Altus Insight - June 2015
The Altus Insight
Market news, commentary and relevant topics for today’s alternative asset investor
Date: June 30, 2015
FR: Forrest Jinks
RE: Only under a full moon…
I love baseball, and long time baseball people often say that no matter how long they are around the sport continues to surprise them with occurrences they couldn’t have guessed would have happened. Politics is also like this. While generally a supporter of free trade, I don’t know if the recent Trans-Pacific Partnership agreement (nicknamed Obamatrade), or at least the fast track component of it, is good policy or not. In fact, very few people know. That is because the full bill was never released for viewing, even to members of the House and Senate. Despite not being able to view the full document congress people and senators were expected to vote (and expected to approve) the bill. The first go around they didn’t approve it, the second round they did.
Politics does indeed make for strange bedfellows. Those among us who thought we would see President Obama and Speaker Boehner (and the rest of the Republican leadership) stumping hard for the same piece of legislation please raise your hand. And if any of you thought you would see tea party conservatives joining Nancy Pelosi in a rather public partnership against the bill, please raise your hand. There are not a lot of hands in the air right now. Again, I don’t know if the policy is a good one or not, but for one of the few times I can remember I supported Pelosi in a political battle. Obama promised transparency when he first ran for president. Boehner later promised that all legislation would be available in the public domain for at least 24 hours before a vote. They both broke their promises. I admit this grates against my personal political/ethical ethos but the Insight isn’t a place for me to be espousing my political or moral views. It is a place, however, to discuss investing, business, and the effect of current events on both.
From the viewpoint of business and investing the issue at hand isn’t that the political establishment (ex Pelosi) couldn’t keep their promises, the issue is the total lack of transparency. Free trade pacts can have substantive impacts on an economy. The issue with the lack of transparency is that we have no idea what those impacts might be, and without that knowledge it is impossible to make informed forward looking investment, and in some cases business, decisions. Will the price of imported knick knacks drop, increasing the pressure on the margins of domestic knick knack producers? Will exporters of oil and natural gas equipment be able to increase their margins due to reduced tariffs? Will farmers thrive as new markets open up to their production? More importantly for Altus, and maybe for many of you, will the new trade pacts allow for an easier path of foreign investment to enter the country? If so, real estate in many of the hottest markets (San Francisco, Seattle, New York) could have a much longer bull market that anticipated. The issue is that we just don’t know.
Staying in the arena of political events, the Supreme Court’s decision to uphold Obamacare is a big deal. Regardless of how I or any of you reading this article feel about the Affordable Care Act, the reality is that it is here and by all appearances the question of it staying around are gone. With that knowledge investors and business owners need to make the appropriate adjustments to their strategy. It is what Ben Hunt of Epsilon Theory calls ‘Adaptive Investing’. Our opinion of something matters far less than the reality of that something. Really, unless someone is far more powerful than I am, their opinion matters not at all. If I hold onto my opinions as being more important than reality I well could end up sacrificing results in an attempt to be “right”. We have discussed the dangers of paradigms in many past Altus Insights but this is more than just blindness due to existing paradigms. If we hold on to what we want to have had happen versus what did happen it is likely not an issue of a paradigm, it is an issue of our pride getting in the way and potentially doing us harm.
I don’t really know what the effects of Obamacare will be yet. I don’t think anyone does. So many of the main points of the law have been delayed (and again) that we haven’t seen the full effect enter the economy. I know for me personally that it has had a large negative impact on my disposable income, both through increased health care costs and increased taxes, but there are economic winners as well. Maybe there are some that now qualify for subsidies that were previously coming out of pocket to pay for health care. There is no question that people that didn’t previously have health care but now do are funneling more money into the health care industry and the subsidies they have now fund new health benefits they weren’t previously able to take advantage of. As with any change there will be winners and losers. As investors, the sooner we can identify who is which, the better we can adjust our portfolio. As business owners the sooner we can understand the impacts of a major change in governing laws like this one, the sooner we can make the needed adjustments so that we can be one of the winners.
I have two forecasts of industries that will be winners. Health insurance companies (there is a reason they were pushing the legislation) and automation/robotics (as increased labor costs further incentivize automation capital investment).
In other news…
Last month I mentioned that property prices in several southern California markets had tipped and that median home prices had started to fall. It is too early to know for sure, but there is evidence the same is now happening in Northern California as well. In May we were involved with a few different listings on the lower end of the price spectrum. Those properties all flew into contract with multiple offers and well above asking. In June we placed more properties on the market, also in the lower price levels for their particular areas, and…nothing. This includes a $300,000 4 bedroom home in a decent area in Sacramento, a $550,000 3 bedroom home in Healdsburg, Ca, and a $350,000 three bedroom home in Santa Rosa. All of them were listed at a price we thought sure to bring multiple offers. All are just sitting there. There are very few showings and on the three houses we have received only one offer, which was a lowball offer on the house in Santa Rosa. And of course we still have four condos in Carmichael that are for sale lower than some apartments are selling per door and are getting little to no activity. Based on our experience I checked in with a couple agents who I trust to have a good feel for the market. They responded that they too felt the market had slowed down. Our sales rep at our preferred title company confirmed that new escrows had dropped quite a bit in early June. Have we reached the upper limits of affordability like is believed to be the case in parts of Southern California? Is it just a timing thing with fewer people out looking for houses due to graduation parties, vacations, and Father’s Day? Or is it something more? Even years prior to the residential crash in 2006/2007 I felt an impending sense of doom and urgency any time there was so much as a blip in the momentum of the market. I don’t feel the same doom or urgency this time around, at least not yet. I don’t know that my ‘gut’ is a useful barometer or not but if it is to be trusted this slowdown does not portend a major market movement. Might things drop 5%? Sure, but 5% will rarely kill anyone. I feel the chances of prices dropping considerably more than that, at least in the short run, are low. With that in mind we are largely holding the course on the pricing of our listed properties. We might drop the price a little to bring our listing back to the top of agents’ awareness, but we don’t feel we are to the point of needing a fire sale just yet.
Long term we are still bullish that rentals, specifically apartments, are a good investment. Despite some crazy movement in apartment loan pricing over the past few months there still large interest rate to cap rate spreads available in many solid markets. Those spreads are much smaller in California but in many California markets there doesn’t appear to be anything of consequence over the short term horizon to reduce the upward momentum of rents. There simply aren’t enough units to house the people that need housing, and in most cases the cost of supplying the new housing still doesn’t make sense at today’s pricing.