’re generally more expensive than traditional fossil fuel systems, prices do continue to drop.
What you should do: Understand the difference between a battery backup system and a typical generator, even if you’re not working in an area that sees frequent extreme weather events.
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Missing Middle Housing
Why now: Architect Daniel Parolek, principal at Opticos Design in Berkeley, Calif., sees a solution emerging for the mismatch between demand and the housing that’s actually been delivered over the last 20 to 30 years. “Thirty percent of home buyers are single, and their numbers may swell to 75 to 85 percent by 2040, yet 90 percent of available housing is designed for families and located in single-family home neighborhoods,” he says. Parolek says builders must fill in this demand with smaller housing of 600 to 1,200 square feet, usually constructed in styles such as duplexes and cottages communities, and preferably in walkable areas. He cites Holmes Homes’ small townhouses at Daybreak in South Jordan, Utah, as an affordable transit-oriented development that follows missing middle principles.
What you should do: Know where existing missing middle housing may be hiding in your community, so you can help buyers of all ages seeking smaller homes. Also, look for opportunities to invest, either for yourself or your clients, in a type of housing that will likely see more demand than supply in the coming years.
Back in September, we reported on a major milestone in bitcoin’s evolution into a respectable medium of exchange for large purchases: A Dallas real estate agent had negotiated the first all-bitcoin purchase of a US home on record. Few details about the home or the identity of the buyers were released. However, given bitcoin’s blistering rise since then – the value of a single coin has more than doubled – it’s reasonable to assume that, whoever they are, they probably regret pulling the trigger on their dream home, seeing as, if they had just waited two more months, they could’ve bought two. Indeed, the unknown seller of the home reportedly earned $1.3 million from the bitcoin they accepted as payment in the transaction.
At the time, we predicted that it wouldn’t be long before settling real-estate transactions in bitcoin would be commonplace, something we imagine could help further inflate real-estate prices in trendy markets like San Francisco, while also potentially attracting real-estate speculators to also dabble in bitcoin.
As if according to some preordained plan, Cryptocoins News reported this weekend that real-estate agents in bothMiamiandNew York Cityare warming to bitcoin, and some have even convinced their clients to accept payment in the digital currency.
Eric Fernandez, owner of Sol/Mar Real Estate, recently listed a $3.5 million penthouse condo at the Blue Diamond in Miami Beach, Fla. saying the owners would accept payment in bitcoin or Ethereum, according to the Miami New Times.
Fernandez believes it is only a matter of time before bitcoin acceptance for real estate purchases gains popularity.
Fernandez is not the only real estate agent who expects more homes to be bought with digital currency. Bitcoin is achieving cult status for international buyers. Some believe Miami will lead this trend.
Another Miami realtor, Stephan Burke, who listed a Coral Gables mansion for sale in August, said the seller would accept bitcoin. Burke pointed out that Miami is an ideal market for bitcoin since it offers investors from South America, Canada, Asia and Russia a way to quickly purchase property.
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Manhattan realtors are also jumping on the bitcoin bandwagon, according to Ben Shaoul, of Magnum Real Estate Group.
We were approached by a buyer who has been collecting bitcoin for many years and was interested in using it to buy property.
Since then there have been a further two to three customers who have approached the developer to see if they can purchase luxury condos with the cryptocurrency. Prices for these properties range in price from $700,000 to $1.5 million.
The United Kingdom has also recorded a few examples of sellers accepting payment in bitcoin for their homes, with at least one case of a seller accepting payment only in bitcoin.
Last month, a Notting Hill mansion in London was put up for sale with the asking price of $17 million, believed to be a first for the metropolitan city. In this case, though, the seller is only accepting bitcoin. In the last week it has been reported that a 49-year-old man has put his £80,000 house up for sale, with the option of accepting the digital currency.
Meawhile,a UK co-living companyhas announced that it will begin accepting down payments made in bitcoin, making it that much easier for traders hooked on effortless, outstanding returns to speculate in another bubble-prone market: UK housing.
Of course, bitcoin’s sometimes-extreme volatility presents risks. But the NYC realtors say they’re not worried.
“Would you stop investing in stock markets? No, you wouldn’t. Each person is going to have a risk assessed judgement on whether or not they want to invest in bitcoin,” one realtor said.
And now that traders can easily purchase futures contracts allowing them to profit off of declines in the bitcoin price, sellers can purchase protection to offset some of the risk.
I hope this article brings forward important questions about the Federal Reserves role in the US as it attempts to begin a broader dialogue about the financial and economic impacts of allowing the Federal Reserve to direct America’s economy. At the heart of this discussion is how the Federal Reserve always was, or perhaps morphed, into a state level predatory lender providing the means for a nation to eventually bankrupt itself.
Against the adamant wishes of the Constitution’s framers, in 1913 the Federal Reserve System was Congressionally created. According to the Fed’s website, “it was created to provide the nation with a safer, more flexible, and more stable monetary and financial system.” Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was supposedly established to serve the public interest.
A quick overview; monetary policy is the Federal Reserve’s actions, as a central bank, to achieve three goals specified by Congress: maximum employment, stable prices, and moderate long-term interest rates in the United States. The Federal Reserve conducts the nation’s monetary policy by managing the level of short-term interest rates and influencing the availability and cost of credit in the economy. Monetary policy directly affects interest rates; it indirectly affects stock prices, wealth, and currency exchange rates. Through these channels, monetary policy influences spending, investment, production, employment, and inflation in the United States.
I suggest what truly happened in 1913 was that Congress willingly abdicated a portion of its responsibilities, and through the Federal Reserve, began a process that would undermine the functioning American democracy. “How”, you ask? The Fed, believing the free-market to be “imperfect” (aka; wrong) believed it (the Fed) should control and set interest rates, determine full employment, determine asset prices; not the “free market”. And here’s what happened:
From 1913 to 1971, an increase of $400 billion in federal debt cost $35 billion in additional annual interest payments.
From 1971 to 1981, an increase of $600 billion in federal debt cost $108 billion in additional annual interest payments.
From 1981 to 1997, an increase of $4.4 trillion cost $224 billion in additional annual interest payments.
From 1997 to 2017, an increase of $15.2 trillion cost “just” $132 billion in additional annual interest payments.
Stop and read through those bullet points again…and then one more time. In case that hasn’t sunk in, check the chart below…
What was the economic impact of the Federal Reserve encouraging all that debt? The yellow line in the chart below shows the annual net impact of economic growth (in growing part, spurred by the spending of that new debt)…gauged by GDP (blue columns) minus the annual rise in federal government debt (red columns). When viewing the chart, the problem should be fairly apparent. GDP, subtracting the annual federal debt fueled spending, shows the US economy is collapsing except for counting the massive debt spending as “economic growth”.
Same as above, but a close-up from 1981 to present. Not pretty.
Consider since 1981, the Federal Reserve set FFR % (Federal Funds rate %) is down 94% and the associated impacts on the 10yr Treasury (down 82%) and the 30yr Mortgage rate (down 77%). Four decades of cheapening the cost of servicing debt has incentivized and promoted ever greater use of debt.
Again, according to the Fed’s website, “it was created to provide the nation with a safer, more flexible, and more stable monetary and financial system.” However, the chart below shows the Federal Reserve policies’ impact on the 10yr Treasury, stocks (Wilshire 5000 representing all publicly traded US stocks), and housing to be anything but “safer” or “stable”.
Previously, I have made it clear the asset appreciation the Fed is providing is helping a select few, at the expense of the many,HERE.
But a functioning democratic republic is premised on a simple agreement that We (the people) will freely choose our leaders who will (among other things) compromise on how taxation is to be levied, how much tax is to be collected, and how that taxation is to be spent. The intervention of the Federal Reserve into that equation, controlling interest rates, outright purchasing assets, and plainly goosing asset prices has introduced a cancer into the nation which has now metastasized.
In time, Congress (& the electorate) would realize they no longer had to compromise between infinite wants and finite means. The Federal Reserve’s nearly four decades of interest rate reductions and a decade of asset purchases motivated the election of candidates promising ever greater government absent the higher taxation to pay for it. Surging asset prices created fast rising tax revenue. Those espousing “fiscal conservatism” or living within our means (among R’s and/or D’s) were simply unelectable.
This Congressionally created mess has culminated in the accumulation of national debt beyond our means to ever repay. As the chart below highlights, the Federal Reserve set interest rate (Fed. Funds Rate=blue line) peaked in 1981 and was continually reduced until it reached zero in 2009. The impact of lower interest rates to promote ever greater national debt creation was stupendous, rising from under $1 trillion in 1981 to nearing $21 trillion presently. However, thanks to the seemingly perpetually lower Federal Reserve provided rates, America’s interest rate continually declined inversely to America’s credit worthiness or ability to repay the debt.
The impact of the declining rates meant America would not be burdened with significantly rising interest payments or the much feared bond “Armageddon” (chart below). All the upside of spending now, with none of the downside of ever paying it back, or even simply paying more in interest. Politicians were able to tell their constituencies they could have it all…and anyone suggesting otherwise was plainly not in contention. Federal debt soared and soared but interest payable in dollars on that debt only gently nudged upward.
In 1971, the US paid $36 billion in interest on $400 billion in federal debt…a 9% APR.
In 1981, the US paid $142 billion on just under $1 trillion in debt…a 14% APR.
In 1997, the US paid $368 billion on $5.4 trillion in debt or 7% APR…and despite debt nearly doubling by 2007, annual interest payments in ’07 were $30 billion less than a decade earlier.
By 2017, the US will pay out about $500 billion on nearly $21 trillion in debt…just a 2% APR.
The Federal Reserve began cutting its benchmark interest rates in 1981 from peak rates. Few understood that the Fed would cut rates continually over the next three decades. But by 2008, lower rates were not enough. The Federal Reserve determined to conjure money into existence and purchase $4.5 trillion in mid and long duration assets. Previous to this, the Fed has essentially held zero assets beyond short duration assets in it’s role to effect monetary policy. The change to hold longer duration assets was a new and different self appointed mandate to maintain and increase asset prices.
But why the declining interest rates and asset purchases in the first place?
The Federal Reserve interest rates have very simply primarily followed the population cycle and only secondarily the business cycle. What the chart below highlights is annual 25-54yr/old population growth (blue columns) versus annual change in 25-54yr/old employees (black line), set against the Federal Funds Rate (yellow line). The FFR has followed the core 25-54yr/old population growth…and the rising, then decelerating, now declining demand that that represented means lower or negative rates are likely just on the horizon (despite the Fed’s current messaging to the contrary).
Below, a close-up of the above chart from 2000 to present.
Running out of employees??? Each time the 25-54yr/old population segment has exceeded 80% employment, economic dislocation has been dead ahead. We have just exceeded 78% but given the declining 25-54yr/old population versus rising employment…and the US is likely to again exceed 80% in 2018.
Given the FFR follows population growth, consider that the even broader 20-65yr/old population will essentially see population growth grind to a halt over the next two decades. This is no prediction or estimate, this population has already been born and the only variable is the level of immigration…which is falling fast due to declining illegal immigration meaning the lower Census estimate is more likely than the middle estimate.
So where will America’s population growth take place? The 65+yr/old population is set to surge.
But population growth will be shifting to the most elderly of the elderly…the 75+yr/old population. I outlined the problems with this previouslyHERE.
Back to the Federal Reserve, consider the impact on debt creation prior and post the creation of the Federal Reserve:
1790-1913: Debt to GDP Averaged 14%
1913-2017: Debt to GDP Averaged 53%
1913-1981: 46% Average
1981-2000: 52% Average
2000-2017: 79% Average
As the chart below highlights, since the creation of the Federal Reserve the growth of debt (relative to growth of economic activity) has gone to levels never dreamed of by the founding fathers. In particular, the systemic surges in debt since 1981 are unlike anything ever seen prior in American history. Although the peak of debt to GDP seen in WWII may have been higher (changes in GDP calculations mean current GDP levels are likely significantly overstating economic activity), the duration and reliance upon debt was entirely tied to the war. Upon the end of the war, the economy did not rely on debt for further growth and total debt fell.
Any suggestion that the current situation is like any America has seen previously is simply ludicrous. Consider that during WWII, debt was used to fight a war and initiate a global rebuild via the Marshall Plan…but by 1948, total federal debt had already been paid down by $19 billion or a seven percent reduction…and total debt would not exceed the 1946 high water mark again until 1957. During that ’46 to ’57 stretch, the economy would boom with zero federal debt growth.
1941…Fed debt = $58 b (Debt to GDP = 44%)
1946…Fed debt = $271 b (Debt to GDP = 119%)
1948…Fed debt = $252 b <$19b> (Debt to GDP = 92%)
1957…Fed debt = $272 b (Debt to GDP = 57%)
If the current crisis ended in 2011 (recession ended by 2010, by July of 2011 stock markets had recovered their losses), then the use of debt as a temporary stimulus should have ended?!? Instead, debt and debt to GDP are still rising.
2007…Federal debt = $8.9 T (Debt to GDP = 62%)
2011…Federal debt = $13.5 T (Debt to GDP = 95%)
2017…Federal Debt = $20.5 T (Debt to GDP = 105%)
July of 2011 was the great debt ceiling debate when America determined once and for all, that the federal debt was not actually debt. America had no intention to ever repay it. It was simply monetization and since the Federal Reserve was maintaining ZIRP, and all oil importers were forced to buy their oil using US dollars thanks to the Petrodollar agreement…what could go wrong?
But who would continue to buy US debt if the US was addicted to monetization in order to pay its bills? Apparently, not foreigners. If we look at foreign Treasury buying, some very notable changes are apparent beginning in July of 2011:
The BRICS (Brazil, Russia, India, China, S. Africa…represented in red in the chart below) ceased net accumulating US debt as of July 2011.
Simultaneous to the BRICS cessation, the BLICS (Belgium, Luxembourg, Ireland, Cayman Island, Switzerland…represented in black in the chart below) stepped in to maintain the bid.
Since QE ended in late 2014, foreigners have followed the Federal Reserve’s example and nearly forgone buying US Treasury debt.
China was first to opt out and began net selling US Treasuries as of August, 2011 (China in red, chart below). China has continued to run record trade driven dollar surplus but has net recycled none of that into US debt since July, 2011. China had averaged 50% of its trade surplus into Treasury debt from 2000 to July of 2011, but from August 2011 onward China stopped cold.
As China (and more generally the BRICS) ceased buying US Treasury debt, a strange collection of financier nations (the BLICS) suddenly became very interested in US Treasury debt. From the debt ceiling debate to the end of QE, these nations were suddenly very excited to add $700 billion in near record low yielding US debt while China net sold.
The chart below shows total debt issued during periods, from 1950 to present, and who accumulated the increase in outstanding Treasurys.
The Federal Reserve plus foreigners represented nearly 2/3rds of all demand from ’08 through ’14. However, since the end of QE, and that 2/3rds of demand gone…rates continue near generational lows??? Who is buying Treasury debt? According to the US Treasury, since QE ended, it is record domestic demand that is maintaining the Treasury bid. The same domestic public buying stocks at record highs and buying housing at record highs.
Looking at who owns America’s debt 2007 through 2016, the chart below highlights the four groups that hold nearly 90% of the debt:
The combined Federal Reserve/Government Accounting Series
Domestic Mutual Funds
And the massive rise in Treasury holdings by domestic “Other Investors” who are not domestic insurance companies, not local or state governments, not depository institutions, not pensions, not mutual funds, nor US Saving bonds.
Treasury buying by foreigners and the Federal Reserve has collapsed since QE ended (chart below). However, the odd surge of domestic “other investors”, Intra-Governmental GAS, and domestic mutual funds have nearly been the sole buyer preventing the US from suffering a very painful surge in interest payments on the record quantity of US Treasury debt.
No, this is nothing like WWII or any previous “crisis”. While America has appointed itself “global policeman” and militarily outspends the rest of the world combined, America is not at war. Simply put, what we are looking at appears little different than the Madoff style Ponzi…but this time it is a state sponsored financial fraud magnitudes larger.
The Federal Reserve and its systematic declining interest rates to perpetuate unrealistically high rates of growth in the face of rapidly decelerating population growth have fouled the American political system, its democracy, and promoted the system that has now bankrupted the nation. And it appears that the Federal Reserve is now directing a state level fraud and farce. If it isn’t time to reconsider the Fed’s role and continued existence now, then when?
As discussed last Friday, several notable surprises in the proposed GOP tax bill involved real estate, and would have an explicit – and adverse – impact on not only proprietors’ tax bills, but also on future real estate values if the republican tax bill is passed. And, as the following analysis by Barclays suggests, they may have a secondary purpose: to slam real estate values in counties that by and large voted for Hillary Clinton.
Going back to Friday, the biggest surprise was that mortgage interest would only be deductible on mortgage balances up to $500K for new home purchases, down from the current $1mn threshold. Existing mortgages would be grandfathered, such that borrowers with existing loans would still be allowed to deduct interest on the first $1mn of their mortgage balances. In addition, only the first $10K of local and state property taxes would be allowed to be deducted from income. Finally, married couples seeking a tax exemption on the first $500K of capital gains upon a sale of their primary residence will need to have lived in their home for five of the past eight years, versus two out of the past five years under current rules. This capital gains tax exemption would also be gradually phased out for households that have more than $500K of income a year.
As might be expected, the above provisions caused an uproar in the realtor and home building industries, as Barclays Dennis Lee points out. The National Association of Realtors (NAR) released a statement commenting that “the bill represents a tax increase on middle-class homeowners”, with the NAR President stating that “[t]he nation’s 1.3 million Realtors cannot support a bill that takes home ownership off the table for millions of middle-class families”. Meanwhile, the chairman of the National Association of Home Builders (NAHB) stated that “[t]he House Republican tax reform plan abandons middle-class taxpayers in favor of high-income Americans and wealthy corporations”. Given the strong resistance from these two powerful housing groups, there may be changes made to these provisions in the final version of the bill.
What is more interesting, however, is a detailed analysis looking at who would be most affected by Trump’s real estate tax changes. Here, an interest pattern emerges, courtesy of Barclays.
According to CoreLogic, the median home price in the US is around $224K while the average property tax paid by homeowners in the country is around $3,300. This suggests that only a minority of homeowners are likely to be affected by the proposed mortgage interest and property tax deduction caps. Indeed, according to preliminary analysis by the NAHB, only about 7mn homes will be affected by the $500K mortgage interest deduction, and since these homeowners will receive the grandfathering benefit, they will not experience any immediate increase in taxes as a result of the mortgage interest deduction cap.
Meanwhile, approximately 3.7mn homeowners pay more than $10K in property taxes according to the NAHB. These homeowners will experience an immediate increase in taxes from the property tax deduction cap; however, to put this number in perspective, the US Census estimates that there are approximately 76mn owner-occupied homes in the country, indicating that fewer than 5% of households may experience a rise in taxes as a result of the property tax cap.
Who Is Most Impacted?
As expected, the homeowners who will be most negatively affected by the proposed caps primarily reside along the coasts, particularly in California. Using estimated median home prices provided by the NAR, Barclays found that of the 20 counties in the country with the highest median home prices, eight were located in California (Figure 3). Perhaps not surprisingly, a majority of voters in all 20 counties voted for Clinton in last year’s presidential election. In fact, Clinton won the vote in the top 45 counties in the country with the highest median home prices. Suddenly the method behind Trump’s madness becomes readily apparent…
And while we now know who will be largely impacted, there is a broader implication: not only will these pro-Clinton counties pay more in taxes, it is there that real estate values will tumbles the most. Hers’ Barclays:
We can also use the above median home prices to estimate the potential increase in taxes from the deduction caps in the first 12 months for would-be homeowners looking to purchase a home in these counties. Using the simplifying assumption that all borrowers purchase their homes at the median home price in each county and take out an 80% LTV, 30y mortgage at a 4% rate, we can come up with estimates for the monthly P&I payment for each of these areas (Figure 4). We can also estimate the average property tax burden in these counties using average state-level property tax rates.
As Dennis Lee calculates, “assuming that all of these homeowners are taxed at a marginal rate of 39.6%, we find that the increase in tax burden during the first 12 months of homeownership driven solely by the mortgage interest and property tax deduction caps varies from $0 for the county with the 20th highest median home price (San Miguel County, Colorado) to approximately $7,200 for the highest-priced county (San Francisco County, California).” Barclays’ conclusion: these counties – all of which are largely pro-Clinton – would need a 0-11% decline in their median home prices to keep the after-tax monthly mortgage and property tax payments the same for would-be buyers.
And that’s how Trump is about to punish the “bi-coastals” for voting against him: by sending their real estate values tumbling as much as 11%, while serving them with a higher tax bill to boot.
The MBA (Mortgage Bankers Association) sent a letter to the House Committee on Ways and Means regarding its recently released tax reform proposal. Given the tax proposal, the MBA reports (using its analysis of 2016 HMDA data) that only 7% of first lien home purchase mortgage balances originated in the US in 2016 exceeded $500,000. ($500,000 is the proposed maximum balance on which mortgage interest would be deductible in the House Republican proposal.) The Senate’s version, on the other hand, is expected to keep the $1 million mortgage cap unchanged.
Mortgage applications decreased 0.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 26, 2014 …
The Refinance Index decreased 0.3 percent from the previous week. The seasonally adjusted Purchase Index remained unchanged from one week earlier. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 11 percent lower than the same week one year ago. … … The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.33 percent from 4.39 percent, with points decreasing to 0.31 from 0.35 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
The majority of middle class wealth is locked up in unproductive assets or assets that only become available upon retirement or death.
One of Charles Hugh Smith’s points in Why Governments Will Not Ban Bitcoin was to highlight how few families had the financial wherewithal to invest in bitcoin or an alternative hedge such as precious metals.
The limitation on middle class wealth isn’t just the total net worth of each family; it’s also how their wealth is allocated: the vast majority of most middle class family wealth is locked up in the family home or retirement funds.
This chart provides key insights into the differences between middle class and upper-class wealth. The majority of the wealth held by the bottom 90% of households is in the family home, i.e. the principal residence. Other major assets held include life insurance policies, pension accounts and deposits (savings).
What characterizes the family home, insurance policies and pension/retirement accounts? The wealth is largely locked up in these asset classes.
Yes, the family can borrow against these assets, but then interest accrues and the wealth is siphoned off by the loans. Early withdrawals from retirement funds trigger punishing penalties.
In effect, this wealth is in a lock box and unavailable for deployment in other assets.
IRAs and 401K retirement accounts can be invested, but company plans come with limitations on where and how the funds can be invested, and the gains (if any) can’t be accessed until retirement.
Compare these lock boxes and limitations with the top 1%, which owns the bulk of business equity assets. Business equity means ownership of businesses; ownership of shares in corporations (stocks) is classified as ownership of financial securities.
These two charts add context to the ownership of business equity. Note that despite the recent bounce off a trough, the percentage of families with business equity has declined for the past 25 years. The chart is one of lower highs and lower lows, the classic definition of a downtrend.
The mean value of business equity is concentrated in the top 10% of families.While the value of the top 10%’s biz-equity dropped sharply in the global financial crisis of 2008-09, it has since recovered and reached new heights, while the value of the biz equity held by the bottom 90% has flat lined.
Assets either produce income (i.e. they are productive assets) or they don’t (i.e. they are unproductive assets). Businesses either produce net income or they become insolvent and close down. Family homes typically don’t produce any income (unless the owners rent out rooms), and whatever income life insurance and retirement funds produce is unavailable.
This is the key difference between financial-elite wealth and middle class wealth: the majority of middle class wealth is locked up in unproductive assets or assets that only become available upon retirement or death.
The income flowing to family-owned businesses can be spent, of course, but it can also be reinvested, piling up additional income streams that then generate even more income to reinvest.
No wonder wealth is increasingly concentrated in the hands of the top 5%: those who own productive assets have the means to acquire more productive assets because they own income streams they can direct and use in the here and now without all the limitations imposed on the primary assets held by the middle class.
The owner of one tiny, unassuming cottage in Mountain View, California just sold his house for well below the asking price of $1.6 million – but asked the new buyers to agree to one highly unusual condition: They must allow him to continue living there, rent free, for seven years,NBC Newsreported.
The Silicon Valley property went for $1.1 million after being on the market for only a few weeks, which is surprising, considering the house – little more than a shotgun shack – hardly has room for multiple tenants.
The property’s realtor said the home’s elderly former owner will continue living in the home for seven more years ‘rent back at no charge.’
Realtor Joban Brown said that while the price is not unusual for the hot spot location, the former owner’s request to continue living at the property is ‘not a typical situation.’
Erika Enos, another realtor, said she’d never heard of this type of a deal during her multi-decade career as a realtor:
‘In almost 40 years as a realtor, I have never seen terms of sale that included seven years free rent back, not even seven months free rent back,’ Enos said.
‘What if the property does not close or the seller is unhappy with the results or work men don’t get paid and put a lien the property?’
‘The asking price reflects market value, which is essentially lot value, for this area … I empathize with the seller, but the terms and conditions for this sale I feel are unrealistic and may have negative legal ramifications.’
The listing for the 976 square-foot cottage also included a requirement for the buyer to pay for the expensive repairs needed.
However, Mountain View’s status as a well-heeled tech hub – Google’s headquarters is located in the town, and companies including Microsoft and Samsung have offices there – has caused real-estate prices to explode over the past two decades, reflecting similar gains throughout the tech-focused Bay Area.
The realtor in charge of selling the location described it as having “all the conveniences of urban living” but in a secluded setting.
‘This is a location that’s hard to beat, tucked away in a quiet corner at the end of a small street,’ listing agent Daniel Berman said.
‘You’ve got all the conveniences of urban living, nestled in a secluded country-like enclave.’
We wonder: With Silicon Valley home prices soaring well beyond the means of most middle-class families, will we start to see more deals like this one? Already, a startup called Loftium has hit upon a similar concept. The commpany will front you the entire down payment if you just agree to rent out one of the rooms in your new house over Airbnb for a specified period of time. But there’s a catch … for now Loftium is only available in Seattle.
This is how monetary policies have crushed the value of labor.
For the good folks who hope fervently that the Fed doesn’t have reasons to raise rates or unwind QE because there isn’t enough inflation, here is an update on one aspect of inflation – asset price inflation, and particularly house price inflation – where the value of your hard-earned dollars has collapsed over a given number of years to where it takes a whole lot more dollars to pay for the same house.
So here are some visuals of amazing house price bubbles, city by city. Bubbles really aren’t hard to recognize, if you want to recognize them. What’s hard to predict accurately is when they will burst. Normally the Fed doesn’t want to acknowledge them. But now it has its eyes focused on them.
The S&P CoreLogic Case-Shiller National Home Price Index for June was released today. It jumped 5.8% year-over-year, not seasonally adjusted, once again outpacing growth in household incomes, as it has done for years. At 192.6, the index has surpassed by 5% the peak in May 2006 of crazy Housing Bubble 1, which everyone called “housing bubble” after it imploded (data viaFRED, St. Louis Fed):
The Case-Shiller Index is based on a rolling-three month average; today’s release was for April, May, and June data. Instead of median prices, it uses “home price sales pairs,” for example, a house sold in 2011 and then again in 2017. Algorithms adjust this price movement and add other factors. The index was set at 100 for January 2000. An index value of 200 means prices have doubled in the past 17 years, which is what most of the metros in this series have accomplished, or are close to accomplishing.
Real estate is local. Therefore real estate bubbles are local. If enough local bubbles balloon at the same time, it becomes a national housing bubble. As the above chart shows, the US national Housing Bubble 2 now exceeds the crazy levels of Housing Bubble 1, and in all ten major metro areas, home prices are setting new records.
In the Boston metro, the home price index is now 11% above the peak of Housing Bubble 1 (Nov 2005):
Home prices in the Seattle metro have spiked over the past year, pushing the index 20% above the peak of Housing Bubble 1 (Jul 2007):
Then there’s Denver’s very special house price bubble. The index has soared a stunning 43% above the peak of Housing Bubble 1 (Aug 2006):
People in the Dallas-Fort Worth metro felt left out during Housing Bubble 1, when prices rose only 13% in five years, while folks in other parts of the country were getting rich just sitting there. They also skipped much of the house price crash. But they know how to party when time comes. The index has now surged by 42% from the peak in June 2007:
The Atlanta metro, where home prices had plunged 36% after Housing Bubble 1, has now finally squeaked past the prior peak by 2%, with a near-perfect V-shaped bubble recovery:
Portland’s home prices have kicked butt since 2012, with the index soaring 71% in five years – not that homes were cheap in Portland in 2012. Portland’s house price bubble is now 20% above the peak of Housing Bubble 1:
The San Francisco Case-Shiller Index, which covers the five-county Bay Area and not just San Francisco, is now 10% above the insane peak of Housing Bubble 1. During the last housing crash, the index plunged 43%. Eight years of global monetary craziness has sent liquidity from around the world sloshing knee-deep through the streets, which has performed miracles:
Los Angeles home prices performed similar feat, doubling from 2002 to July 2006, before giving up two-thirds of those gains, then soaring once again. The index is now 3% above the peak of totally insane Housing Bubble 1:
New York City condo bubble never saw the crash in its full bloom. Prices are now 19% above the peak of the prior bubble (Feb. 2006). Over the past 15 years, the index has soared 112%:
While the monetary policies of the past eight years have had no impact on wage inflation in the US, and only moderate impact on consumer price inflation, they’ve been a rip-roaring success in creating asset price inflation.
Asset price inflation means that the dollar loses its value when it comes to buying assets. Wage earners, when they’re trying to buy assets today – not just homes but any type of asset, including buying into retirement plans – are finding out that their labor is buying only a fraction of the assets that their labor could buy eight years ago. This is how these monetary policies have crushed the value of labor.
So what do you do when the bubbly market for your exorbitantly priced New York City commercial real estate collapses by over 50% in two years? Well, you lever up, of course.
AsBloombergnotes this morning, the ‘smart money’ at U.S. banking institutions are tripping over themselves to throw money at commercial real estate projects all while ‘dumb money’ buyers have completely dried up.
A growing chasm between what buyers are willing to pay and what sellers think their properties are worth has put the brakes on deals. In New York City, the largest U.S. market for offices, apartments and other commercial buildings, transactions in the first half of the year tumbled about 50 percent from the same period in 2016, to $15.4 billion, the slowest start since 2012, according to research firm Real Capital Analytics Inc.
At the same time, the market for debt on commercial properties is booming. Investors of all stripes — from banks and insurance companies to hedge funds and private equity firms — are plowing into real estate loans as an alternative to lower-yielding bonds. That’s giving building owners another option to cash in if their plans to sell don’t work out.
“Sellers have a number in mind, and the market is not there right now,” said Aaron Appel, a managing director at brokerage Jones Lang LaSalle Inc. who arranges commercial real estate debt. “Owners are pulling out capital” by refinancing loans instead of finding buyers, he said.
But don’t concern yourself with talk of bubbles because Scott Rechler of RXR would like for you to rest assured that the lack of buyers is not at all concerning…they’ve just “hit the pause button” while they wander out in search of the ever elusive “price discovery.”
At 237 Park Ave., Walton Street Capital hired a broker in March to sell its stake in the midtown Manhattan tower, acquired in a partnership with RXR Realty for $810 million in 2013. After several months of marketing, the Chicago-based firm opted instead for $850 million in loans that value the 21-story building at more than $1.3 billion, according to financing documents. The owners kept about $23.4 million.
“The basic trend is you have a really strong debt market and a sales market that has hit the pause button while it seeks to find price discovery,” said Scott Rechler, chief executive officer of RXR.
The debt market has become so appealing that landlords are looking at mortgage options while simultaneously putting out feelers for buyers, said Rechler, whose company owns $15 billion of real estate throughout New York, New Jersey and Connecticut. That’s a departure for Manhattan’s property owners, who in prior years would pursue one track at a time, he said.
Of course, this isn’t just a NYC phenomenon as sales of office towers, apartment buildings, hotels and shopping centers across the U.S. have been plunging since reaching $262 billion nationally in 2015, just behind the record $311 billion of real estate that changed hands in 2007, according to Real Capital. Property investors are on the sidelines amid concern that rising interest rates will hurt values that have jumped as much as 85 percent in big cities like New York, compounded by overbuilding and a pullback of the foreign capital that helped power the recent property boom.
The tough sales market has put some property owners in a bind — most notably Kushner Cos., which has struggled to find partners for 666 Fifth Ave., the Midtown tower it bought for a record price in 2007. The mortgage on the building will need to be refinanced in 18 months.
Thankfully, at least someone interviewed by Bloomberg seemed to be grounded in reality with Jeff Nicholson of CreditFi saying that it just might be a “red flag” that buyers have completely abandoned the commercial real estate market at the same time that owners are massively levering up to take cash out of projects.
Some lenders view seeking a loan to take money off the table as a red flag, according to Jeff Nicholson, a senior analyst at CrediFi, a firm that collects and analyzes data on real estate loans. It may signal the borrower is less committed to the project, and makes it easier to walk away from the mortgage if something goes wrong, he said.
College graduates and other young Americans are increasingly clustering in urban centers like New York City, Chicago and Boston. And now, American companies are starting to follow them. Companies looking to appeal to, and be near, young professionals versed in the world of e-commerce, software analytics, digital engineering, marketing and finance are flocking to cities. But in many cases, they’re leaving their former suburban homes to face significant financial difficulties, according tothe Washington Post.
Earlier this summer, health-insurer Aetna said it would move its executives, plus most of technology-focused employees to New York City from Hartford, Conn., the city where the company was founded, and where it prospered for more than 150 years.GE said last year it would leave its Fairfield, Conn., campus for a new global headquarters in Boston. Marriott International is moving from an emptying Maryland office park into the center of Bethesda.
Meanwhile, Caterpillar is moving many of its executives and non-manufacturing employees to Deerfield, Ill. from Peoria, Ill., the manufacturing hub that CAT has long called home. And McDonald’s is leaving its longtime home in Oak Brook, Ill. for a new corporate campus in Chicago.
“Visitors to the McDonald’s wooded corporate campus enter on a driveway named for the late chief executive Ray Kroc, then turn onto Ronald Lane before reaching Hamburger University, where more than 80,000 people have been trained as fast-food managers.
Surrounded by quiet neighborhoods and easy highway connections, this 86-acre suburban compound adorned with walking paths and duck ponds was for four decades considered the ideal place to attract top executives as the company rose to global dominance.
Now its leafy environs are considered a liability. Locked in a battle with companies of all stripes to woo top tech workers and young professionals, McDonald’s executives announced last year that they were putting the property up for sale and moving to the West Loop of Chicago where “L” trains arrive every few minutes and construction cranes dot the skyline.”
The migration to urban centers, according toWaPo,threatens the prosperity outlying suburbs have long enjoyed, bringing a dose of pain felt by rural communities and exacerbating stark gaps in earnings and wealth that Donald Trump capitalized on in winning the presidency.
Many of these itinerant companies aren’t really moving – or at least not entirely. Some, like Caterpillar, are only moving executives, along with workers involved in technology and marketing work, while other employees remain behind.
“Machinery giant Caterpillar said this year that it was moving its headquarters from Peoria to Deerfield, which is closer to Chicago. It said it would keep about 12,000 manufacturing, engineering and research jobs in its original home town. But top-paying office jobs — the type that Caterpillar’s higher-ups enjoy — are being lost, and the company is canceling plans for a 3,200-person headquarters aimed at revitalizing Peoria’s downtown.”
Big corporate moves can be seriously disruptive for a cohort of smaller enterprises that feed on their proximity to big companies, from restaurants and janitorial operations to other subcontractors who located nearby. Plus, the cancellation of the new headquarters was a serious blow. Not to mention the rollback in public investment.
“It was really hard. I mean, you know that $800 million headquarters translated into hundreds and hundreds of good construction jobs over a number of years,” Peoria Mayor Jim Ardis (R) said.
For the village of Oak Brook, being the home of McDonald’s has always been a point of pride. Over the year’s the town’s brand has become closely intertwined with the company’s. But as McDonald’s came under pressure to update its offerings for the Internet age, it opened an office in San Francisco and a year later moved additional digital operations to downtown Chicago, strategically near tech incubators as well as digital outposts of companies that included Yelp and eBay. That precipitated the much larger move it is now planning to make.
“The village of Oak Brook and McDonald’s sort of grew up together. So, when the news came, it was a jolt from the blue — we were really not expecting it,” said Gopal G. Lalmalani, a cardiologist who also serves as the village president.
Lalmalani is no stranger to the desire of young professionals to live in cities: His adult daughters, a lawyer and an actress, live in Chicago. When McDonald’s arrived in Oak Brook, in 1971, many Americans were migrating in the opposite direction, away from the city. In the years since, the tiny village’s identity became closely linked with the fast-food chain as McDonald’s forged a brand that spread across postwar suburbia one Happy Meal at a time.
“It was fun to be traveling and tell someone you’re from Oak Brook and have them say, ‘Well, I never heard of that,’ and then tell them, ‘Yes, you have. Look at the back of the ketchup package from McDonald’s,’ ” said former village president Karen Bushy. Her son held his wedding reception at the hotel on campus, sometimes called McLodge.
The village showed its gratitude — there is no property tax — and McDonald’s reciprocated with donations such as $100,000 annually for the Fourth of July fireworks display and with an outsize status for a town of fewer than 8,000 people.”
Robert Gibbs, the former White House press secretary who is now a McDonald’s executive vice president, said the company had decided that it needed to be closer not just to workers who build e-commerce tools but also to the customers who use them.
“The decision is really grounded in getting closer to our customers,” Gibbs said.
Some in Oak Brook have begun to invent conspiracy theories about why McDonald’s is moving, including one theory that the company is trying to shake off its lifetime employees in Oak Brook in favor of hiring cheaper and younger urban workers.
“The site of the new headquarters, being built in place of the studio where Oprah Winfrey’s show was filmed, is in Fulton Market, a bustling neighborhood filled with new apartments and some of the city’s most highly rated new restaurants.
Bushy and others in Oak Brook wondered aloud if part of the reasoning for the relocation was to effectively get rid of the employees who have built lives around commuting to Oak Brook and may not follow the company downtown. Gibbs said that was not the intention.
‘Our assumption is not that some amount [of our staff] will not come. Some may not. In some ways that’s probably some personal decision. I think we’ve got a workforce that’s actually quite excited with the move,’ he said.”
Despite Chicago’s rapidly rising murder rate and one would think its reputation as an indebted, crime-ridden metropolis would repel companies looking for a new location for their headquarters. But crime and violence rarely penetrate Chicago’s tony neighborhoods like the Loop, where most corporate office space is located.
“Chicago’s arrival as a magnet for corporations belies statistics that would normally give corporate movers pause. High homicide rates and concerns about the police department have eroded Emanuel’s popularity locally, but those issues seem confined to other parts of the city as young professionals crowd into the Loop, Chicago’s lively central business district.
Chicago has been ranked the No. 1 city in the United States for corporate investment for the past four years by Site Selection Magazine, a real estate trade publication.
Emanuel said crime is not something executives scouting new offices routinely express concerns about. Rather, he touts data points such as 140,000 — the number of new graduates local colleges produce every year.
“Corporations tell me the number one concern that t: Zerohey have — workforce,” he said.”
Chicago Mayor Rahm Emanuel said the old model, where executives chose locations near where they wanted to live has been upturned by the growing influence of technology in nearly every industry. Years ago, IT operations were an afterthought. Now, people with such expertise are driving top-level corporate decisions, and many of them prefer to live in cities.
“It used to be the IT division was in a back office somewhere,” Emanuel said. “The IT division and software, computer and data mining, et cetera, is now next to the CEO. Otherwise, that company is gone.”
The housing market is suffering from a supply shortage, not a demand dilemma. As Millennial first-time homebuyer demand continues to increase, the inventory of homes for sale tightens. At the same time, prices are increasing, so why aren’t there more homeowners selling their homes?
In most markets, the seller, or supplier, makes their decision about adding supply to the market independent of the buyer, or source of demand, and their decision to buy. In the housing market, the seller and the buyer are, in many cases, actually the same economic actor. In order to buy a new home, you have to sell the home you already own.
So, in a market with rising prices and strong demand, what’s preventing existing homeowners from putting their homes on the market?
“Existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate. It makes choosing a kitchen renovation seem more appealing than moving.”
The housing market has experienced a long-run decline in mortgage rates from a high of 18 percent for the 30-year, fixed-rate mortgage in 1981 to a low of almost 3 percent in 2012. Today, five years later, mortgage rates remain just a stone’s throw away from that historic low point. This long-run decline in rates encouraged existing homeowners to both move more often and to refinance more often, in many cases refinancing multiple times between each move.
It’s widely expected that mortgage rates will rise further. This is more important than we may even realize because the housing market has not experienced a rising rate environment in almost three decades! No longer is there a financial incentive to refinance for most homeowners, and there’s more to consider when moving. Why move when it will cost more each month to borrow the same amount from the bank? A homeowner can re-extend the mortgage term another 30 years to increase the amount one can borrow at the higher rate, but the mortgage has to be paid off at some point. Hopefully before or soon after retirement. Existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate. It makes choosing a kitchen renovation seem more appealing than moving.”
There is one more possibility caused by the fact that the existing-home owner is both seller and buyer. In today’s market, sellers face a prisoner’s dilemma, a situation in which individuals don’t cooperate with each other, even though it is seemingly in their best interest to do so.
Consider two existing homeowners. They both want to buy a new house and move, but are unable to communicate with each other. If they both choose to sell, they both benefit because they increase the inventory of homes available, and collectively alleviate the supply shortage. However, if one chooses to sell and the other doesn’t, the seller must buy a new home in a market with a shortage of supply, bidding wars and escalating prices. Because of this risk, neither homeowner sells (non-cooperation) and neither get what they wanted in the first place – a move to a new, more desirable home. Imagine this scenario playing out across an entire market. If everyone sells there will be plenty of supply. But, the risk of selling when others don’t convinces everyone not to sell and produces the non-cooperative outcome.
Owner moves, but pays a price escalated by supply shortages for a more desirable home
Owner stays in current house and does not get a more desirable home
Owner moves, finding a more desirable home without paying a price escalated by supply shortages
Rising mortgage rates and the fear of not being able to find something affordable to buy is imprisoning homeowners and causing the inventory shortages that are seen in practically every market across the country. So, what gives in a market short of supply relative to demand? Prices.According to the First American Real House Price Index, the fast pace of house price growth, combined with rising rates, has had a material impact on affordability. In our most recent analysis in April, affordability was down 11 percent compared to a year ago. It was once said that a man’s home is his castle. In today’s market, a man’s home may be his prison, but he is getting wealthier for it.
With about 150 projects starting this year or in the pipeline just in the core of the city, construction is as frenzied as ever.
(The Seattle Times) For the second year in a row, Seattle has been named the crane capital of America — and no other city is even close, as the local construction boom transforming the city shows no signs of slowing.
Seattle had 58 construction cranes towering over the skyline at the start of the month, about 60 percent more than any other U.S. city, according to a new semiannual count from Rider Levett Bucknall, a firm that tracks cranes around the world.
The designation has come to symbolize — for better or worse —the rapid growthand changing nature of the city, as mid-rises and skyscrapers pop up where parking lots and single-story buildings once stood.
And the title of most cranes might be here to stay, at least for a while. The city’sconstruction crazeis continuing at the same pace as last year, while cranes are coming down elsewhere: Crane counts in major cities nationwide have dropped 8 percent over the past six months.
During the last count, Seattle had just six more cranes than the next-highest city, Chicago. Now it holds a 22-crane lead over second-place Los Angeles, with Denver, Chicago and Portland just behind.
Seattle has more than twice as many cranes as San Francisco or Washington, D.C., and three times as many cranes as New York. Seattle has more cranes than New York, Honolulu, Austin, Boston and Phoenix combined.
At the same time, Seattle’s construction cycle doesn’t look like it’s letting up. Just in the greater downtown region, 50 major projects are scheduled to begin construction this year, according to the Downtown Seattle Association. An additional 99 developments are in the pipeline for future years. And that’s on top of what is already thebusiest-period everfor construction in the city’s core.
“We continue to see a lot of construction activity; projects that are finishing up are quickly replaced with new projects starting up,” said Emile Le Roux, who leads Rider Levett Bucknall’s Seattle office. “We are projecting that that’s going to continue for at least another year or two years.”
“It mainly has to do with the tech industry expanding big time here in Seattle,” Le Roux said.
Companies that supply the tower cranes say there’sa shortage of both equipment and manpower, so developers need to book the cranesand their operators several months in advance. It costs up to about $50,000 a month to rent one, and they can rise 600 feet into the air.
Most cranes continue to be clustered in downtown and South Lake Union, but several other neighborhoods have at least one, from Ballard to Interbay and Capitol Hill to Columbia City.
As if things weren’t bad enough for America’s mall owners, what with the having to filling their retail space withhigh schools, grocers and churches, it seems that retailers have grown so uncertain about the future of these 1980s relics that they’re only willing to sign 1-2 year leases these days.
AsBloomberg points out this morning, leases renewals used to be 5-10 years in length but are increasingly only being signed with 1-2 year terms. Meanwhile, thousands of stores are closing each year and it’s only expected to get worse over time.
After more than a dozen bankruptcies this year contributed to thousands of store closures, visibility for the industry is so poor that retailers are pushing for lease renewals as short as a year or two — down from five to 10 years.
“You’re certainly seeing the renewals geared toward the shorter term, rather than the five-year renewal,” said Andrew Graiser, head of A&G Realty Partners. Retailers are now struggling to figure out how many stores they actually need, he added, and landlords are looking at them “with a much closer eye than they did before.”
Somewhere between 9,000 and 10,000 stores will close in the U.S. this year, said Garrick Brown, vice president of Americas retail research for commercial broker Cushman & Wakefield — more than twice as many as the 4,000 last year. He sees this figure rising to about 13,000 next year.
“Everyone’s trying to figure out where the bottom of the market’s going to be,” Brown said. He estimates it could occur in 2018 or early 2019.
Not surprisingly, retailers are finding it difficult to sign long-term leases in an environment where 26% of malls around the country are expected to close their doors over the next five years.
Further complicating the lease-length dilemma is the question of which shopping centers will still be around in a decade. Cushman & Wakefield’s Brown sees about 300 of 1,150 U.S. malls shutting down in the next five years.
Perry Mandarino, senior managing director and head of corporate finance at B. Riley & Co., predicts that retail bankruptcies and restructurings will further accelerate in 2018. Some of this will be the result of a long-overdue shakeout of the surfeit of U.S. store space, but the downturn is also compounded by shifts to online shopping and consumers spending on experiences rather than physical stuff, he said.
Meanwhile, landlords are trying to fight back, though it’s a fairly difficult task both arms tied behind their backs.
Landlords “have their backs against the wall, so they’ve been fighting back, hard,” he said. “What you have is a game of chicken up to the end.”
“With all this excess inventory, landlords are trying to do whatever they can to keep malls occupied,” Agran said. “The more empty spaces, the more difficult it is to attract new tenants.”
Frankly, it’s shocking that Abercrombie wouldn’t jump at the opportunity to scoop up some prime square footage in this mall…it already has the Chili’s awning and everything.
Banks have sharply pulled back on lending and have been tightening lending standards.
Banks are saying they see less demand so why are people saying demand is strong?
We live in a credit driven economy. Most know this to be the case. Individuals and corporations borrow money from banks for homes, cars, real estate projects and other investments. The availability for credit is perhaps the most important driver of economic growth, aside from income growth. Without credit, the economy grinds to a halt. It is not a surprise that banks have a desire to lend money when times are good and pull back lending when times are tough. This seems logical but when times are tough for consumers is exactly when they need credit to push forward with new marginal consumption.
Much of my research lately has been outlining the peak in the economic cycle that occurred in 2015. Many people misconstrue this for an imminent recession call or a stock market crash prediction when that simply is not the case.
The economy follows a sine curve. It peaks and troughs and for the most part follows a nice cyclical wave. Recessions occur when growth is negative but the “peak” of the cycle occurs well before the recession. They are not simultaneous events.
The sine wave below may help illustrate my point:
The most important point to understand is the elapsed time between the peak and the recession, where we live today.
Many confuse the “peak” of the cycle with the end of the cycle when in fact, across all economic cycles, the peak occurred about ~2 years prior to the recession. After the peak of the cycle is in, growth does continue, albeit at a slower pace. It is a dangerous assumption to make when critics of this analysis say we are still growing when we are growing at an ever slowing pace. When growth goes from 3% to -2%, let’s say, it has to hit 2%, 1%, 0%, etc. in the middle. That deceleration is what occurs between the peak and the recession.
There is a large population of investors and analysts that simply look at the nominal growth rate and say 2% is still okay, without regarding that the growth has gone from 3% to 2.5% to 2% and now lower.
The time to prepare for the end of the economic cycle is after the peak in the cycle has been established. The good news, like I said before, is you typically have two years after the peak to prepare yourself.
Preparing yourself does not mean buying canned foods and building a bunker as many raging bulls like to straw-man even the smallest critics into a “doom and gloom” scenario.
Preparing yourself in my view involves reducing equity exposure, raising cash, and increasing defensive exposure.
The good news is that you can still ride the gains of the lasting bull market with an asset allocation that is slightly more defensive. You may slightly under perform the last year or two of the bull market but if offered a scenario in which you gained 3% instead of 10% in the last year of the bull market and then gained another 3% instead of -10% in the following year, I would hope you’d pick the pair of 3% because that in fact leaves you with more money.
In a raging bull market some cannot stomach “leaving” that 7% (these are clearly arbitrary numbers used to make a point) on the table.
For the rest of the piece, I will use the banking loan growth and the banking surveys to prove the peak of the credit cycle is in and we are in a period of decelerating growth, falling down the back of the sine wave as I pointed out above. The recession is in sight despite how hard many want to avoid it.
I will also at the end run through the portfolio I began to recommend on May 1st that will prepare you for slowing growth but also allows you to share in the upside should the market continue higher.
So far, that portfolio is actually outperforming the S&P 500 with a negative correlation and lower volatility. I will go through this at the end.
The Peak in Credit is Behind Us, The Fat Lady is Singing
For the analysis of the credit peak, I will use two main economic reports. First is the “Assets and Liabilities of Commercial Banks” published by the Board of Governors of the Federal Reserve and the second is the Senior Loan Officer Survey also published by the Board of Governors of the Federal Reserve.
Assets and Liabilities
The “Assets and Liabilities” report is a weekly aggregate balance sheet for all commercial banks in the United States. The release also breaks down several banking groups. The most interesting part of the report is the breakdown of loan group in which you can see auto loans, real estate loans, consumer loans and much more.
Most importantly, this is hard data and not subject to sentiment, feeling or bias. Banks are either growing their loan books at a faster pace or a slower pace. This is perhaps one of the biggest economic signals. Banks would experience lower demand or credit issues and tighten up their loan books before that lack of credit leaks into the economy in the form of lower growth.
The following data from the Assets and Liabilities report will indicate just how much banks have reeled in their lending and prove the peak in credit growth is long gone.
All Commercial & Industrial Loans:
This is exactly as it sounds; all loans banks make, the broadest measure of credit availability. This is an aggregation of all the loans made by all the commercial banks in the survey. Currently this report aggregates 875 domestically chartered banks and foreign related institutions.
Rarely do I look at any data series in nominal terms, not year over year that is, but this chart does show the peaks in total credit fairly clearly. Credit rises week after week without ever slowing down. The only times when there was a pause, drop, or large deceleration in credit creation was during times of economic distress. Banks are fairly smart and they won’t lend if risk is too high, uncertainty is too great or credit quality is too low.
Many will speculate on the reason for a drop off in bank lending but the reason truthfully isn’t that important.
The growth rate in total credit shows you exactly when the fat lady began to sing on loan growth.
The question is not whether credit growth has peaked, that is clear. Credit growth is also never negative without a recession and we are getting dangerously close to that. If the prevailing sentiment is that demand is high, why are banks pulling back lending at a record pace?
The rate of the drop in credit growth has been accelerating. Some may point to the current administration and the uncertainty surrounding policy changes but I would push back and say that growth peaked and was falling since 2015, far before this political scenario.
It is very critical to look at the above loan growth chart in the context of the sine curve at the beginning of this piece. If negative growth is a sign of recession, I think you’d be crazy not to shift defensive. Don’t sell all stocks, just know where you are in the cycle.
This is the broadest measure of all credit, so what is the specific sector that is causing the aggregate loan growth to plummet.
The context of the cycle is clear in the above chart so for all the specific loan sectors going forward I will focus on this cycle only from 2009 through today. The report is also on a weekly basis. If a data series does not start from 2009 or prior, that is because that is all the data available as some series began in 2014.
Real Estate Loans:
Credit growth in the real estate sector peaked later than overall credit but has certainly registered its highest growth of the cycle.
Real estate clearly does well in times of credit expansion and less so during times of credit growth contraction.
Mapping home price growth from the Case-Shiller Home Price Index over real estate loan growth should highlight the importance of credit growth for real estate and the dangers of disregarding its rollover.
Not surprisingly, there is a high correlation between real estate loan growth and home price growth. Just briefly skipping ahead (will return to this) the Senior Loan officer survey also shows that banks are claiming lower demand for real estate loans; mortgages and more specifically, commercial real estate.
It is hard to overstate the importance of this, specifically the commercial real estate demand. People claim “demand is booming” or something of the sort but banks, the ones who actually make the loans, are claiming demand for real estate loans is the weakest since just before the last housing crisis. Again, not making that call but this drop in loan growth and demand is telling a far different story than those who claim demand is through the roof.
Consumer Loans: Credit Cards:
Consumer loan growth in the credit card space are following trend with the rest of loan growth, still growing but decelerating and months past peak.
With credit card growth rolling over, in order to keep up with the same consumption, consumers need to spend their income. The problem is income growth is falling as well.
Total real aggregate income is near its lowest level of the cycle.
With loan growth slowing and income growth slowing, where is the marginal consumption going to come from? With this data in hand, it should not some as a surprise that GDP growth has gone from 2% to 1% and sub 1% as of the latest Q1 reading.
What are banks saying about consumer demand?
Across all categories banks are reporting weaker demand. Again, where is the strong demand that everyone keeps talking about? It is not showing up in loan growth data or in banking demand surveys.
I will reiterate this point continually; loans are still growing and income is still growing but at a slower pace and past peak pace. This should put into context where we are in the broader economic cycle.
Unfortunately, the auto loan data started in 2015 so there is no previous cycle to use for comparison. Nevertheless, the peak in auto loan growth occurred in the summer of 2016, and like other credit, has been declining to its lowest level of the cycle.
Not much more needs to be discussed on auto loans that is not widely covered in the media. Subprime auto loans and sky-high inventories are a massive issue. In fact, auto inventories are the highest they’ve been since the Great Recession.
The goal here is not to predict a subprime auto loan issue but rather to point out yet another area of growth that is slowing to its lowest level of the cycle.
Commercial Real Estate:
While the peak in commercial real estate loan growth is in as well, the peak occurred later than the aggregate index. CRE loan growth topped out in 2016 while the aggregate loan growth peaked closer to the beginning of 2015.
As I pointed out above, banks are sending a serious warning sign on the commercial real estate market.
The senior loan survey shows a triple threat of warning signs from the banks. They are claiming falling demand, tighter lending standards and uncertainty about future prices.
The following is an excerpt from the senior loan survey on commercial real estate:
A warning from the banks.
The fat lady has been singing on credit growth…So what do you do?
How To Prepare
On May 1st, I put out a recommended portfolio that the average investor can follow. The portfolio is a take on Ray Dalio’s All Weather portfolio.
I strongly believe peak growth is behind us, and when that happens, growth decelerates until the eventual recession. I am not in the game of predicting the exact date of the next recession.
I do not want to be long the market or short the market per se.
The best way to phrase my positioning is I want to be long growth slowing.
The portfolio I recommended (and will continue to update and change asset allocation on a weekly basis. Follow my SA page for continued updates) was the following:
(All analysis on this portfolio is from the time of recommendation, May 1st, to the time of this writing on May 18).
I use SCHD in my analysis as I mentioned I would choose this over SPY for additional safety but either one is fine.
Since the recommendation, the portfolio is up an excess of 0.96% above the S&P 500 with under 2/3 the volatility and a negative correlation.
The weighted beta of this portfolio, given the asset allocations above, is 0.02. This portfolio is nearly exactly market neutral and has a yield of around 2.5%, above the S&P 500. This portfolio protects you in all scenarios. If the stock market continues to rise, your portfolio should rise just slightly and you should continue to clip a nice coupon.
Should the market fall, the bond allocation will provide safety and stability to the portfolio. A portfolio like this allows you to weather the bumpy ride, stay invested, and continue to clip a dividend yield.
Of course, this is not an exact science and past performance is no indication of future results. Also, those who chose to follow a defensive, yet still net long, portfolio such as the one above can replace SPY or SCHD with their favorite basket of stocks. The reason I chose the ETF was for simplicity.
The percentages above are what I feel are best for the current environment we are in. It will allow me to share partially in the upside while mitigating my downside. At the end of the day, the most important thing is to protect capital.
If you want more equity beta, reduce TLT exposure and raise SPY exposure (or your favorite stocks).
This portfolio is the best way in my opinion to not be long, not be short, but be neutral and long growth slowing.
I will continue to update this portfolio and rotate asset allocation as the economic data changes and my positioning becomes more bullish or bearish.
Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in TLT, GLD, IEF over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Sen. Dianne Feinstein’s husband, Richard Blum, could bag $1 billion in commissions for his company from a government plan to sell 56 US Postal Service buildings.
As theNew York Postnotes, “Blum’s company, CBRE, was selected in March 2011 as the sole real estate agent on sales expected to fetch $19 billion. Most voters didn’t notice that Blum is a member of CBRE’s board and served as chairman from 2001 to 2014.”
Feinstein’s office denies that she had anything to do with the USPS decision.
This is not the first time Feinstein and her husband have come under fire for engaging incrony capitalism.
In 2013, a construction group partially owned by Blum’s investment firm scored aconstruction contractfor California’s high-speed rail project valued at $985,142,530.
U.S. home inventory tumbled to a new low in the first quarter of 2017, falling for eight consecutive quarters. Homebuyers have now been stifled by low inventory for the last two years despite prices rising to pre-recession highs in many markets.
In this edition of Trulia’s Inventory and Price Watch, we examine how home value recovery may be limiting supply in markets that have recovered most. We find that homebuyers in markets with the biggest gains are facing the tightest supply.
The Trulia Inventory and Price Watch is an analysis of the supply and affordability of starter homes, trade-up homes, and premium homes currently on the market. Segmentation is important because home seekers need information not just about total inventory, but also about inventory in the price range they are interested in buying. For example, changes in total inventory or median affordability don’t provide first-time buyers useful information about what’s happening with the types of homes they’re likely to buy, which are predominantly starter homes.
Looking at the housing stock nationally and in the 100 largest U.S. metros from Q1 2012 to Q1 2017, we found:
Nationally, the number of starter and trade-up homes continues drop, falling 8.7% and 7.9% respectively, during the past year, while inventory of premium homes has fallen by just 1.7%;
The persistent and disproportional drop in starter and trade-up home inventory is pushing affordability further out of reach of homebuyers. Starter and trade-up homebuyers need to spend 2.9% and 1.6% more of their income than this time last year, whereas premium homebuyers only need to shell out 0.9% more of their income;
A strong recovery may be partly to blame for the large drop in inventory some markets have experienced over the past five years. On average, the more valuable a market’s housing is compared to pre-recession levels, the larger drop in inventory it is has seen.
2017 Ushers in a Dramatic Shortage of Homes
Nationally, housing inventory dropped to its lowest level on record in 2017 Q1. The number of homes on the market dropped for the eighth consecutive quarter, falling 5.1% over the past year. In addition:
The number of starter homes on the market dropped by 8.7%, while the share of starter homes dropped from 26.1% to 25.9%. Starter homebuyers today will need to shell out 2.9% more of their income towards a home purchase than last year;
The number of trade-up homes on the market decreased by 7.9%, while the share of trade-up homes dropped from 23.9% to 23%. Trade-up homebuyers today will need to pay 1.6% more of their income for a home than last year;
The number of premium homes on the market decreased by 1.7%, while the share of premium homes increased from 50% to 51%. Premium homebuyers today will need to spend 0.6% more of their income for a home than last year.
How and Where a Strong Housing Market May Be Hurting Inventory
In the first edition of ourreport, we provided a few reasons why inventory is low: (1) investors bought up much of the foreclosure home inventory during the financial crisis and turned them into rental units, (2) price spread – that is, when prices of homes in different segments of the housing market diverge from each other – makes it difficult for existing homeowners to tradeup to the next the segment, and (3) slow home value recovery was making it difficult for some homeowners to break even on their homes. While there isevidencethat investors indeed converted owner-occupied homes into rentals as well as evidence from our first report that increasing price spread is correlated with decreases in inventory, little work has examined how home value recovery affects inventory. This is perhaps due to the tricky conceptual relationship between home values and inventory: too little recovery might make it difficult for homeowners to sell their home but cheap to buy one, while too much recovery might make it easy for them to sell but difficult to buy.
In fact, we find a negative correlation between how much a housing market has recovered and how much inventory has changed over the past five years. Using the current value of the housing market relative to the peak value as our measure of recovery, we find markets with greater home value recovery have experienced larger decreases in inventory over the past five years. The linear correlation was moderate (-0.36) and statistically significant. We also found that markets with the strongest recovery, on average, have experienced the largest decreases in inventory.
For example, the five-year average change in inventory of housing markets currently valued below their pre-recession peak (< 95% of peak value) isn’t that different from ones that have recovered to 95% – 105% of their peak. (-27.6% vs. -30.1%). However, the average change in inventory in well-recovered markets (> 105%) is 0more drastic at -45.4%.
The disparity also persists when looking at changes in inventory within each segment, although the difference is largest for starter homes. On average, markets with less than 95% recovery or 95% to 105% recovery had a 34.2% and 31.7% decrease in starter inventory, while markets with more than 105% home value recovery had a whopping 58.2% drop. These findings suggest that a moderate home value recovery doesn’t affect inventory much, but a strong recovery does and impacts inventory of starter homes the most.
As with all price control schemes, rent control will serve only to make housing affordable to a small sliver of the population while rendering housing more inaccessible to most.
Specifically, city activists hope that a new bill in the state legislature, AB1506,will allow local governments, Los Angeles included, to expand the number of units covered by rent control laws while also restricting the extent to which landlords can raise rents.
Currently, partial rent control is already in place in Los Angeles and landlords there are limited in how much they can raise rents on current residents. However,according to LA Weekly, landlords are free to raise rents to market levels for a unit once that unit turns over to new residents.
This creates a situation of perverse incentives that do a disservice to both renters and landlords. Under normal circumstances, landlords want to minimize turnover among renters because it is costly to advertise and fill units, and it’s costly to prepare units for new renters. (Turnover is also costly and inconvenient for renters.)
By limiting rent growth for ongoing renters, however, this creates an incentive for landlords to break leases with residents — even residents who the landlords may like — just so the landlords can increase rents for new incoming renters in order to cover their costs of building maintenance and improvements. The only upside to this current regime is that at least this partial loophole still allows for some profit to be made, and thus allows for owners to produce and improve housing some of the time.
But, if this loophole is closed, as the “affordable housing” activists hope to do, we can look forward to even fewer housing units being built, current units falling into disrepair, and even less availability of housing for residents.
Why Entrepreneurs Bring Products to Market
The reason fewer units will be built under a regime of harsher rent control, is because entrepreneurs (i.e., producers) only bring goods and services to market if they can be produced at a cost below the market price.
In fact, producers are at the mercy of the renters who — in the absence of price controls — determine the price level at which entrepreneurs must produce housing before they can expect to make any profit.
However, when governments dictate that rent levels must be below what would have been market prices — and also below the level at which new units can be produced and maintained — then producers of housing will look elsewhere.
Henry Hazlittexplainsmany of the distortions and bizarre incentives that emerge from price control measures:
The effects of rent control become worse the longer the rent control continues. New housing is not built because there is no incentive to build it. With the increase in building costs (commonly as a result of inflation), the old level of rents will not yield a profit. If, as often happens, the government finally recognizes this and exempts new housing from rent control, there is still not an incentive to as much new building as if older buildings were also free of rent control. Depending on the extent of money depreciation since old rents were legally frozen, rents for new housing might be ten or twenty times as high as rent in equivalent space in the old. (This actually happened in France after World War II, for example.) Under such conditions existing tenants in old buildings are indisposed to move, no matter how much their families grow or their existing accommodations deteriorate.
Rent control … encourages wasteful use of space. It discriminates in favor of those who already occupy houses or apartments in a particular city or region at the expense of those who find themselves on the outside. Permitting rents to rise to the free market level allows all tenants or would-be tenants equal opportunity to bid for space.
Nor surprisingly, when we look into the current rent-control regime in Los Angeles, we find that newer housing is exempt, just as Hazlitt might have predicted. Unfortunately, housing activists now seek to eliminate even this exemption, and once these expanded rent controls are imposed, those on the outside won’t be able to bid for space in either new or old housing.
Newcomers will be locked out of all rent-controlled units — on which the current residents hold a death grip — and they can’t bid on the units that were never built because rent control made new housing production unprofitable. Thus, as rent control expands, the universe of available units shrinks smaller and smaller. Renters might flee to single-family rental homes where rent increases might still be allowed, or they might have to move to neighboring jurisdictions that might not have rent controls in place.
In both cases, the effect is to reduce affordability and choice. By pushing new renters toward single-family homes this makes single-family homes relatively more profitable than multi-family dwellings, thus reducing density, and robbing both owners and renters of the benefits of economies of scale that come with higher-density housing. Also, those renters who would prefer the amenities of multi-family communities are prevented from accessing them. Meanwhile, by forcing multi-family production into neighboring jurisdictions, this increases commute times for renters while forcing them into areas they would have preferred not to live in the first place.
But, then again, for many local governments — and the residents who support them — fewer multi-family units, lower densities, and fewer residents in general, are all to the good. After all, local government routinely prohibit developers from developing more housing through zoning laws, regulation of new construction, parking requirements, and limitations on density.
And these local ordinances, of course, are the real cause of Los Angeles’s housing crisis. Housing isn’t expensive in Los Angeles because landlords are greedy monsters who try to exploit their residents. Housing is expensive because a large number of renters are competing for a relatively small number of housing units.
And why are there so few housing units? Because the local governments usually drive up the cost of housing. Asthis reportfrom UC Berkeley concluded:
In California, local governments have substantial control over the quantity and type of housing that can be built. Through the local zoning code, cities decide how much housing can theoretically be built, whether it can be built by right or requires significant public review, whether the developer needs to perform a costly environmental review, fees that a developer must pay, parking and retail required on site, and the design of the building, among other regulations. And these factors can be significant – a 2002 study by economists from Harvard and the University of Pennsylvania found strict zoning controls to be the most likely cause of high housing costs in California.
Contrary to what housing activists seem to think, declaring that rents shall be lower will not magically make more housing appear. Put simply, the problem of too little housing — assuming demand remains the same — can be solved with only one strategy: producing more housing.
Rent control certainly won’t solve that problem, and if housing advocates need to find a reason why so little housing is being built, they likely will need to look no further than the city council.
One of the most significant financial trends to sweep the country is more of a hit with homeowners than refinance mortgage lenders.
Logically, it sure seems as though a loan application which shows extra income through short-term room rentals would be a winner, something that would greatly please mortgage lenders.
The catch is that it’s not a sure thing, and in some cases, room rentals could actually be a negative.
New Trend Creates Uncertainty
Across the country, a number of electronic platforms now allow those with extra space to provide short-term housing.
National services such as Airbnb, Flipkey, HomeAway and VRBO are at the heart of this new business, one which takes an idle asset – that unused mother-in-law suite or extra bedroom – and puts it to use.
The result is that many homeowners are now getting cash for their quarters, money that can help with monthly bills and even mortgage payments.
At first, short-term home rentals seem like a win-win business proposition: the homeowner earns income while the traveler gets space for a few days, space that might be a lot cheaper than standard-issue hotel rooms.
The catch is that although the cash earned from short-term rentals is real, it may not automatically count on a mortgage application.
Home Rentals And Your Refinance Mortgage
For a very long time, there has been a business which offers short-term rentals — the hotel industry. Like most industries, it has not been shy about seeking legal protections for its products and services.
Check the local rules for virtually all jurisdictions, and you will find laws on the books which prohibit unlicensed short-term rentals or leases of fewer than 30 days.
These laws are largely unenforced, but that is changing. According to the New York Post, on October 21, 2016, New York Governor Cuomo signed a bill that would impose fines of up to $7,500 against hosts who posted short-term rentals. A California couple who had already paid $2,081 for their room found themselves with nowhere to stay when another resident reported their host to the authorities.
Rental Income: Is It Reported?
For lenders, the new surge in short-term rentals raises a number of issues. The money is nice, and congratulations on that, but whether such funds can be counted in a refinance home loan application is uncertain. Here’s why:
First, the lender will want to see that the rental income has been reported on tax returns. If income is not reported, it doesn’t usually count.
Note that if you report short-term rental income, it may not be taxable, depending on how many nights the property was rented. See a tax professional for details.
Is It Legal?
Second, if the income is reported, was it legally obtained? Here we get back to those sticky local rules that ban short-term rentals.
Lenders like to see income that’s ongoing, because mortgages tend to be lengthy obligations lasting 15 or 30 years.
If cash is coming from unlicensed room rentals, there is the possibility that the money might be cut off at any moment by an irate neighbor who reports the matter to local authorities.
Is It Your Primary Residence?
Third, is the property a residence? Mortgage lenders generally are in the business of financing homes with one-to-four units, and the best refinance rates go to those being used as primary residences.
New York state found that six percent of the units it studied captured almost 40 percent of the private short-term rental income.
In other words, some properties did a lot of short term rentals, a volume which will make lenders wonder whether the property is a comfy residence or an unlicensed hotel.
It’s not just lenders who will have such questions. The property will have to be appraised and that’s where problems are likely to arise.
Home, Sweet Boarding House?
Francois (Frank) K. Gregoire, an appraiser based in St. Petersburg and a nationally-recognized valuation authority, notes that “a room rental situation, depending on the number of rooms, may shift the use of the property from single or multifamily to a business use, such as a hotel or rooming house.
“If there are more than four units, the property is outside the one to four units certified residential appraisers are permitted to appraise, and outside the one to four unit limitation for loan purchase by Fannie and Freddie.”
The Future Of Short-Term Rentals
While the current situation is muddled and puzzled, there’s a very great likelihood that short-term home rentals will be increasingly legitimatized.
In the same way that Uber has disrupted the traditional cab industry, the odds are that the same thing will happen with short-term rentals. The reason is that the private rental rules now on the books were passed when no one cared and are largely unenforced.
Now, the landscape has changed. A very large number of homeowners want to be in the short-term rental business, or are at least disinclined to report their neighbors.
The police surely don’t want to break into homes in search of paying guests, and state and local lawmakers really want homeowner votes.
Be Careful Out There
For the moment, homeowners with an interest in earning a few extra dollars from short-term home rentals should get advice and counsel from a local real estate attorney before signing up guests.
In addition, speak with your insurance broker to assure that you have adequate coverage. Some policies allow short-term rentals, some do not, and there are differing definitions regarding what is or is not an allowable short-term rental.
CFPB orders Prospect Mortgage to pay $3.5 million for improper mortgage referrals
Regulator calls alleged activity a “kickback” scheme
The Consumer Financial Protection Bureau today ordered Prospect Mortgage, a major mortgage lender, to pay a $3.5 million fine for improper mortgage referrals, in what the regulator calls an alleged “kickback” scheme.
The lender paid illegal kickbacks for mortgage business referrals. But Prospect Mortgage isn’t the only one being fined. The CFPB also dealt out penalties to two real estate brokers and a mortgage servicer who took kickbacks from Prospect. These three will pay a combined total of $495,000 in consumer relief, repayment of ill-gotten gains and penalties.
“Today’s action sends a clear message that it is illegal to make or accept payments for mortgage referrals,” CFPB Director Richard Cordray said. “We will hold both sides of these improper arrangements accountable for breaking the law, which skews the real estate market to the disadvantage of consumers and honest businesses.”
Here are three reasons the CFPB said it is fining Prospect Mortgage:
Paid for referrals through agreements:
Prospect maintained various agreements with over 100 real estate brokers, including ReMax Gold Coast and Keller Williams Mid-Willamette, which served primarily as vehicles to deliver payments for referrals of mortgage business. Prospect tracked the number of referrals made by each broker and adjusted the amounts paid accordingly. Prospect also had other, more informal, co-marketing arrangements that operated as vehicles to make payments for referrals.
Paid brokers to require consumers – even those who had already prequalified with another lender – to pre-qualify with Prospect:
One particular method Prospect used to obtain referrals under their lead agreements was to have brokers engage in a practice of “writing in” Prospect into their real estate listings. “Writing in” meant that brokers and their agents required anyone seeking to purchase a listed property to obtain pre-qualification with Prospect, even consumers who had pre-qualified for a mortgage with another lender.
Split fees with a mortgage servicer to obtain consumer referrals:
Prospect and Planet Home Lending had an agreement under which Planet worked to identify and persuade eligible consumers to refinance with Prospect for their Home Affordable Refinance Program mortgages. Prospect compensated Planet for the referrals by splitting the proceeds of the sale of such loans evenly with Planet. Prospect also sent the resulting mortgage servicing rights back to Planet.
Prospect is prohibited from future violations of the Real Estate Settlement Procedures Act, will not pay for referrals and will not enter into any agreements with settlement service providers to endorse the use of their services, according to the CFPB.
Three of the companies that accepted the illegal money, ReMax Gold Coast, Keller Williams Mid-Willamette and Planet Home Lending, were also fined by the CFPB. ReMax Gold Coast will pay $50,000 in civil money penalties, and Keller Williams Mid-Willamette will pay $145,000 in disgorgement and $35,000 in penalties. Under the consent order filed against Planet Home Lending, the company will directly pay harmed consumers a total of $265,000 in redress.
HousingWire reached out to Prospect Mortgage for comment, but has not yet received a reply. This article will be updated when and if we receive one.
2015 was a spectacular year for the commercial real estate market, and 2016 was a solid year. 2017, however, is likely to be a bit of wildcard, analysts say.
Despite a recent rise in interest rates and the uncertainty surrounding the new regime in Washington, market watchers are forecasting a good year for the market, with stable prices and lots of properties changing hands.
Still, it also could go the other way.
“If interest rates go up much more than they have, transaction volume might come down some more,” said Jim Costello, senior vice president with Real Capital Analytics (RCA). “If sellers aren’t forced to sell, they could just sit on the property for awhile until things look more favorable to them.”
Deal volume in 2016 dropped significantly compared to 2015 for properties valued over $2.5 million. Through November, the 2016 year-to-date transaction volume stood at $424.2 billion, which was down 10 percent compared to same 11-month period in 2015, RCA reported.
RCA’s numbers for the full-year in 2016 were not yet available, but it would take a huge month in December for 2016’s deal volume to match the 2015 levels. Transaction volume was trending down at the end of the year. In November, asset sales totaled $33.9 billion, which was down 6 percent compared to November 2015, RCA reported.
Sales in 2016 were still strong compared to previous years since the recovery. Year-to-date through November, the overall transaction volume in 2016 was 12 percent and 35 percent above the 2014 and 2015 levels, respectively.
2016 saw fewer large mega-deals involving multiple properties compared with 2015, but single-asset sales volume remained solid. “If anything, 2015 was almost an aberration,” Costello said. He was optimistic that sales volumes this year would run ahead of the 2016 pace. He noted that, outside a few pockets of the country, the commercial real estate market hasn’t generally seen a building boom that could flood the market with new space and weaken demand for pre-existing buildings.
The new year brings uncertainty, however. Costello said the higher interest rates could eventually lower property values, causing a standoff between buyers and sellers in 2017. Higher interest rates tend to lower commercial asset prices by driving up capitalization rates. Cap rates in all classes have been at historic lows, which have propelled the market forward in recent years.
Costello also said the policies of President-elect Donald Trump also are not fully known, but will ultimately have some impact on the market.
On the campaign trail, Trump proposed a huge infrastructure spending plan, which could lead to a significant rise in interest rates. However, Trump’s pro-growth tax policies also could spur more activity in the market, Costello said.
“The initial reaction of the market was that, well, President-elect Trump was talking about all these potentially inflationary policies, so we better be careful,” Costello said. “Will that come through? It remains to be seen. I am not sure that [House Speaker] Paul Ryan is going to be happy spending lots of money in a [New Deal-era] WPA-style jobs program for infrastructure. That was the thing that was thrown out there that was making the market spooked.”
Ken Riggs, president of Situs RERC, said that the market ended 2016 in a stable position, with prices perfectly matching the values. He said the performance of each property is highly dependent on its asset class and location, and varies widely. He doesn’t expect an overall market correction next year, although investors are growing more cautious with each passing year.
“There will be continued high interest for commercial real estate,” Riggs told Scotsman Guide News. “Investors will just have to be very selective, not only about the property types, but also where they invest within the capital stack.”
Nobody has any idea what will happen, or frankly, what is happening when dealing with artificial, centrally-planned markets …
When we first warned 8 days ago that in the last week of trading a “Red Flag For Markets Has Emerged: Pension Funds To Sell “Near Record Amount Of Stocks In The Next Few Days”, and may have to “rebalance”, i.e. sell as much as $58 billion of equity to debt ahead of year end, many scoffed wondering who would be stupid enough to leave such a material capital reallocation for the last possible moment in a market that is already dangerously thin as is, and in which such a size order would be sure to move markets lower, and not just one day.
Today we got the answer, and yes – pension funds indeed left the reallocation until the last possible moment, because three days after the biggest drop in the S&P in over two months, the equity selling persisted as the reallocation trade continued, leading to the S&P closing off the year with a whimper, not a bang, as Treasurys rose, reaching session highs minutes before the 1pm ET futures close when month-end index rebalancing took effect.
10Y yields were lower by 2bp-3bp after the 2pm cash market close, with the 10Y below closing levels since Dec. 8. Confirming it was indeed a substantial rebalancing trade, volumes surged into the futures close, which included a 5Y block trade with ~$435k/DV01 according to Bloomberg while ~80k 10Y contracts traded over a 3- minute period.
The long-end led the late rally, briefly flattening 5s30s back to little changed at 112.5bps. Month-end flows started to pick up around noon amid reports of domestic real money demand; +0.07yr duration extension was estimated for Bloomberg Barclays Treasury Index. Earlier, TSYs were underpinned by declines for U.S. equities that accelerated after Dec. Chicago PMI fell more than expected.
Looking further back, the Treasury picture is one of “sell in December 2015 and go away” because as shown in the chart below, the 10Y closed 2016 just shy of where it was one year ago while the 30Y is a “whopping” 4 bps wider on the year, and considering the recent drop in yields as doubts about Trumpflation start to swirl, we would not be surprised to see a sharp drop in yields in the first weeks of 2017. Already in Europe, German Bunds are back to where they were on the day Trump was elected.
So with a last minute scramble for safety in Treasures, it was only logical that stocks would slide, closing the year off on a weak note. Sure enough, the S&P500 pared its fourth annual gain in the last five years, as it slipped to a three-week low in light holiday trading, catalyzed by the above mentioned pension fund selling.
The day started off, appropriately enough, with a Dollar flash crash, which capped any potential gains in the USD early on, and while a spike in the euro trimmed the dollar’s fourth straight yearly advance, the greenback still closed just shy of 13 year highs, up just shy of 3% for the year.
Meanwhile, the year’s best surprising performing asset, crude, trimmed its gain in 2016 to 52%.
The S&P 500 Index cut its advance this year to 9.7 percent as it headed for the first three-days slide since the election. The Dow Jones Industrial Average was poised to finish the year 200 points below 20,000 after climbing within 30 points earlier in the week. It appears the relentless cheer leading by CNBC’s Bob Pisani finally jinxed the Dow’s chances at surpassing 20,000 in 2016. Trading volume was at least 34 percent below the 30-day average at this time of day. A rapid surge in the euro disturbed the calm during the Asian morning, as a rush of computer-generated orders caught traders off guard. That sent a measure of the dollar lower for a second day, trimming its rally this year below 3 percent.
Actually, did we say crude was the best performing asset of the year? We meant Bitcoin, the same digital currency which we said in September 2015 (when it was trading at $250) is set to soar as Chinese residents start using it more actively to circumvent capital controls, soared, and in 2016 exploded higher by over 120%.
For those nostalgic about 2016, the chart below breaks down the performance of major US indices in 2016 – what began as the worst start to a year on record, ended up as a solid year performance wise, with the S&P closing up just shy of 10%, with more than half of the gains coming courtesy of an event which everyone was convinced would lead to a market crash and/or recession, namely Trump’s election, showing once again that when dealing with artificial, centrally-planned market nobody has any idea what will happen, or frankly, what is happening.
Looking at the breakdown between the main asset classes, while 30Y TSYs are closing the year effectively unchanged, the biggest equity winners were financials which after hugging the flat line, soared after the Trump election on hopes of deregulation, reduced taxes and a Trump cabinet comprised of former Wall Streeters, all of which would boost financial stocks, such as Goldman Sachs, which single handedly contributed nearly a quarter of the Dow Jones “Industrial” Average’s upside since the election.
The FX world was anything but boring this year: while the dollar soared on expectations of reflation and recovery, the biggest moves relative to the USD belonged to sterling, with cable plunging after Brexit and never really recovering, while the Yen unexpectedly soared for most of the year, only to cut most of its gains late in the year, when the Trump election proved to be more powerful for Yen devaluation that the BOJ’s QE and NIRP.
The largely unspoken story of the year is that while stocks, if only in the US – both Europe and Japan closed down on the year – jumped on the back of the Trump rally, bonds tumbled. The problem is that with many investors and retirees’ funds have been tucked away firmly in the rate-sensitive space, read bonds, so it is debatable if equity gains offset losses suffered by global bondholders.
And speaking of the divergence between US equities and, well, everything else, no other chart shows the Trump “hope” trade of 2016 better than this one: spot thee odd “market” out.
So as we close out 2016 and head into 2017, all we can add is that the Trump “hope” better convert into something tangible fast, or there will be a lot of very disappointed equity investors next year.
And with that brief walk down the 2016 memory lane, we wish all readers fewer centrally-planned, artificial “markets” and more true price discovery and, of course, profits. See you all on the other side.
In its latest outlook for the U.S. lodging sector, CBRE Hotels’ Americas Research noted that the sector will continue to accrue benefits from achieving the industry’s all-time record occupancy record in 2016 of 65.4%.
However, a range of expected factors, from new hotel supply entering the market to the growing influence of Airbrb, is expected to impact hotel returns in 2017. CBRE forecasts the average daily rate (ADR) will increase 3.3% next year, a strong positive indicator but a lower ADR growth rate than in 2016, and a continuation of a trend since 2014.
According to CBRE, ADR movement will vary by location and chain-scale, with Northern California markets such as Sacramento and Oakland, along with Washington, D.C. and Tampa projected to lead the nation, with ADR gains of more than 6% during 2017.
“Conventional wisdom says that at such high occupancy levels, hoteliers should have the leverage to implement strong price increases,” notes R. Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research. “However, like for much of 2016, you need to throw conventional wisdom out the window.”
In fact, CBRE sees slight declines in occupancy combined with minimal real gains in ADR as the pattern through 2020.
“Lodging is a cyclical business and we continue to see U.S. hotels sit on top of the peak of the cycle after recovering from the Great Recession,” Woodworth said, adding that the positive outlook for lodging demand and resulting high levels of occupancy will continue to keep the sector on a steady but level path.
“While flat performance sounds disappointing, the strong underpinnings supporting continued growth in travel will prevent an outright fall from the peak,” Woodworth added.
For lodging REITs, the current cycle appears to be similar to the 1990s, during which a prolonged economic expansion sustained growth in revenue per available room (RevPAR) or nearly a decade, said Brian H. Dobson, REIT analyst for Nomura.
While lodging is entering the latter stages of its life cycle when RevPAR growth usually plateaus, supply headwinds in urban markets is expected to reduce RevPAR growth by an additional 100 basis points, resulting in 2% growth through 2018, Dobson said.
Chiming in with its hotel outlook, PricewaterhouseCoopers (PwC) said the lodging cycle is expected to moderate after seven years of growth. PwC analysts predicted supply growth will increase at the long-term historical average of 1.9%, but they forecast a decline in demand growth will lead to the first occupancy decline that the U.S. lodging industry has seen in eight years.
“Uncertainty, combined with plateauing growth in corporate profits, is expected to continue to weigh on corporate transient demand,” PwC said in its assessment.
“Additional demand-side concerns, including the strong U.S. dollar, Brexit, and economic weakness in the Eurozone, Zika, and depressed energy sector activity, are all expected to contribute to the continued weakness in lodging sector demand growth.”
The carnage in bonds has consequences. The average interest rate of the a conforming 30-year fixed mortgage as of Friday was quoted at 4.125% for top credit scores. That’s up about 0.5 percentage point from just before the election, according to Mortgage News Daily. It put the month “on a short list of 4 worst months in more than a decade.”
One of the other three months on that short list occurred at the end of 2010 and two “back to back amid the 2013 Taper Tantrum,” when the Fed let it slip that it might taper QE Infinity out of existence.
Investors were not amused. From the day after the election through November 16, they yanked $8.2 billion out of bond funds, the largest weekly outflow since Taper-Tantrum June.
The 10-year Treasury yield jumped to 2.36% in late trading on Friday, the highest since December 2015, up 66 basis point since the election, and up one full percentage point since July!
The 10-year yield is at a critical juncture. In terms of reality, the first thing that might happen is a rate increase by the Fed in December, after a year of flip-flopping. A slew of post-election pronouncements by Fed heads – including Yellen’s “relatively soon” – have pushed the odds of a rate hike to 98%.
Then in January, the new administration will move into the White House. It will take them a while to get their feet on the ground. Legislation isn’t an instant thing. Lobbyists will swarm all over it and ask for more time to shoehorn their special goodies into it. In other words, that massive deficit-funded stimulus package, if it happens at all, won’t turn into circulating money for a while.
So eventually the bond market is going to figure this out and sit back and lick its wounds. A week ago, I pontificated that “it wouldn’t surprise me if yields fall some back next week – on the theory that nothing goes to heck in a straight line.”
And with impeccable timing, that’s what we got: mid-week, one teeny-weeny little squiggle in the 10-year yield, which I circled in the chart below. The only “pullback” in the yield spike since the election. (via StockCharts.com):
Note how the 10-year yield has jumped 100 basis points (1 percentage point) since July. I still think that pullback in yields is going to happen any day now. As I said, nothing goes to heck in a straight line.
In terms of dollars and cents, this move has wiped out a lot of wealth. Bond prices fall when yields rise. This chart (via StockCharts.com) shows the CBOT Price Index for the 10-year note. It’s down 5.6% since July:
The 30-year Treasury bond went through a similar drubbing. The yield spiked to 3.01%. The mid-week pullback was a little more pronounced. Since the election, the yield has spiked by 44 basis points and since early July by 91 basis points (via StockCharts.com):
Folks who have this “risk free” bond in their portfolios: note that in terms of dollars and cents, the CBOT Price Index for the 30-year bond has plunged 13.8% since early July!
However, the election razzmatazz hasn’t had much impact on junk bonds. They’d had a phenomenal run from mid-February through mid-October, when NIRP refugees from Europe and Japan plowed into them, along with those who believed that crushed energy junk bonds were a huge buying opportunity and that the banks after all wouldn’t cut these drillers’ lifelines to push them into bankruptcy, and so these junk bonds surged until mid-October. Since then, they have declined some. But they slept through the election and haven’t budged much since.
It seems worried folks fleeing junk bonds, or those cashing out at the top, were replaced by bloodied sellers of Treasuries.
Overall in bond-land, the Bloomberg Barclays Global Aggregate bond Index fell 4% from Friday November 4, just before the election, through Thursday. It was, as Bloomberg put it, “the biggest two-week rout in the data, which go back to 1990.”
And the hated dollar – which by all accounts should have died long ago – has jumped since the election, as the world now expects rate hikes from the Fed while other central banks are still jabbering about QE. In fact, it has been the place to go since mid-2014, which is when Fed heads began sprinkling their oracles with references to rate hikes (weekly chart of the dollar index DXY back to January 2014):
The markets now have a new interpretation: Every time a talking head affiliated with the future Trump administration says anything about policies — deficit-funded stimulus spending for infrastructure and defense, trade restrictions, new tariffs, walls and fences, keeping manufacturing in the US, tax cuts, and what not — the markets hear “inflation.”
So in the futures markets, inflation expectations have jumped. This chart via OtterWood Capital doesn’t capture the last couple of days of the bond carnage, but it does show how inflation expectations in the futures markets (black line) have spiked along with the 10-year yield (red line), whereas during the Taper Tantrum in 2013, inflation expectations continued to head lower:
Inflation expectations and Treasury yields normally move in sync. And they do now. The futures markets are saying that the spike in yields and mortgage rates during the Taper Tantrum was just a tantrum by a bunch of spooked traders, but that this time, it’s real, inflation is coming and rates are going up; that’s what they’re saying.
In the last few months, as The Fed has jawboned a rate hike into markets, mortgage applications in America have collapsed 30% to 10-month lows – plunging over 9% in the last week as mortgage rates approach 4.00%.
We suspect the divergent surge in homebuilders is overdone…
Donald Trump’s victory sparked a tremendous sell-off in the Treasury market from an expectation of fiscal stimulus, but more broadly, from an expectation that a unified-party government can enact business-friendly policies (protectionism, deregulation, tax cuts) which will be inflationary and economically positive. It doesn’t take too much digging to show that the reality is different. The deluge of commentaries suggesting ‘big-reflation’ are short-sighted. Just as before last Tuesday we thought the 10yr UST yield would get below 1%, we still think this now.
History also doesn’t bode well for new Republican administrations. Certainly, the circumstances were varied, but of the five new Republican administrations replacing Democrats in the 19th and 20th centuries, four of them (Eisenhower, Nixon, Reagan, and George W. Bush) faced new recessions in their first year. The fifth, Warren Harding, started his administration within a recession.
Fiscal stimulus through infrastructure projects and tax cuts is now expected, but the Federal Reserve has been begging for more fiscal help since the financial crisis and it has been politically infeasible. The desire has not created the act. A unified-party government doesn’t make it any easier when that unified party is Republican; the party of fiscal conservatism. Many newer House of Representatives members have been elected almost wholly on platforms to reduce the Federal debt. Congress has gone to the wire several times with resistance to new budgets and debt ceilings. After all, the United States still carries a AA debt rating from S&P as a memento from this. Getting a bill through congress with a direct intention to increase debt will not be easy. As we often say, the political will to do fiscal stimulus only comes about after a big enough decrease in the stock market to get policy makers scared.
Also, fiscal stimulus doesn’t seem to generate inflation, probably because it is only used as a mitigation against recessions. After the U.S. 2009 Fiscal stimulus bill, the YoY CPI fell from 1.7% to 1% two years later. Japan has now injected 26 doses (link is external) of fiscal stimulus into its economy since 1990 and the country has a 0.0% YoY core CPI, and a 10yr Government bond at 0.0%.
Rate Sensitive World Economy
A hallmark of this economic recovery has been its reliance on debt to fuel it. The more debt outstanding, the more interest rates influence the economy’s performance. Not only does the Trump administration need low rates to try to sell fiscal stimulus to the nation, but the private sector needs it to survive. The household, business, and public sectors are all heavily reliant on the price of credit. So far, interest rates rising by 0.5% in the last two months is a drag on growth.
Global policies favoring low rates continue to be extended, and there isn’t any economic reason to abandon them. Just about every developed economy (US, Central Europe, Japan, UK, Scandinavia) has policies in place to encourage interest rates to be lower. To the extent that the rest of the world has lower rates than in the US, this continues to exert a downward force on Treasury yields.
As Japan knows and we are just getting into, aging demographics is an unmovable force against consumption, solved only with time. The percent of the population 65 and over in the United States is in the midst of its steepest climb. As older people spend less, paired with slowing immigration from the new administration, consumer demand slackens and puts downward pressure on prices.
We haven’t seen such a rush to judgement of boundless higher rates that we can remember. Its noise-level is correlated with its desire, not its likelihood. While we cannot call the absolute top of this movement in interest rates, it is limited by these enduring factors and thus, we think it is close to an end. In a sentence, not only will the Trump-administration policies not be enacted as imagined, but even if they were, they won’t have the net-positive effect that is hoped for. We think that a 3.0% 30yr UST is a rare opportunity buy.
The California housing market is expected to grow increasingly un-affordable next year, driving would-be home buyers away from high-cost coastal regions and toward the more inexpensive inland stretches of the state, according to an industry forecast.
The California Assn. of Realtors on Thursday predicted that sales will be more robust in the Central Valley and Inland Empire as families look for a home they can afford.
And as more and more families struggle to afford a home, price increases are expected to be more muted than in years past. The state’s median price is projected to end this year at $503,900, up 6.2% from last year. In 2017, prices should climb 4.3% to $525,600.
“Next year, California’s housing market will be driven by tight housing supplies and the lowest housing affordability in six years,” Pat Zicarelli, the association’s president, said in a statement.
The high cost of housing in California has become a growing political issue within the state. And it has spurred calls for increased funding for subsidized housing, as well as efforts to loosen building regulations so the private sector can quickly construct more residential units.
This week, two studies — one from UC Riverside and another from UCLA — warned that the state’s housing shortage threatens to put a drag on economic growth.
Despite those and other fears, the Realtors association predicted that the economy will keep improving and produce enough demand to nudge statewide home sales up 1.4%, compared to 2016.
In contrast, sales this year are projected to inch down 0.4% from 2015.
“The underlying fundamentals continue to support overall home sales growth, but headwinds, such as global economic uncertainty and deteriorating housing affordability, will temper stronger sales activity,” the association’s chief economist, Leslie Appleton-Young, said in a statement.
California is expensive to anyone who wants to move here, but is that a “crisis”? State Treasurer John Chiang and the bureaucrats in Sacramento want you to believe this so they can add another 5 million people to the state, and they don’t want to stop there. More people everywhere, more cars on the jam-packed streets and freeways, more kids in already crowded schools, more water resources drained, more pollution, and more environmental damages. The character and nature of our state and every community changed forever. Sacramento wants them to live in your neighborhood. Why should we let them ruin the good thing we’ve sacrificed for?
Let’s examine homeownership affordability in the state. According to records from the California Association of REALTORS, their Affordability index is currently at 34, meaning 34% of California families – using traditional metrics – can afford to buy the median priced California home. In the past 28 years, this index has been as low as 22% in 1991 and as high as 56% in 2012. For comparison, the national affordability index is at 60%. So California is expensive, but it has been for decades. If home ownership, currently 54% in California, were truly unaffordable we should be seeing massive mortgage defaults. But only 1.41% of California mortgages are at risk of foreclosure, meaning 98.59% of California homeowners with a mortgage are affording them. Does that sound like a crisis or a reason to add another 5 million people to the state?
The definition of “unaffordable” is “too expensive for people to be able to buy or pay for.” At California’s current median price, homes are selling so fast the current statewide inventory of unsold homes would last only 3.5 months if new inventory didn’t regularly come on the market. This sales pace is with nearly every loan requiring very strict qualifying standards.
State Treasurer Jon Chiang wants your community to grow because not everyone who wants to live in it can afford it. There will always be people who can’t afford to live wherever they want. I would love to live in Montecito, so should Sacramento make that affordable for me, for everyone else in the state, or in the country? The state is not one median house price. It has expensive areas and cheap neighborhoods, many a relatively short commute between. In Santa Barbara county the median price on the south coast is $1,200,000 for a single family home. Less than an hour away in Lompoc the median single-family home sales price is $310,000 and two bedroom apartments that rent for $1,950 a month in Santa Barbara go for $1,050 in Lompoc. But of course, there are still people who can’t afford even that. Though renters tend to stay in a residence for a median of 4 years, but up to 40% move in less than a year and they can leave for more affordable digs with just a 30-day notice.
So, maybe California isn’t for everyone? But should it be? Should we have everyone in the United States living here? Maybe there are better opportunities in other parts of our great country for those who find us too expensive? According to Bloomberg median price for starter homes in Atlanta, GA is $87,000; St. Louis, MO $65,000; and Detroit, MI $33,075. Many homes can be had for less! Employment is even more plentiful than in California with the unemployment rates for these cities averaging 5.3%. My best friend from Dos Pueblos High School in Goleta moved his wife, who grew up in Ventura, and their two children, to Colorado Springs for a more affordable home purchase. A close friend from Goleta Valley Junior High moved to Dallas and found a wife, job, and homeownership. One of my brothers, who grew up Santa Barbara, is very happy with his family in Denver, owning a $450,000 home that would cost at least $1,300,000 in Santa Barbara.
If you don’t build them they won’t come, and the ones who can’t afford to live here will move to less expensive communities. Let’s not spoil the good state we have to make Sacramento and developers happy.
Mall Investors Are Set to Lose Billions as America’s Retail Gloom Deepens
The blame lies with online shopping and widespread discounting.
The dramatic shift to online shopping that has crushed U.S. department stores in recent years now threatens the investors who a decade ago funded the vast expanse of brick and mortar emporiums that many Americans no longer visit.
Weak September core retail sales, which strip out auto and gasoline sales, provide a window into the pain the holders of mall debt face in coming months as retailers with a physical presence keep discounting to stave off lagging sales.
Some $128 billion of commercial real estate loans—more than one-quarter of which went to finance malls a decade ago—are due to refinance between now and the end of 2017, according to Morningstar Credit Ratings.
Wells Fargo estimates that about $38 billion of these loans were taken out by retailers, bundled into commercial mortgage-backed securities (CMBS) and sold to institutional investors.
Morgan Stanley, Deutsche Bank, and other underwriters now reckon about half of all CMBS maturing in 2017 could struggle to get financing on current terms. Commercial mortgage debt often only pays off the interest and the principal must be refinanced.
The blame lies with online shopping and widespread discounting, which have shrunk profit margins and increased store closures, such as Aeropostale’s bankruptcy filing in May, making it harder for mall operators to meet their debt obligations.
Between the end of 2009 and this July e-commerce doubled its share of the retail pie and while overall sales have risen a cumulative 31 percent, department store sales have plunged 17 percent, according to Commerce Department data.
According to Howard Davidowitz, chairman of Davidowitz & Associates, which has provided consulting and investment banking services for the retail industry since 1981, half the 1,100 U.S. regional malls will close over the next decade.
A surplus of stores are fighting for survival as the ubiquitous discount signs attest, he said.
“When there is too much, and we have too much, then the only differentiator is price. That’s why they’re all going into bankruptcy and closing all these stores,” Davidowitz said.
The crunch in the CMBS market means holders of non-performing debt, such as pensions or hedge funds, stand to lose money.
The mall owners, mostly real estate investment trusts (REITs), have avoided major losses because they can often shed their debt through an easy foreclosure process.
“You have a lot of volume that won’t be able to refi,” said Ann Hambly founder and chief executive of 1st Service Solutions, which works with borrowers when CMBS loans need to be restructured.
Cumulative losses from mostly 10-year CMBS loans issued in 2005 through 2007 already reach $32.6 billion, a big jump from the average $1.23 billion incurred annually in the prior decade, according to Wells Fargo.
The CMBS industry is bracing for losses to spike as loan servicers struggle to extract any value from problematic malls, particularly those based in less affluent areas.
In January, for example, investors recouped just 4 percent of a $136 million CMBS loan from 2006 on the Citadel Mall in Colorado Springs, Colorado.
Investor worries about exposure to struggling malls and retailers intensified in August when Macy’s said it would close 100 stores, prompting increased hedging and widening spreads on the junk-rated bonds made up of riskier commercial mortgages.
Adding to the stress, new rules, set to be introduced on Dec. 24, will make it constlier for banks to sell CMBS debt. The rules require banks to hold at least 5 percent of each new deal they create, or find a qualified investor to assume the risk.
This has already roughly halved new CMBS issuance in 2016 and loan brokers say the packaged debt financing is now only available to the nation’s best malls. Investors too are demanding greater prudence in CMBS underwriting.
Mall owners who failed to meet debt payments in the past would just hand over the keys because the borrowers contributed little, if any, of their own money. The terms often shielded other assets from being seized as collateral to repay the debt.
Dodging the overall trend, retail rents for premier shopping centers located in affluent areas continue to rise. Vacant retail space at malls is at its lowest rate since 2010, according to research by Cushman & Wakefield.
The low vacancy rate reflects the ability of some malls to fill the void left by store closings by offering space to dollar stores and discounters.
That is, however, little consolation for investors.
“With the retail consolidation that we have ahead of us, malls have a fair amount of pain left to come,” Edward Dittmer, a CMBS analyst at Morningstar, said.
Spring and summer usually get all the real estate glory with lofty accolades as the best time to buy a home—and, of course, the busiest. Meanwhile, their seasonal sibling, fall, often gets tossed to the leaf pile by potential buyers who might think autumn is just about haunted houses and turkey dinners rather than house hunting.
But surprise! Fall is not only a great time to buy a home, it might also be the best season to find the perfect property (and not just because you can browse the listings while cupping a pumpkin latte).
Read on to discover the many reasons.
Reason No. 1: Lower home prices
The best month to snag a deal when buying a home? October. This isn’t just some random guess; it’s based on RealtyTrac’s analysis of more than 32 million home sales over 15 years. The resulting data showed that on average, October buyers paid 2.6% below estimated market value at the time for their homes.
For a house that would normally be $300,000, 2.6% translates into a $7,800 discount. Those savings are nothing to sneeze at, so bargain hunters should get hopping once autumn rolls around. (For an even better deal, aim for Oct. 8, when buyers get a home, on average, at 10.8% below estimated market value.)
“For buyers looking for a better deal, fall is a great time to make offers,” says NewYorkCity Realtor® JoanneR. Douglas. (In case you’re wondering, the worst month for buyers is April, when homes sell for 1.2% above estimated market value. The worst single day is Jan. 19, with an average 9.6% premium.)
Reason No. 2: Less competition
Like a beach after Labor Day, the realty market clears out as the days turn crisp. Most summer buyers have already found a home, meaning a fall buyer will have way less competition for the available houses on the market, says Bill Golden of Re/Max Metro Atlanta Cityside. And don’t worry about those buyers who didn’t close before August, either.
“Many folks will drop out of the market until after the new year,” says Golden, giving a fall buyer even greater room to roam at open houses. There may not be as many properties to choose from, but as Golden says, “a little patience and perseverance could reap big rewards.”
Reason No. 3: Worn-out home sellers
Say hello to your little friend, leverage. Sellers who have their homes on the market in the fall “are generally people who need to sell, which can make for better negotiations for the buyer,” says Golden. And if a home you have your eye on has been on the market all summer, you’re really in the driver’s seat as far as making an offer the seller can’t refuse. The longer a home sits on the market, the more negotiating power the buyer wields.
Reason No. 4: The holidays are around the corner
Not only are most home sellers worn out after the summer selling season, they’re also caught between a real estate rock and a hard place in that the holidays are barreling down on them. If they want to move and settle down in time to host Thanksgiving and put up their Christmas lights, they’ll have to close, fast. So use this pre-holiday window to your advantage by offering to help them vacate fast if they cut you a deal.
Reason No. 5: Year-end tax credits
No one wants to buy a home purely to make their accountant happy. But there’s a sweet added incentive to closing on a home at the end of the fiscal year. Come the following April 15, you might be able to take some nice tax deductions, including closing costs, property tax, and mortgage interest, to offset your taxable earnings.
Reason No. 6: More quality time with your real estate team
As the year comes to an end, fewer buyers also means you should have the full attention of your real estate agent, mortgage broker, real estate lawyer, and everyone else on your house hunting team. You can take your time to ask all those questions you have about earnest money, due diligence, title transfers, and more without feeling like you’re horning in their busiest season to turn a buck.
Reason No. 7: Home improvement bargains
Once you close on that home you found in the fall, you may want to upgrade your appliances. Luckily, December is when major appliances—refrigerators, stoves, washers, and dryers—are at their very cheapest, according to Consumer Reports. It’s also the best time of year to buy cookware and TVs.
So once you’re settled in (and provided you have any money left), get ready to renovate!
Social media mogul Mark Zuckerberg’s life seems to always revolve around houses in Palo Alto.
A house in Palo Alto is where he grew Facebook from a seed harvested at Harvard into one of the defining companies of 21st century Silicon Valley. A house in Palo Alto is where Zuckerberg and his family presently call home. And four houses in Palo Alto adjacent to his own are now a perhaps rare check on the authority of the sixth richest man in the world.
The contentious parcels. City of Palo Alto
In 2013, Zuckerberg bought the houses bordering his property, eventually revealing plans to demolish them. He was worried about his privacy. (You can all insert your own ironic “Facebook data mining privacy” joke here.)
Unfortunately, the city isn’t proving keen on his idea. We can’t imagine why they’d be a tiny bit sensitive about sacrificing perfectly good housing stock for the sake of its wealthiest resident’s desire not to live next to anyone.
To be fair, Zuckerberg also planned to build new homes on the four parcels—smaller ones that wouldn’t be able to peer into his own house. But Palo Alto’s Architectural Review Board didn’t like the looks of his proposed new homes and bounced the plan at Thursday’s meeting.
The board is an advisory committee, and Palo Alto’s director of planning Hillary Gitelman can override their decision and approve the proposals if she wants to. But architects who work in Palo Alto tell Curbed SF that this rarely happens. Railroading unpopular projects through wouldn’t be smart politics, after all.
Zuckerberg will probably have to come up with some new designs, resign himself to keeping the houses the way they are, or just start spending most of his time crashing in one of those sleep pods at the office.
Palo Alto Mayor Wants to ‘Meter’ ‘Reckless Job Growth’
Palo Alto mayor Patrick Burt says: “Palo Alto’s greatest problem right now is the Bay Area’s massive job growth.” And he wants to “meter” businesses to control “reckless job growth” in the Silicon Valley suburb.
Palo Alto has long been the center of Silicon Valley’s tech start-ups, and features 14 of theworld’s top 25 venture capital firms within a 10-mile radius. But in an interview with the real estate blog Curbed.com, Mayor Burt talked about how “Our community will not accept deterioration in our mobility.”
As a tech CEO that sold out for big bucks, Burt seems to want to keep out the riff-raff:
“First, we’re in a region that’s had extremely high job growth at a rate that is just not sustainable if we’re going to keep [Palo Alto] similar to what it’s been historically. Of course we know that the community is going to evolve. But we don’t want it to be a radical departure. We don’t want to turn into Manhattan.”
Burt claims it is the role of local government to avoid “reckless job growth”:
“We want metered job growth and metered housing growth, in places where it will have the least impact on things like our transit infrastructure. We look at the rates and we balance things.”
To “meter” housing growth, 97 percent of the non-commercial portion of Palo Alto is zoned R1 single family residence, while only 3 percent is zoned for multi-family apartments. The least expensive “starter home” in Palo Alto is listed at $995,000.
But according to the Planning Department, 45 percent of Palo Alto workers live in multi-unit housing, which means almost half of Palo Alto workers must commute in every day.
Mark Zuckerberg is believed to be the wealthiest resident of Palo Alto. He is a well known liberal, and made his fortune as the CEO of Facebook. The company data-mines the deepest secrets of 1.7 billion users, then sells those secrets to the highest bidder. Zuckerberg contributes heavily to liberal causes, advocates for unlimited immigration, and says he hates the wall Republican presidential nominee Donald Trump wants to build along the U.S./Mexican border.
But after Mr. Zuckerberg bought the three houses bordering surrounding his own Palo Alto home, he recently built an 8-foot high privacy wall around the compound for himself, his wife and young daughter.
Zuckerberg quietly submitted architectural drawings to the Palo Alto Planning Department this summer that were expected to be favored for approval, because the plan reduced density by demolishing four houses to build a mansion and three casitas.
However, they were rejected amidst a local controversy over gentrification that erupted when Palo Alto Planning and Transportation Commissioner Kate Vershov Downing announced in early September that her family is leaving Palo Alto for Santa Cruz, because they, like many other residents, can no longer afford the area.
Downing’s resignation letter bemoaned that despite splitting a house with another couple, her rent is still $6200 a month. She estimates that to buy the house and share it with children would cost $2.7 million. The monthly cost of a home mortgage, tax and insurance payment would be $12,177, or $146,127 per year. Downing laments that sum is too much for her as an attorney and her husband as a software engineer.
Downing’s resignation put unwelcome pressure on the Palo Alto’s Architectural Review Board to start being more family friendly. On September 15, the Board rejected Mr. Zuckerberg’s plans because they would seriously undermine the city’s housing stock.
The Architectural Board is only an advisory committee, and Palo Alto’s Director of Planning Hillary Gitelman can override their decision and approve the proposals. But local architects familiar with Palo Alto told the Curbed.com this rarely happens, because “railroading unpopular projects through wouldn’t be smart politics.”
It is unclear how widespread Mayor Burt’s feelings are, but there is at least some backlash.
Consumers and lenders are upset with the current residential appraisal situation. This came from Southern California. “Why isn’t anyone publicizing the appraisal gouging going on in select markets? Due to a lack of appraisers since the financial reform acts (must be college educated and possess certificates) there is a ‘rush’ fee on top of an inflated appraisal fee for purchases topping $2,000. All of this is costing the borrower in fees and in rates since some appraisals are taking 6 weeks thus requiring a longer rate lock period and higher rate. It seems like the financial and consumer protections are working in reverse order for the borrower. And speaking of appraisers, they are all older folks as the younger generation does not want to pursue a career in a dying industry (full automation).”
And this from one of the Rocky Mountain states. “Just this month, I have more than 4-week turnaround times quoted by most appraisers through the AMCs and appraisals as high as $2,620 for a non-rural basic FHA appraisal. Taking years to fix the problem is not good: we have major problems now. My first time homebuyers can barely afford the $500 appraisals let alone the $2,620 appraisals (most don’t even have credit cards with a limit that high). I even had an appraiser tell me (and it’s someone I know to be an honest hardworking appraiser) that if he can do 3 appraisals a week for $1000 each or 6 appraisals a week for $500 each, which do you think he will pick? Somebody asked me the other day if we did ‘cost plus’ for the AMC appraisals. We can’t do that as appraisals are one of the items we can’t redisclose if it comes in higher unless we can prove we didn’t know something about the property and that is extremely hard to prove. Something must be done.”
From Kentucky Dora Ann Griffin contributed, “The answer is with Collateral Underwriters (CU) – there is no reason we cannot go back to allowing brokers and lenders order appraisals from professional quality appraisers. It would allow small appraisal businesses to thrive and compete. The end result would be a much better pricing and quality. The question is how do we make that happen? I know it would be moving a mountain but is there a way associations, brokers, etc. can affect a movement back to common sense.
“I just closed a loan where the property failed CU. A desk review was done. Then a field review. The whole appraisal process spanned six weeks due to appraisers taking 4 days to accept and missing the delivery by four days. I was told repeatedly the AMC could not push because the appraiser would then not do it at all. That appraiser would be still on the roster if that happened! Meanwhile my buyer is living in a motel for weeks with two dogs, three kids and her husband spending thousands of dollars to get by.
“In the end the original appraiser had the wrong property ID and even had an address wrong on a comp along with nine other serious or minor corrections. As a consumer that appraisal was faulty but there is no remedy. I suffer the loss of repeat business and referrals for something totally out of my control.
“I dream of the day I can engage a qualified appraiser directly. If that does not happen we are looking at even higher costs and increasingly inferior quality. All the good appraisers in my market work directly with banks. I get the worst of the worst thru AMCs as a broker – an unfair playing field.”
From Washington Theresa Springer mailed, “In the PDX MSA (including Clark County, WA) it is a travesty with an average 4-6 week turn time with high rush fees to get us to this insane return point. Appraisers are cherry picking jobs based on amount given to receive appraisal back at a somewhat ‘normal’ time frame of 3+ weeks and where it is located, i.e. in town vs. ‘rural’ as in Camas and Ridgefield, like those two are rural (not). I spoke with an appraiser buddy of mine a week ago and he said, ‘I just scroll through my email in the AM to see what is being offered and I take the best fee and locale and go from there.’ He said he is getting offered $1,500- $2,000 to do an in-town appraisal with a 3 week turn time. Appraisers are now quoting mid-October to early November for an appraisal that is being ordered this week. We have a lack of appraisers, and here’s a video about why they’re taking so long. They are over loaded and it is the fault of the feds as they have made the bar to entry for an appraiser so high.
“This is getting so ridiculous and is causing a large uptick in costs to the borrowers and the sellers are so angry as they cannot close in any timely manner. Most agents now are writing PSA’s for 8 weeks or 6 weeks knowing that they will need an extension(s). VA loans are upwards of 8+ weeks in town and the VA seems to be doing very little to fix this issue on their end. Just closed a Brigadier General’s VA loan and he called the VA raised a riot and he was able to get his appraisal turned in 3 business days after an 8-week acceptance time lag. But it is taking the borrowers to call the VA to get anything done. The VA is only assigning out appraisals on Monday’s now and is no longer letting you know where you are in line. This is also hurting the Veterans as many sellers will no longer accept VA loans on their homes, which is their right.
“Due to the rules in place where a new appraiser needs a 4-year degree (this was the MOST insipid part of the appraisal license change, then comes the 2 +/- year apprenticeship where the certified appraiser has to personally review EVERY home and its comps in its entirety before approving the report, like they have time) we are not getting any new folks into the business. So much for saving the consumer money as all this is doing is creating more costs for the borrower and a longer wait time for the seller to close. Many sellers are only entertaining cash offers if they have this option due to these issues.”
Mike VanDerWeerd sent, “As a former (still licensed) appraiser, this appraisal discussion is quite interesting. In a nutshell, they took the business out of the profession and made appraisers lapdogs to AMCs. There is no incentive to perform quality work on a client basis. All you get is spoon fed assignments with no way of growing the business. My opinion is once the GSEs figure out an automated valuation method with a home inspection, appraisers will be VCR repairmen!”
And Bill King opined, “I would proffer that a good appraiser cannot do 2 to 3 appraisals per day and do them well. Unfortunately, that very expectation does more to drive down appraisal quality than almost all other things combined. Unless one has two or three of the same floor plan, in the same plat (rare) on the same day a good, competent appraisal isn’t going to happen with just 3 to 4 hours’ work. Without the ‘assembly line’ operation 2 or 3 appraisals per day is just not possible. The elephant in the living room is appraisal process itself. The single point value and single approach appraisal is fundamentally flawed and antiquated. Small data valuations in a big data world is silly.”
From Florida came, “As we all know, according to TRID, a consumer must receive Loan Estimate disclosures within 3 days of submitting all 6 items that comprise a loan application. First, the in-house stall was holding the property address out so more information could be gathered before mandatory disclosures. That worked for a while, except that when we have a purchase contract, we automatically have an address. So that stall doesn’t work anymore though offices do try to bury the contract for a while. Now, local offices are stalling disclosures until the appraisal comes back saying that is the basis for an estimate of property value. The obvious point being ignored by this argument is that if there’s a contract, there’s an estimation of property value. Two people have decided that the property is worth the agreed price and since a copy of the MLS listing is part of the loan file, processors and underwriters can see listed and contract values. The ‘wait for appraisal’ stall is a very thin one, and continues to make consumers wait longer for decisions and closing. As I have said before, every time CFPB tweaks a regulation a new cottage industry opens up in the lending community to try and circumvent the intended benefit to the public.” Thank you to Chris Carter for this note!
Chris Nielsen forecast, “I think in 10 years (maybe less) the Certified Appraiser will be little needed. With The UCDP and EAD portals, drone technology and other new intelligent systems, the routine property appraisal by a Human Being will be unnecessary.”
But those in the appraisal business deserve to be heard.
Mike Ousley, President & CEO of Direct Valuation Solutions, sends, “Being a company that provides solutions for lenders and appraisers to work directly with one another and one that also provides AMC services (DVS-AMC) gives me a unique perspective. On the AMC side we have first-hand knowledge of appraisers purposely and actively trying to damage the AMC by accepting orders, holding them for a week or two or three, then rejecting the order saying, ‘we never accepted the order.’ Recently, we had an appraiser in a well populated area quote a 4 month turn time!!!! Really? He had 80+ orders in his queue?
“The blogs are full of Appraiser v. AMC drama, and for sure there are good and bad AMCs, just like there are good and bad appraisers and yes, it would seem that some appraisers view the AMC as their shield from the relationships with the lender so they don’t have to ‘face the music’ when due dates are missed, report quality is substandard or errors are made and the lender is left holding the AMC responsible for their ‘inability to manage the independent appraiser.’
“The real rub is that in some cases the same appraiser who intentionally damages the AMC relationship is the same one professing to want the direct relationship with the lender through our software! Having started as a professional appraiser way back in 1979 and hopefully establishing myself as a ‘professional appraiser’ over the decades since, I am entirely flummoxed by the disconnect between saying as an appraiser you are a professional, acting professional and adhering to the Uniform Standards of PROFESSIONAL Appraisal Practice (USPAP) when the purpose of USPAP is ‘to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers.’ I think it is safe to say ‘public’ here includes the consumer who the lender is attempting to assist in securing a home loan for purchase or refinance purposes, and yet aren’t they the ones being damaged by the unprofessional conduct of the intentional actions of appraisers trying to damage the AMC hired by the lender and almost always paid for by the borrower? All too often, it seems, the word ‘Professional’ has gotten lost and the very public (read consumer) trust lost with it.
Mike wraps up with, “I think everyone, appraisers, lenders & AMCs, need to keep in mind the public we serve and not only maintain their trust but take a big step towards consistent and professional actions. While there is most certainly an issue with the number of appraisers dwindling, the number and frequency of underwriting or lender/investor stipulations and overall volume impacting the appraisal process, keeping professional conduct by ALL parties must be non-negotiable. On a closing note, I hope to drive a conversation with our national representation, the Mortgage Bankers Association, at our upcoming National Convention and bring not only more awareness to these growing issues but discuss forward thinking solutions and inclusion of appraisers & AMCs in the MBA agenda.”
Last Saturday in the commentary I quoted a reader who noted, among other things, “AMCs are keeping 1/3 to 1/2 of the appraisal fee.” Paul Dorman, President of Accurate Group, writes, “I did want to respond to this to dispel a myth. Good AMCs who want to promote partnerships with appraisers and expand their appraisal panels are not taking anywhere close to 1/3 to 1/2 of the appraisal fee. Good AMCs are actually sharing more of the appraisal fee with the appraiser and, when necessary, sharing the entire appraisal fee with the appraiser or taking losses on some orders to ensure service levels are met for both consumers and lenders.
“Yes, there is an appraiser shortage and good AMCs are working on solutions to that shortage – helping appraisers stay in the business, paying appraisers timely, limiting revision requests, looking for ways to educate and train new appraisers and developing products that make appraisers more efficient so they can complete more than 2 or 3 assignments a day. We’re doing all we can to ensure appraisers understand that the right AMCs can add a ton of value for them. We are expecting to see these efforts differentiate us in the market and expect that overtime more appraisers will see that not all AMCs are created equal.”
Like used cars and retired pro football players, regional shopping malls do not age well.
In a span of no more than a decade, a popular mall with high-end anchor stores and boutique retail tenants can fall into substandard Class B or C property condition, left behind by shifting customer demographics or newer amenities at rival shopping centers. More so today, they also face the reality of more consumers choosing to stay home to shop online.
When these malls become passé, that’s when trouble starts for commercial mortgage bond investors, who can sustain outsized losses on their exposure to these properties, compared with other kinds of collateral such as office buildings, hotels and industrial property.
In a report published Thursday, Moody’s Investors Service warned that loans backed by shopping centers are an increasing cause of concern for mortgage bond investors and provided some criteria for evaluating the long-term viability of regional malls.
“The ability of a mall to adapt to this changing environment and find new ways to attract shoppers is key to its ongoing success,” the report states. “Very few of the top tenants in malls 20 years ago are still strong performers — or even in still in business — today.”
Moody’s looked at the loss severity on loans backed by 30 regional malls that have liquidated since 2008: each averaged 75%, almost twice as severe as the 45% average for all other CMBS loan liquidations in that time period. In the case of 10 of the failed malls, the loss severity was over 100%.
Loans backed by shopping malls are typically structured no differently than other kinds of commercial mortgages: they have 10-year tenors with large balloon payments due at maturity, meaning they amortize very little during their terms. The issue is that malls can have relatively short lives as premier properties, and so may need new capital investments — and thus new financing — within a decade to expand their shelf life.
Individual malls have been under pressure to maintain their appeal and customer interest since the 1980s, but these challenges are now exacerbated by competition from online retailers, which is hitting traditional mall anchor stores like Macy’s and Sears particularly hard. With a business model dependent on traffic driven by magnet department stores, malls could be in significant trouble, and as a result, perform poorly as CMBS collateral.
For example, Macy’s plans to shutter 100 stores this year, a move that Morningstar Credit Ratings estimates could impact $3.64 billion in outstanding securitized commercial mortgages backed by malls with Macy’s as a prime tenant.
So how can CMBS investors assess their risk?
To find out, Moody’s mapped out the capabilities of local and national mall owners to keep their properties viable and profitable during long-term 10- to 20-year leases. Demographics, location and property age were not the only, or the most important, factors. Some properties like The Florida Mall in Orlando having weathered the replacement of four anchor stores over 30 years to remain a competitive shopping mecca in central Florida.
Malls that maintain upscale amenities and ties to national ownership attract high-end, non-anchor stores (or “inline” tenants, with stores under 10,000 square feet), the report noted. The healthiest malls average more than $400 in per-square-feet sales for their non-anchor stores, and have occupancy cost ratios (tenant real estate costs divided by gross sales) above 13% for its inline tenants.
Those gross sales figures for the strongest malls, as measured by Moody’s, exclude the transactions from high-demand boutique retail outlets that skew sales figures, such as Apple Stores. An Apple retail store by itself can boost a mall’s sales per square foot by $100, Moody’s stated.
Weaker malls will usually average inline store sales of no more than $275 per square foot and have locations with limited demographics and fewer national chain tenants. If they do have chain tenants, those stores will likely have lower-than-average sales figures for than sister stores across the country.
Low traffic volume, whether due to mundane store options or too few neighboring entertainment and dining establishments, often gives malls less negotiating power with tenants over rent terms. These property owners might have to accept “gross” leases where the tenant pays a percentage of sales versus a base rent for occupancy.
Net income operating margins could fall below 65%, sometimes 50% for struggling substandard malls, compared to 70%-80% for the stronger malls that can demand excess percentages above base rents. Strong performers can also draw up “triple net” leases that foist some of the real estate expenses onto some tenants.
National sponsorship is considered a key indicator for a strong mall’s performance, with ability to provide more incentives for key anchor tenants to maintain or expand their presence. A sell-off by a national ownership group to a local owner can often trigger a mall’s weakening performance — tenants may ask for rent relief or may exit the mall in the absence of a national ownership backer.
Even if weaker-performing malls demonstrate stability, investors must weigh the cost-effectiveness of when the inevitable, and capital-intensive, rehab of a mall must be undertaken. For “highly productive” malls, Moody’s stated, the high cost of market repositioning or a refresh of the tenant lineup can be justified. For less-productive malls, they are often forced to sell well below par to give new owners the capital space to invest in a revitalization project.
“Depreciation for malls is not just an accounting concept; malls need to stay current and vibrant or risk a reduction in their earnings power,” the report states.
One month ago, ZeroHedge said that “it is not looking good for the US housing market”, when in the latest red flag for the US luxury real estate market, they reported that sales in the Hamptons plunged by halfand home prices fell sharply in the second quarter in the ultra-wealthy enclave, New York’s favorite weekend haunt for the 1%-ers.
Reutersblamed this on “stock market jitters earlier in the year” which damped the appetite to buy, however one can also blame the halt of offshore money laundering, a slowing global economy, the collapse of the petrodollar, and the drastic drop in Wall Street bonuses. In short: a sudden loss of confidence that a greater fool may emerge just around the corner, which in turn has frozen buyer interest.
A beachfront residence is seen in East Hampton, New York, March 16, 2016.
We concluded this is just the beginning, and sure enough, several weeks later a similar collapse in the luxury housing segment was reported in a different part of the country. As the Denver Post reported recently, high-end sales that fuel Aspen’s $2 billion-a-year real estate market are evaporating, pushing Pitkin County’s sales volume down more than 42 percent to $546.45 million for the first half of the year from $939.91 million in the same period of 2015.
The collapse in transactions means that Aspen’s high-end real estate market “one of the most robust in the country, with dozens of options for buyers ready to spend more than $10 million” finds itself in its first-ever sustained nosedive, despite “dense summer crowds, soaring sales tax revenues and high lodging occupancy.”
Like in the Hamptons, the question everyone is asking is “why”? There are many answers:
Ask a dozen market watchers why, and you’ll get a dozen answers. Uncertainty around the presidential election. Fear of Trump. Fear of Clinton. Growing trade imbalances with China. Brexit. Roller-coaster oil prices. Zika. Wobbling economies in South America. The list goes on.
“People are worried about all kinds of stuff these days,” says longtime Aspen broker Bob Ritchie. “I’ve never seen anything like this before.”
The speed of the collapse has been stunning. Until just last year, the local market was beyond robust, with Pitkin County real estate sales hitting $2 billion in 2015, a 33% annual increase driven largely by sales of homes in Aspen, where prices average $7.7 million.
This year, however, “a slowdown in January turned into a free fall.” Sales volume in Pitkin County is down 42%, according to data compiled by Land Title Guarantee Co.
Almost all of that decline is coming from Aspen, where the market is frozen. Sales in the Aspen-Snowmass market in the first half of the year were the bleakest since the first half of 2009, and inventory soared to levels not seen since the recession.
High-end sales that fuel Aspen’s $2 billion-a-year real estate market are evaporating
The statistics are stunning: single-family home sales in Aspen are down 62% in dollar volume through the first-half of the year. Sales of homes priced at $10 million or more — almost always paid for in cash — are down 60%. Last year, super-high-end transactions accounted for nearly a third of sales volume in Pitkin County.
“The high-end buyer has disappeared,” said Tim Estin, an Aspen broker whose Estin Report analyzes the Aspen-Snowmass real estate market.
“Aspen has never experienced such a sudden and precipitous drop in real estate sales,” according to the post.
Worse, it’s not just the collapse in the number of transaction: even more disconcerting for brokers who have always trumpeted Aspen as a safe and lucrative place to park a huge pile of money: Prices are dropping.
In the first half of this year, the average price per square foot of Aspen homes dropped 22 percent to $1,095 from $1,338 in 2015. Recent Aspen sales also closed at more than 15 percent below listing price, a rare discount.
Some brokers suspect that the frenzied sales and pricing pace of 2015 was not sustainable. The present decline is a correction, they say. “I think a lot of people thought we would go to the next level in 2016. Take the next step up and that step got resistance from buyers,” said longtime Aspen broker Joshua Saslove, who just put an Aspen home for more than $10 million under contract. If it closes, it will be just the fourth sale above $10 million in Aspen this year, compared with more than a dozen by this point last year.
“I think a lot of developers thought they would push their, say, $5 million properties to $6 million this year, but no one is buying,” Saslove said. “I don’t see that nonchalance or cavalier attitude any more.”
To be sure, Saslove is hoping that a rebound is coming; that however, may be overly optimistic and first far more pain is in store especially if one considers what is taking place in yet another formerly red-hot housing market, where suddenly things are just as bad, because as Mansion Global reports…
Luxury condo sales in Miami have crashed 44%.
According to the latest report by the Miami Association of Realtors, the local luxury housing market is just as bad, if not worse, than the Hamptons and Aspen.
The latest figures out of Miami this week showed residential sales are down almost 21% from the same time last year. But as bad as this double-digit decline may seem, it pales in comparison to what’s happening at the high end of the market.
A closer look at transactions for properties of $1 million or more in July shows just 73 single-family home sales, representing an annual decline of 31.8%, according to a new report by the Miami Association of Realtors. In the case of condos in the same price range, the number of closed sales fell by an even wider margin: 44.4%, to 45 transactions.
The Miami housing market, and its luxury segment in particular, has been softening for the past year with high-end condos sitting on the market for twice as long as they did a year ago and sellers offering bigger discounts amid an increased supply.
Number of closed sales for Miami condos priced over $1 million fell by 44%
In July, townhouses and condos of $1 million or more waited, on average, 162 days for a buyer, a 1.9% increase over a year ago and the longest time of any other price range, according to the report.
As in the previous two markets, the locals want something to blame, in this case the strong dollar, which has significantly increased the value of properties in other currencies, has been blamed, and perhaps rightfully so as sales to foreigners—an important client base, since international buyers acquire more homes in Florida than in any other state, according to the National Association of Realtors – have tumbled.
Real estate appraiser and data expert Jonathan Miller said that Miami is behaving like most of the rest of the U.S. housing market, which is in fairly good shape overall “but soft at the top.”
As noted here over the years, In the case of Miami, like in other most other coastal markets such as New York and Los Angeles, the housing boom was heavily boosted by foreign buyers, who used US luxury real estate as their new form of anonymous “offshore bank accounts” courtesy of the NAR’s exemption from Anti-Money Laundering Provisions. However, after the recent drops in commodity prices and the spike in the USD, they have scaled back their purchases.
“The international component is not as intense,” Mr. Miller said.
Depsite the slowdown deals are still being done, with cash the preferred form of payment of foreign buyers in the U.S., – some 43% of all sales in Miami in July were closed in cash, however down from 48.1% the same month last year, according to the latest figures.
Other potential buyers are also stepping back: cash sales for townhouses and condominiums, an indicator of investor activity, hit their lowest level in a year last month: 633 transactions, representing a 30.4% year-over-year decline, according to the report.
As for the forecast for the coming months, sales activity doesn’t look likely to surge. There were 1,272 pending sales of townhouses and condos in Miami in July, which means 25.4% fewer transactions waiting to close than in the same month in 2015 and the lowest number so far this year. Meanwhile, as a result of a building boom, luxury condo inventory is up 47.8% from last year, with 2,482 units worth $1 million or more waiting to change hands; this means that sellers of high-end condos will continue to face stiff competition, prompting even fewer transactions and/or lower prices.
So far, the collapse at the luxury end has failed to transmit to the broader market, less impacted by lack of foreign demand, however as we documented two weeks ago,it is only a matter of time before the overall US housing market suffers as well. The only question is whether the NAR and the US Census Bureau, who tabulate the “goal-seeked”, seasonally adjusted data, will admit it before or after the presidential elections. The likely answer: it depends on who the next president is.
26 feet underneath this modest, 2 story suburban home in Las Vegas you will find a sprawling, 5,000 square foot home—complete with four-hole putting green, swimming pool, jacuzzi and sauna—and designed to withstand a nuclear blast.
The bunker home at 3970 Spencer Street was built in the 1970s by businessman Girard ‘Jerry’ B. Henderson, who fearing attack from the Soviets, built his first underground bunker in the 1960s in Boulder, Colorado during the height of the Cold War.
The only signs of something amiss on the surface of this underground retreat were the ‘unusual’ amount of ground-mounted air conditioning units that were camouflaged by clusters of rocks and boulders…
According to VegasInc.com, the house had been purchased for $2 million in 2005 and was foreclosed by Seaway Bank and Trust Co. in 2012.
The bank listed the property for $1.7 million in 2013, eventually selling the property in March 2014 to a mysterious group called the Society for the Preservation of Near Extinct Species for $1.15 million. [source]
The two-bedroom, three-bathroom underground home might be the most peculiar in Las Vegas. Built beneath a typical, suburban two-story house, the bunker home spans more than 5,000 square feet and is part of a 15,200-square-foot basement that also features a casita.
The subterranean refuge seems designed to stave off boredom and claustrophobia. It has a four-hole putting green, a swimming pool, two jacuzzis, a sauna, a dance floor with a small stage, a bar, a barbecue and huge murals of rural, tranquil settings.
The home, with unchanged “Brady Bunch” decor, also has a laundry room, a kitchen, a fireplace, a generator, fake trees, fake flowers, two elevators, fire alarm bells, smoke detectors, an intercom system and several large pantries.
Light switches labeled “Sunset,” “Day,” “Dusk” and “Night” mimic lighting conditions at those times by dimming or brightening lights and stars on the ceiling, which is painted sky blue with white clouds.
A few miles east of the Strip, the home was built in the 1970s by entrepreneur Girard B. “Jerry” Henderson, who feared a nuclear Armageddon during the Cold War. While others built fallout shelters, he wanted to live underground full time, according to news reports.
Henderson co-founded Underground World Home Corp., a subterranean home building company. A brochure for the company boasts that underground living is healthier, cleaner, quieter, cheaper, safer and is “the ultimate in true privacy!”
“How would you like sunshine every day … when you want it?” the brochure asks.