The Ownership Society

[don]

Re: The Ownership Society

There is a simple bet to take if you believe housing is going to lead this nation into a next wave of prosperity. Take a bet on home builders. The argument is that the U.S. population continues to grow so therefore, prices on homes will simply continue to go up. But what if the growth is coming to households with lower wages? The iShares U.S. Home Construction ETF is down over 6 percent for the year while the S&P 500 is up 1 percent. What gives? Isn’t the housing market recovering? Prices are up because of constrained inventory (now slowly picking up), investor demand (starting to wane), and artificially low interest rates. You’ll notice that few of the major reasons for higher home prices have to do with household balance sheets improving. If you truly believe housing has healthy demographics ahead you would bet on home building. This index is moving in the opposite direction of prices. The place where we do see home building is with multi-family building permits. Builders are gearing up for a nation of renters. In fact, multi-family housing starts are up a massive 416 percent since their low in 2010. Apparently builders are realizing that with incomes so low and weak household formation that when these households begin to form, the first step will be in a rental. Many in the Millennial cohort live at home while house horny parents try their best to out-bid investors.Multi-family housing starts up 400+ percentThere is a simple bet to take if you really think the housing market is going to take the lead in a new recovery. Bet on U.S. Home Construction. Simple enough. You can purchase the ETF tracking the sector. As I mentioned before, this ETF is down over 6 percent for the year. Why? Because when it comes to supply and demand, you actually need the right supply and the right demand. You don’t see Ferrari setting up shops on every corner in Detroit. I’m sure people would love a Ferrari but simply put, they don’t have the income for this. Similar to housing in places like California, current residents do not have the income to buy even with artificially low interest rates and paltry down payment requirements. This trend has actually caused an out migration of domestic Californians out of the state for over a decade.

One sure bet however is the need for rental housing. Builders are ahead of the game on this one:





Housing starts for multi-unit buildings are up 416 percent from 2010. As the nation becomes one of more renters, this is a good bet to make. At some point, many younger American adults will set out to form their own households. Given their weak balance sheets, the first step is likely to be in a rental. In the past, this was the traditional route. First you move out into a rental, save for a down payment, then bought a home. That part of the market has been stunted in this recovery because first-time buyers make a pathetic amount of all current home sales.

A nation of renters

The trend is very favorable to multi-family building:




Since 2005 we have added 7 million rental households (no coincidence that we have witnessed 7 million foreclosures as well). During this same time, owner occupied housing has actually fallen. This is a trend that is fully in place. In more expensive markets, the rental share of the market is growing at a quicker pace. For example, in California you have 2.3 million adults living at home. Why? They either have no job, a job with low wages, or are financially struggling. These are the main culprits. This group is struggling to enter into a rental let alone buy a home. That is why in some areas investors make up thebulk of all home sales.And the political winds are shifting. For example, the untouchable Prop 13 looks to be on the table for changes:

“(LA Times) I think that the withdrawal of our opposition, at least for now, suggests that we don’t see this as a direct threat to Prop. 13,” said Jon Coupal, president of the Jarvis group, whose crusade for the law sparked a nationwide tax revolt.”

This is to close a loophole on commercial properties. This loophole has been around for ages. Why be open to this change now especially from such a staunch opponent? Because California is building a bigger renting majority. Now just think when more and more of the population is renting and has little at stake in the property market. This is the trend.

Slow household formation

One of the more startling trends is in light of population growth, household formation has hit a wall:



This trend has been in place for over a generation and suddenly has stopped. What we will see however is more demand for rentals. As we have previously noted, we have added 7 million rental households in the last 10 years. With more rental housing on the market at some point you will see young adults moving out and getting their own place to live. In most areas of the country, housing is still affordable. Yet in many large metro areas this is simply not the case.There are simple bets to make if you feel housing will continue to go up. Put your money on the line and buy. No one will stop you. Be an investor and purchase a home to rent out or flip. Prices only go up right? It is amazing how some people think that once you buy, you suddenly “own” the place when in fact, you have a 30 year locked in commitment. Similar to renting, you have to pay someone for a very long-time regardless of your path. In California house horny buyers would plunk down money they don’t even have to squeeze into a house to be an owner but at least we are still checking incomes for loans. We already have stats showing that usage of ARMs is at multi-year highs highlighting that people need every gimmick to squeeze the monthly payment down to as low as possible just so they can compete with investors. However, inventory is rising and in non-prime areas, the fever of house lusting lemmings is slowly cooling off. As it turns out when we look at the bigger picture, we truly are becoming a nation largely made up of renters.

[aaron]

Re: If it's that bad

100% correct. Trading/Investment banking/PE/Hedge fund analyst goes about as deep as something like the Univ of Michigan maybe not even, which is about the 35th ranked school in the country. Anything below that the best you can get in finance is a job pounding pavement as a grunt for a commercial real estate broker or FA at an investment bank or in hedge fund/PE ops/accounting. To get ahead from there you better be in the right place and be lucky as heck to get an opportunity and bust your butt to make the best of it. The mobility of being a grunt for a broker then becoming one is better than trying to move through ops/accounting to a more senior trading/PM/analyst role at a hedge fund or PE.

I think most kids entering the workforce today out of a mid-tier college are better off trying something other than finance where their drive and determination can be more quickly recognized and the barriers to entry are lower.

Finance sucks. It is parasitic. It is a waste of talent. Do not encourage anybody to go into it (sociopaths are excepted), please. It's very base is built on fraud. How much raw talent has been lost to that cesspool in New York?

[Polish_Silver]

College Advice for Flintlock

Thats kind of what I heard. Now if my family will just quit treating my daughter like a snob because she wants to go to a better school. I keep hearing " its what you make of it" and there is some truth to that, but there is also a lot of competition out there and I'd rather see her being recruited for a job out of college rather than working at a mall shop like her cousin. I have no idea, I dont run in those circles, so any input is appreciated.

I am assuming your daughter is capable and motivated, but hasn't settled on a major. That is good. An 18 year old has not taken advanced classes, or seen people versed in those subjects, so they have no basis for choosing a major.

I am also assuming the family is not struggling financially, and they can devote some resources to non-economic purposes.

If at all possible, the major subject should be something the student loves. The reason is that college is the only time most people can pursue something they love. The rest of the time you are trying to make the mortgage, please your boss, or meet a dead line.

Secondly, if the family can afford it, she should live away from home. She cannot have free thought and action unless she is away from parents.

I believe college is the chance for your daughter to develop her intellectual, aesthetic, social and moral dimensions. Financial outcomes are part of this but far from the sole or even main purpose. Your daughter should choose a college with strong programs in one or more areas that she is interested in. Choosing a college valued by employers, rather than the one she wants, is living by other peoples values. There is not much happiness down that path.

If the student wants to study a beautiful, but poorly paid subject, like Art History, they can offset the problem by using electives to prepare for work in accounting or nursing. Alternatively, they can major in something practical and minor in what they love. At age 23, there is plenty of time to get practical.

Some subjects are totalitarian. If you look at a physics department, 90% of the graduate students were physics majors, 9% were math majors, and 1% were mechanical or electrical engineering majors. The reason for this is that the knowledge is so hierarchical that you must master the core concepts by age 23. To do quantum physics, you must know partial differential equations, which depends on knowing vector calculus.
If you don't major in physics, you will never catch up with those who did. On the other hand, at most colleges, a physics major has many electives and could develop a strong background in philosophy, music, or language.
This tree is very tall, but not that wide.

But most subjects are not so demanding. A history major could do graduate work in sociology. An engineering major could go into economics.

The relationship between subject and career is more complex than many people think. Sociology is considered "unemployable" , but it would be an excellent background for public health or business. Anthropology is also considered useless, but would be an excellent starting point for medicine or psycho-therapy. A philosophy major I know got a job representing a company that makes energy efficient houses. My friend's sister majored in ecology. She works for the county, busting water polluters. Her pay is not huge, but she values saving the world.

The student should be realistic about the job market and the effects of the major on her future. This does not imply choosing a major or school mainly for financial considerations. It does imply keeping options open for more pragmatic action after graduation---ie not emerging deeply in debt with no career options but photography.

I have a lot of formal education and I feel that it is over valued by society in general and also by many employers. It is also true that most professions worth pursuing require some preparation and you have to figure out how to get to a starting point. Formal education does that for many people, but it also fails many of them, while others succeed with minimal education.

[ddn3f]

Re: College Advice for Flintlock

For the new graduates coming out of school, they either have a desirable degree, GPA, school, etc. and land a job, or they have inside connections and land a job. If they have both, then it is much easier to land a job or get fast-tracked in. If they have neither, then they look just like the majority of every other college graduate out there.

As far as I have seen in my field (Federal Government Contracting), it is the degree majors that recruiters look for and do not give much weight to the degree minors. So a person can major in something practical and minor/double major in something they love.

From my perspective it seems like it is harder for college graduates to find jobs, and every year there are more and more graduates coming out. Now that a bachelor's degree is the minimum requirements, people are getting master's degrees and other certifications to stand out. When someone graduates from school, they are fighting the several years of graduates that came before them for the same entry-level positions. I will have to admit though that the best way for recent graduates to find a job is to have some sort of inside connection.

I understand the philosophy of doing what you love, but sometimes in life you just have to do what you do not love. Or look at it in a different way, find things to love about what it is that you do. You can also pursue your passions outside of working hours. Money is not everything, but it is not easy being a college graduate today. It will only likely get harder in 4 years.

[Polish_Silver]

Re: College Advice for Flintlock

For the new graduates coming out of school, they either have a desirable degree, GPA, school, etc. and land a job, or they have inside connections and land a job. If they have both, then it is much easier to land a job or get fast-tracked in. If they have neither, then they look just like the majority of every other college graduate out there.

As far as I have seen in my field (Federal Government Contracting), it is the degree majors that recruiters look for and do not give much weight to the degree minors. So a person can major in something practical and minor/double major in something they love.

From my perspective it seems like it is harder for college graduates to find jobs, and every year there are more and more graduates coming out. Now that a bachelor's degree is the minimum requirements, people are getting master's degrees and other certifications to stand out. When someone graduates from school, they are fighting the several years of graduates that came before them for the same entry-level positions. I will have to admit though that the best way for recent graduates to find a job is to have some sort of inside connection.

I understand the philosophy of doing what you love, but sometimes in life you just have to do what you do not love. Or look at it in a different way, find things to love about what it is that you do. You can also pursue your passions outside of working hours. Money is not everything, but it is not easy being a college graduate today. It will only likely get harder in 4 years.

I agree that the world is flooded with college graduates. That is one reason I don't think it should be looked on as THE way to start a career.

[don]

RE: into a less productive sector . . .

There was much celebration regarding the jump in private housing starts. However, once you begin to look beyond the headlines you realize that the big jump came largely because of multi-family starts. In other words, building more rentals in the form of apartments for a growing population that rents. Private starts for places with 5 units or more has now hit a post recession high. This makes sense given the fall in rental vacancy rates and the rise in rental prices. Yet what we find is that more income is being siphoned off into a less productive sector of our economy.

Real estate tends to be a big plus for an economy when it happens organically with rising incomes, good overall employment prospects, and first time buyers leading the charge.

Today it is more of a shifting of assets into fewer hands while extracting more income from the productive sectors of the economy. Not everyone can have their flipping show on cable television. For example, over 11 million Americans now pay 50 percent or more of their income to rent. Many of those people are here in California. The trend to building rentals alignswith the underlying reality that many future Americans will be less affluent compared to their parents.

Multi-unit starts

Builders realize there is pent up demand but not for expensive new homes. New demand is in the form of rentals where little savings are required and incomes are less scrutinized. Although I will say in many tight rental markets like San Francisco getting a rental is even more stringent than purchasing a home. The charge for private housing starts is being pushed by rental housing. In some way more supply of this kind of housing should alleviate some of the short-term pressure we are seeing on rental prices.Take a look at private starts for structures with 5 units or more:




A large part of the blockbuster numbers reported on housing starts were being driven by this multi-family trend. And there is a clear argument to be made that there is pent up rental demand. Multi-generation households being brought on by adults moving home is something that is very real:



The data is clear and most of these adults are living at home because they are financial strapped. These people are not in the market for purchasing a Barbie sized pizza box, let alone venturing out to land a rental. However, should things improve and their incomes stabilize the first step out will be into a rental. That is usually the normal trajectory. Or, as is the case in California many are simply waiting until their Taco Tuesday baby boomer parents go down with their golden sarcophagus so they can haggle over who gets the stucco box next.It is an interesting case to see so many young adults living at home. All the data points to financial struggles. These people aren’t planning some creative backdoor arbitrage to leverage into an overpriced home. No, most have no money for a rental let alone a home purchase. This is a nationwide trend. Yet builders are now realizing people need to live somewhere and living with mom and dad forever is not going to be a viable option for most (especially if you are still in dating mode). Building more rentals likely makes sense given the movement towards a permanent serfdom for many.If you think rising rental prices are coming because of big surges in income, think again:



Americans are simply spending more of their disposable income on rent and this likely has the consequence of hitting other areas of consumer spending (which we are seeing). You are seeing companies trying to offer more generous credit offers to get people to spend money they don’t have. Not exactly a wise strategy but in this system, it seems like boatloads of debt is the answer to every problem.

The one thing with housing is that at any given point, only a margin of units are available for rent or purchase. This causes distortions in prices given the current availability of demand and supply. Think of the booms and busts we have lived through. Unlike a stock, there is less liquidity and a more constrained market. If you are looking to buy Google stock you are likely to find a buyer in London, New York, Tokyo, or anywhere around the world for the right price. Housing doesn’t work that way. Prices are made at the margin by a small group of people. The big buyers of the last few years were in the form of investors and those leveraging to the max out with low interest rates. Investors are pulling back and with rates at near record lows, it is hard to juice the system more on this end. That is why sales have fallen strongly in the last year and prices are stalling out. Housing booms and busts in a typically slow and methodical fashion.

One thing I will say with rents is that these units usually get hit the hardest when recessions hit. No sitting around missing mortgage payment after mortgage payment in a unit as banks figure out strategies to constrain supply. If you can’t pay the rent, the landlord is usually forced to evict. Some states are friendly to landlords but others like California can make the process a long drawn out saga. Should be interesting with many single family units now converted into rentals. What is clear is that the nation continues down this road of housing feudalism and rentals are becoming an option for more Americans.

Evictions Soar in Hot Market

For tens of thousands of renters, life has become increasingly unstable in recent years, even as the economy has slowly improved. Middle-class wages have stagnated and rents have risen sharply in many places, fueled by growing interest in urban living and a shortage of rental housing. The result is a surge in eviction cases that has abruptly disrupted lives, leaving families to search for not just new housing that fits their budgets but new schools, new bus routes and sometimes new jobs.

In Milwaukee County, for instance, the number of eviction cases filed against tenants leapt by 43 percent from 2010 to 2013. Other parts of the country have seen similar, if less drastic spikes — and not only in high-cost cities like San Francisco.

Landlord-tenant laws and housing market conditions vary widely, and evictions are not surging everywhere. And a court filing does not necessarily result in eviction; some cases are resolved through payment plans or other agreements. From 2010 to 2013, Maine experienced a 21 percent increase in eviction filings, Massachusetts 11 percent and Kentucky 8 percent. In the fiscal year that ended in June, New Jersey, which has some of the strongest tenant protections in the country, had one eviction filing for every six renter households. In Georgia, where court statistics do not differentiate between tenants evicted by a landlord and homeowners evicted after foreclosure, filings soared to almost 270,000 last year, a 9 percent jump since 2010. Over the same period, according to the research firm CoreLogic, the number of foreclosures dropped by half.

The simplest explanation for the rise in evictions is a severe shortage of rental housing caused by a lack of new construction during the recession and the wave of foreclosures that turned homeowners into renters.

[shiny!]

Re: into a less productive sector . . .

Good find as usual, Don. I'd like to pass it on to a friend. What's the source?

[don]

Re: into a less productive sector . . .

Good find as usual, Don. I'd like to pass it on to a friend. What's the source?

http://www.doctorhousingbubble.com/r...spent-on-rent/

and: http://www.nytimes.com/2014/08/29/us...A11%22%7D&_r=0

Thanks Shiny!

[shiny!]

Re: into a less productive sector . . .

http://www.doctorhousingbubble.com/r...spent-on-rent/

and: http://www.nytimes.com/2014/08/29/us...A11%22%7D&_r=0

Thanks Shiny!

Thank you, Don.

[lektrode]

Re: College Advice for Flintlock

double posted for some reason - so deleted the 1st/orig vers - see below for the rest of my rant

[lektrode]

Re: College Advice for Flintlock

I agree that the world is flooded with college graduates. That is one reason I don't think it should be looked on as THE way to start a career.

and here's one example of exactly WHY thats become quite true (and why i'm not quite feeling sorry-for, nor guilty about 'the plight' of some - if not most - in their self-made predicaments)

$chooled
(rhymes with and "...we wont be ____ed again....." ?)

College costs are skyrocketing, but students aren't benefiting

By Rachel Piper

I'm still young by many measures, but there's one big thing that sets me apart from The Youth: I am officially far too old to go to boarding school.

My fascination with boarding schools is likely rooted in a book, though I can't pinpoint which—in literature, boarding schools are as prevalent as orphans. Dispatching the parents via death or distance is necessary for the protagonist to learn, make mistakes and grow without 80 percent of the story being stern parental lectures. Instead, boarding-school kids get to tie together sheets to sneak out of third-story windows, eat plain but hearty porridge and sleep in tiny shared garret bedrooms with newfound friends. Bliss.

The irony is that I would have been terrible at boarding school: hated my roommate, flouted lights-out, gotten in trouble for sleeping through breakfast, and then failed maths (yes, maths; the imaginary boarding school I'm flunking out of is British) because I skipped class to nap in my room.

That's pretty much how I squandered college— five years of it. I was lucky enough to graduate during the recession with a part-time job at City Weekly, but it was my work at the college paper, not my psychology degree, that opened the door to a world of independence instead of the door to my parents' basement.

Most people see college as a magic bullet, whether you're a good student ("Oh, you'll really love college!") or a lackluster one ("Oh, college will be so much better."). But the "college experience" is as much a fantasy as Hogwarts School of Witchcraft & Wizardry.

College is just school. Looser, more customizable school, but school nonetheless. Attendance still makes up a stupid percentage of your grade, and people still weasel out of group projects. There are good professors but bad ones, too, and professors you'll never see because they have graduate students teaching their classes. If all goes well (or well enough, at least; Cs get degrees), at the end of six years or so, you'll be mailed a piece of paper that allows you to add a line to your résumé.

It's different for everyone, of course. I did know people who loved college. Most of them are still there, working on further degrees or teaching new generations of bright-eyed students. Even I was once a bright-eyed student—for at least a week at the beginning of each new semester, flushed with giddy optimism that new highlighters and fancy divided notebooks would transform me into a successful college student.

It never worked. I found few moments worthy of a movie montage in crowded lecture halls or sun-dappled campus lawns. More often than not, what I learned in classes was what the professors wanted to hear and how to repeat their views back to them in essay form.

I never lost my love for color-coding notes, but after all it had been built up to be, college was scarily disappointing. Those studying science or engineering were acquiring skills that most of the population doesn't have and lining up high-paying jobs in their field. We idealists who chose the humanities were acquiring boxes of marked-up papers and heavy literature anthologies. What the hell was I doing with my life, besides throwing away scholarships and my parents' money and expectations?

Looking at my college diploma elicits a mix of guilt (all those skipped classes!) and resentment (all those bullshit required French classes!), but not getting it was never an option. The problems with higher education are too big to address in a gazillion columns (nope, not a math major), but one pitfall is that college today is what high school used to be—the bare-minimum requirement for most good jobs. Yet, while wages in most fields remain stagnant, the costs of tuition, school fees and textbooks are skyrocketing. College isn't about gaining knowledge; it's about money. And colleges—not students and not the economy—are the ones profiting.

I did wrest some meaning out of my five years, despite my failings and the system's.Reading The Working Poor: Invisible in America in a ... history(?) class my freshman year was the first thing that opened my sheltered suburban brain to the kind of inequalities that City Weekly reports on. Later, I realized that working full time—at a bookstore and at my college newspaper—was more edifying than sitting in a classroom, and I found out in time that I didn't want to be an English teacher and did want to be a journalist. For the most part, these discoveries came by way of non-classroom experiences, successes and struggles.

Despite knowing that, each fall brings with it nostalgia for school and the potential in the pages of a blank notebook. Maybe grad school wouldn't be such a bad idea! If I bought a fancy new planner, I could totally find a way to fit it in.

Then I step back from the planners and remember that grad school wouldn't have gotten me to this point.

Working did.

Despite the seductive promises of shiny brochures and academic advisers, more school doesn't necessarily equal more professional or personal success. Formative years are formative years, for making mistakes and growing without parents' stern lectures or safety nets, whether the protagonist is in boarding school or college, or working at their first real job.

I'm too old for boarding school and too young to be writing advice columns. Still, whatever you're doing with your formative years, I hope more will come from them than a dusty box of graded papers and a lifetime of debt.

its quite entertaining to watch the 'lightbulbs' suddenly illuminate inside the brains of the most spoiled rotten, entitled generation of 'self-esteem majors' in the history of the US - as they suddenly discover that partying thru 5years of college in one of THE GUT MAJORS isnt exactly the ticket to ride they all thot it would be (or were bamboozled into thinking it was going to be)

but as you can maybe tell - she has learned something alright - like... when in doubt?

BLAME THE SYSTEM (???)
that her generation is certainly having a profound effect upon...
kinda like the way the 60's students (hippies, yippies, zippies n drippies etc) - that are NOW RUNNING it - had, all thru the 60's onward (and are running it, alright = straight into the ditch)

[don]

Re: Patient's Chart Please



Ownership has Flat Lined





Pressure high and building in rentals





As suspected - you have a shrinking middle-class condition

[lektrode]

Re: Patient's Chart Please

As suspected - you have a shrinking middle-class condition

once upon a time, eye saw/read stuff that extrapolated what would happen when the boomers STOPPED consuming, 'investing' in houses, stox, bonds etc

and would start to 'consume' medical services....

would seem, but i'll still ask - ARE WE THERE YET?

not even sure why i did it at the time - other than the obvious - but sometime - like in late sept2001 - i stopped spending on anything but ABSOLUTE ESSENTIALS and biz-related at that - ie: if i couldnt rationalize it on a schedC, i didnt buy it... and while the number of 50k+ cars suddenly mushroomed (along with co-incident trafficjamsfromhell), along with the 'foodie' phenom (never mind restaurant prices), 'designer' labels (ie: look at ME too!! = 300 sneakers, yoga outfits, jeans and wont even get into whats happened to winter apparel...)

little did i know, how RIGHT i would be ?? - watching over the next 6-8 years as seemingly EVERYBODY (else but me, apparently) went whole-hog and DEEP into the consumption pool (CA HELOCS = chunks of floating fiberglass)

again the question is (what happens when the boomers stop spending): ARE WE THERE YET?

[shiny!]

Re: Patient's Chart Please

once upon a time, eye saw/read stuff that extrapolated what would happen when the boomers STOPPED consuming, 'investing' in houses, stox, bonds etc

and would start to 'consume' medical services....

[...] again the question is (what happens when the boomers stop spending): ARE WE THERE YET?

Good question. I'm interested in the answer to this.

[thriftyandboringinohio]

Re: Patient's Chart Please

...again the question is (what happens when the boomers stop spending): ARE WE THERE YET?

Lek, your raise some pretty interesting points.
I think the answer to your question, "..are we there yet..." is "yes".

I found this nice US census document that gives a basic demographic overview of the baby boom cohort from their birth to their likely final death in 2060

http://www.census.gov/prod/2014pubs/p25-1141.pdf

I know we have some professional actuaries in the iTulip community who are far more qualified than me to comment.
I was surprised at how the boomers seem to have diminished in importance.
The title below is misleading because I cropped the chart. It is all the boomers, I omitted the gender breakout.






- when the boomers were little children at the closing of the cohort in 1964, boomers were more than 1/3 of the US population
- since then, the total population has continued to grow and mortality has taken its toll. Boomers are now only about a quarter of the US population
- boomers are an eighteen year cohort to start with, and will choose different retirement ages even for a single birth year. The effect of their retirement will be less sudden and more gradual






The retirement of the boomers looks to me like less of a sudden catastrophic event.
It's real and it's detectable, so it's probably actionable as an investment thesis.
But it does not look like such a big deal as I once thought it might be.