Week 12: Real Estate Woes, Uptrends and Building Faster
Briefing: Investors are buying too many houses while active listings are at record lows. | After a long sell-off markets are likely back in an upward trend. | 50 years ago we were much faster at building physical infrastructure.
Real Estate Woes
A current story familiar to everyone is the difficulty of purchasing a home in 2022. The numbers behind the trend are staggering. In 2016 there were 1.6m active listings in the US, and today, that number is just 400k. Fewer homes for sale creates dramatic bidding wars and an unfairly competitive environment for new families. Furthermore, investors are buying up more housing stock than ever. It’s estimated that 33% of all new and existing home sales are going to investors and not primary owners.
I propose that we take a page out of the NBA leadership book and limit the investor participation rate in US housing stock to 30%. We wrote in Week 37 of 2021, “Per NBA rules, no team can be more than 30% owned by PE firms and PE firms can’t own stakes in more than five teams at once.” NBA team owners are the ultimate capitalists, and even they see a benefit to limiting investor participation. We need more people to have an ownership stake in their country and community.
Real estate is also one of the easiest ways to launder money. All-cash offers don’t require banking intermediaries because there is no mortgage process. The all-cash purchase excludes an integral part of the AML/KYC process (anti-money laundering / know-your-customer). Many luxury buildings are simply stores of value for wealthy international families, including Russian oligarchs. Check out how many lights are on at night in those luxury buildings in Miami, NYC, Boston and SFO, for example.
Individuals have a lot of choices in how they spend their money, but housing is a basic necessity. People need a place to live, and young families can’t compete with Blackrock’s balance sheet. Unfortunately for individuals looking to buy, the trends are against them for at least the next few years. I’m not an active futures market participant, but there are Case Shiller housing futures that trade through the CME to hedge real estate exposure or lack thereof. The Case Shiller futures curve is steep, indicating increasing prices for the foreseeable future.
In addition to setting limits on investor ownership of residential real estate, adding automation to the construction process will help add new homes faster and cheaper. We are putting together an investment vehicle for our clients to invest in construction automation and software that will help speed up the building process to help ease these real estate woes.
After nearly five months of downward sloping prices, we believe markets have finally found a new base, and the next phase of the bull market is here. Our trend-following metrics flipped positive on Friday for the first time since November, which is a significant moment in our eyes. We have ended our internal buy-strike and have started the buying process with cash accumulated over the past five months. After many high-growth leading companies have fallen 50% or greater, there is now an opportunity to buy high-quality assets at significantly lower prices. Multiples have returned to normal ranges, and some are below the five-year and ten-year averages.
We prefer to buy on the way up rather than trying to time the very bottom. We also average our buying because we never know when we might run into a false positive signal. One potential sign of a false positive in this case could be quarter-end rebalancing. Current estimated rebalancing activities across institutions represent nearly 250 billion of flows out of bonds and into equities. We still need to contend with Covid, Fed tightening, and Ukraine/Russian issues. Buying when fear is high and multiples are in healthy ranges tends to result in attractive outcomes for investors.
Patrick Collison of Stripe, the leading innovator in global payments, maintains a list of “fast” accomplishments in US history. For example:
- “On August 9, 1968, NASA decided that Apollo 8 should go to the moon. It launched on December 21, 1968, 134 days later.”
- The Pentagon. The construction of the world’s largest office building was led by Brehon Somervell. The decision to proceed with the project was made on a Thursday evening. Initial drawings were completed that Sunday. Construction started two months later, on September 11, 1941, and was finished on January 15, 1943, 491 days later.
Something happened in 1970 that dramatically slowed the pace of physical infrastructure development. For example:
- San Francisco proposed a new bus lane on Van Ness in 2001. Its opening was delayed to 2022, yielding a project duration of around 7,600 days.
- In April 2000, the MTA decided to build the Second Avenue Subway. The first phase, with 3 stations, opened on January 1, 2017. Source: The New York Times.
- According to Easterbrook, the modern record for delay is a lock on the Ohio river – 30 years and still not finished in 2018.
Many people are attracted to crypto and software partly because it has a culture that celebrates testing and building at high-speed rates. Elon Musk is bucking this trend by dragging skeptics along and pushing boundaries by building physical products faster than most thought was initially possible. For example, he built the Tesla factory in Germany before the permits were issued while the nearby Berlin airport finally just opened after nine years of delays. That was a big gamble that could have ended poorly, but it worked out.
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