News

Landmark Links October 8th – Balancing Act

Must Read: Apartment construction was expected to peak in 2017/2017 but the market apparently didn’t get the memo.  Household formation continued to surge from 400k-500k per year at the bottom of the housing crash to 1.5MM per year today.  When for sale housing slowed in 2018, demand shifted toward multi-family.  As a result, apartment demand from high-income renter is once again surging, creating an amenities arms race – and there is more demand in the suburbs than in urban cores.

This is a big part of the reason that I think that the next recession will be mild for housing.  We are not getting overbuilt by any measure and household formation looks to continue to be robust.  So long as that continues, any slowdown in for-sale housing will be picked up in the rental market and vice versa.  That being said, when the prime household demographics start to level off around 10 years from now, the risk of a housing-driven recession increases substantially.

demographics

Source: Calculated Risk Blog

Economy

Three Big Things: Incredible article about the big picture in the economy and investing from Morgan Housel of Collaborative Fund:

World War II, World War I, and the Great Depression influenced nearly every important event of the 20th century. Industrialization and the Civil War did the same in the 19th.

Demographics, inequality, and information access will have a huge impact on the coming decades.

Conflicting Indicators: The September NFP report showed a 3.5% unemployment rate, the lowest in a half a century.  But See: Wage growth appears to have tailed off.

About Face: Don’t look now but the yield curve is steepening.

Double Edged Sword: If cash-losing startups like Uber, Lyft and WeWork suddenly became profitable, it would be bad for inflation.

Crunch: What it means to be middle class hasn’t changed much — there’s a steady job, the ability to comfortably raise a family if you choose to, a home to call your own, an annual vacation. But what it takes to achieve all that has become more challenging.

Commercial

Flexible Option: Midsize pension fund investors are increasingly favoring direct real estate investment over funds in an effort to reduce fees, increase overall risk-adjusted returns and increase control (h/t Dave Kidder)

Defensive Posture: Adjusting to market volatility and girding for a recession, some family offices in the U.S. are hedging their bets by shrinking their exposure to hedge funds and boosting their exposure to real estate.

Sorting Through the Rubble: All excess aside, the core reason that WeWork crumbled is that its an old-fashioned real estate play that managed to convince investors that it should be able to grow and be valued as a tech companySee Also: WeWork’s bankers and investors are scrambling to try to salvage what’s left of the collapsing company.

Residential

Dangerous Game: Roughly 30 percent of the loans Fannie Mae guaranteed last year had debt service payments that amounted to 50% or more of the borrower’s monthly income, up from 14 percent in 2016, according to Urban Institute data. At the FHA, 57 percent of the loans it insured breached the high-risk echelon, jumping from 38 percent two years earlier.  But See: Why today’s Fannie and Freddie loans are nothing like the ones that caused the crisis a decade ago.

To the Rescue?  Surging new home construction may provide enough boost to the US economy to offset trade war losses.

Profiles

Perfect Storm: The economic and political climate in the aftermath of the Great Recession has been perfect for private equity, fueling its incredible growth.

Arms Race: Suddenly every meal delivery service out there is looking to get into grocery delivery as Postmates, DoorDash and others encroach on Instacart’s turf.  See Also: Investors are looking to cold storage as a recession hedge thanks to a massive supply / demand imbalance driven by grocery delivery.

Grind it Out: Blackstone’s incredible run of success was far from immediate when Stephen Schwarzman and Pete Peterson left Shearson Lehman.

Chart of the Day

Coming demographic shifts are going to be challenging, to say the least.

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Source: Collaborative Fund

WTF

Stable: A stripper tried to kill a couple of other women with a hand gun in a dispute over a guy because Florida.

Taste Test: A woman who called the police to have them test her meth after being concerned that it was tainted with another drug was arrested because Alabama.

The Sincerest Form of Flattery: Newly-minted qb legend and Uncle Rico lookalike Gardner Minshew has inspired hardcore Jacksonville Jaguars fans to grow lookalike Fu Manchu’s, leaving their spouses less than happy.

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

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