Making money by betting on dying malls

Some are hoping to make a lot of money with the decline of shopping malls:

It’s no secret many mall complexes have been struggling for years as Americans do more of their shopping online. But now, they’re catching the eye of hedge-fund types who think some may soon buckle under their debts, much the way many homeowners did nearly a decade ago.

Like the run-up to the housing debacle, a small but growing group of firms are positioning to profit from a collapse 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. With bad news piling up for anchor chains like Macy’s and J.C. Penney, bearish bets against commercial mortgage-backed securities are growing…

Many of the malls are anchored by the same struggling tenants, like Sears, J.C. Penney and Macy’s, and large-scale closures could be “disastrous” for the mortgage-backed securities. In the worst-case scenario, the BBB- tranche could incur losses of as much as 50 percent, while the BB portion might lose 70 percent.

I’d love to see some analysis of whether this is a good development: it doesn’t sound like this will break the mortgage industry in the same way as the subprime mortgage crisis, clearly some investors have learned something from the past, yet the default of shopping malls can have a big effect on the local economy and community.

There is an interesting summary of the fate of the American shopping mall in the final paragraph of the article:

“When a mall starts to falter, the end result is typically binary in nature,” said Matt Tortorello, a senior analyst at Kroll Bond Rating Agency. “It’s either the mall is going to survive or it’s going take a substantial loss.”

This can’t be good in the short term, particularly if the retail money vanishes into the Internet ether. In the long run, it does hint at a very bifurcated retail experience in coming decades: wealthier places where shopping malls still thrive and are popular and other places where there is nothing but big box stores, the occasional strip mall, and online shopping.

Debating whether Detroit is on an upward trend

There is some disagreement about whether Detroit is on the rebound:

Michigan State political scientist Laura Reese and Wayne State urban affairs expert Gary Sands have written an essay “Detroit’s recovery: The glass is half-full at best,” for Conversation, which was reprinted at CityLab as “Is Detroit Really Making a Comeback?” The article is based on a longer academic treatment of this subject by Reese, Sanders and co-authors, entitled “It’s safe to come, we’ve got lattes,” in the journal Cities.  (This is one of those rare cases where the mass media version of an article is more measured and less snarky than the title of the companion academic piece, but I digress.)

Reese and Sands set about the apparently obligatory task of offering a contrarian view to stories in the popular press suggesting that Detroit has somehow turned the corner on its economic troubles and is starting to come back. We, too, are wary of glib claims that everything is fine in Detroit. It isn’t. The city still bears the deep scars of decades of industrial decline coupled with dramatic failure of urban governance. The nascent rebound is evident only in a few places.

And the opposite position:

It’s going to be a long, hard road ahead for Detroit. And that road will lead to a different and smaller Detroit than existed in, say, the 1950s. That road is made even harder by critics who damn the first few candles for shedding too little light.

While the debate is about Detroit’s fate, it hits on important larger questions: at what point can experts know whether a city is on the decline or on the way up? Who gets to make such pronouncements and with what data? While we are in the moment, when is a trend clearly a trend? Even a consensus of experts may not be good enough; they can all be wrong.

The more complicated answer is that it takes time and lots of data to know for sure what is happening. This is not comforting if things are going bad; there is often a lot of post-hoc analysis of what could have been done in the moment but such moments are difficult to handle. (Think about the public discussions regarding the economic crisis of the late 2000s and what lessons should be drawn from the Great Depression and similar events.) And if the situation has been bad for a long time, people do want to find hope and build on good happenings.

For those of us looking on from a distance, perhaps the best we can do is wait and hope for positive change in Detroit which likely includes both new activities as well as difficult decisions about moving on from past arrangements.

Homebuying in January the highest in a decade

Some news from the American housing market: home sales were up in January.

Home sales rose 3.3 percent in January from December to a seasonally adjusted annual rate of 5.69 million, the National Association of Realtors said Wednesday.

Steady job gains, modest pay raises and rising consumer confidence are spurring healthy home buying even as borrowing costs have risen since last fall. Some potential buyers may be accelerating their home purchases to get ahead of any further increases in mortgage rates. With few homes available for sale, buyers are pressured to rapidly close a deal as they find a suitable property…

Just 1.69 million homes were on the market nationwide in January, near the lowest level since records began in 1999. It would take just 3.6 months to deplete that supply at the current pace of sales, matching a record low reached in December. Supply is usually equal to about six months of sales in a balanced housing market...

The bulk of the stronger buying is occurring among higher-priced properties, the NAR said. Sales among homes and condominiums priced at $100,000 and below fell nearly 10 percent in January compared with a year earlier. They rose slightly in the $100,000 to $250,000 bracket and jumped by roughly 20 percent in homes priced at higher levels.

This is part of a long climb out of the economic crisis of roughly a decade ago. On one hand, increased buying could be seen as a good sign but there are still troubling signs including a lack of supply and higher demand for more expensive properties.

When do we reach a point where this is the new normal?

Claim: Millennials can’t buy a house so they are serfs

Joel Kotkin makes a bold claim regarding the inability of millennials to purchase a home:

Like medieval serfs in pre-industrial Europe, America’s new generation, particularly in its alpha cities, seems increasingly destined to spend their lives paying off their overlords, and having little to show for it.

No wonder that rather than strike out on their own, many millennials are simply failing to launch, with record numbers hunkering down in their parents’ homes. Since 2000, the numbers of people aged 18 to 34 living at home has shot up by over 5 million…

It’s time for millennials to demand politicians abandon the policies that have enriched the wealthy and stolen their future. That means removing barriers to lots of new housing in cities and, crucially, embracing Frank Lloyd Wright’s notion of Broadacre Cities, with expansive development along the periphery.

These new suburbs, like the Levittowns of the past, could improve people’s lives, while using new technology and home-based work  to make them more environmentally sustainable. They could, as some suggest, develop the kind of urban amenities, notably town centers, that may be more important to millennials than earlier generations. One thing that hasn’t changed is the demand for affordable single-family homes and townhomes. But the supply is diminishing—those under $200,000 make up barely one out of five new homes.

This is a familiar argument for Kotkin: millennials really do want to own homes in the suburbs – like many other Americans since the early 1900s – and economic policies limit their opportunities.

But, this argument is still overstated in its claim that millennials are serfs. Kotkin gets at a deeper question: is homeownership essential to the American way of life? More specifically, a suburban home in a nice community? There is much in American history to suggest that owning land and a home is key, even if it isn’t a right. Yet, does it necessarily have to always be part of American life? Could Americans decide that they value other things (and not be forced away from homeownership by forces outside of their control)?

A college degree leads to more geographic mobility

Americans with a college degree are more likely to leave where they grew up and end up in metropolitan regions:

Today, people with a college degree are more likely than they used to be to move to metropolitan regions with good jobs and other people like them, and this means both that those regions do better over time and that the return on that education is even greater. Almost half of college graduates move out of their birth states by age 30, according to Moretti. Only 27 percent of high school graduates do. As booming cities draw in new college-educated workers, employers seeking these workers follow, and cities continue to gain strength like magnets. This improves the prospects of everyone in the region, including those without college degrees. The working-class strongholds that once prospered without college-educated workers, on the other hand, are doing worse and worse, as computers and robots replace the workers whose jobs haven’t been sent overseas, and, as a result, an oversupply of labor brings down wages for everyone still there.

It’s not just that a college degree leads to higher earnings or more opportunities; it is also that people with college degrees tend to cluster in certain locations. Even in a world where technology could theoretically allow workers to be far away from their workplaces, the clustering in desirable cities of employers, cultural scenes, and places to live with a high quality of life is linked to education levels.

Another side effect of this clustering is that cities tend to have diverse and vibrant economies while smaller communities simply can’t access multiple options. Thus, even if a smaller community has a single thriving industry, this may not work well:

Focusing on one type of industry could be a successful strategy; Warsaw, Indiana, a relatively small town in the northern part of the state, is the orthopedic capital of America, with dozens of orthopedic device companies small and large located there and a bustling economy as a result. Elkhart, Indiana is the epicenter of the recreational vehicle industry, and manufacturers and suppliers are located there, creating good jobs when the economy is doing well. Cities and towns may be able to convince a cluster of a certain type of companies to locate there, and reverse their decline. “Every place has to look at its comparative advantage, and find a niche,” Ross DeVol, the chief research officer at the Milken Institute, told me.

Having lived near Elkhart during the financial crisis, such a strategy can look good in boom times but be disastrous in down times.

Looking toward the future, are there any particular industries or sectors that would be willing to spread out geographically in order to build stronger American communities? This might limit their profits or make it difficult to attract certain employees but could it be worthwhile to invest in smaller communities in the long run (either for the communities or also for a competitive advantage)? Even sectors like health care are finding it difficult to maintain facilities in small towns because of the advantages that consolidation and economies of scale offer.

Are we already to the point where people live in rural areas because (1) they are “stuck” there or (2) because they are already well-off and have the resources or option to live there?

Defining a McMansion, Trait #4: A symbol

When I tell people that I have published about McMansions, the same question almost always arises: “What exactly is a McMansion?” My paper defining the McMansion answers this but in a series of posts here, I want to update the definition based on what I have seen in the last five years.

The fourth trait I see in the term McMansion is using the object as a symbol for a larger concept or concern. With this trait, the particular characteristics of the house – size (absolute or relative) and the architecture – matters less than what the McMansion is related to. I don’t think what the McMansion is linked to has changed all that much since I published my paper but I will highlight two areas in which I have seen the McMansion connected to in recent years.

The housing bubble that started in the United States in 2006 has had long-lasting consequences. The use of “McMansion” grew in the early 2000s as housing did well but the term was also used a lot as the housing market plunged. The McMansion became a symbol for the problems with the hot housing market: people bought bigger houses than they needed and it all fell apart. Certain locations were even more prone to McMansions with plenty of open space (exurbs) and questionable/adventurous architecture (Las Vegas). This even left half-completed McMansions and vacant neighborhoods, scary situations lending themselves to use in thrillers and horror films.

But, here is my question: just how much were McMansions responsible for the burst housing bubble? What about the construction of luxury housing in many major cities in the United States? What about the mortgage industry extending loans for all sorts of housing? McMansions are an easy target with this narrative: too many Americans bought ugly large homes that they couldn’t afford. The solution is to stop the construction and purchases of McMansions, for builders and buyers to make more rational decisions.

I’m not sure this fits the data. Housing construction is still down but as noted in the first McMansion traits post on size, more large homes are being constructed than ever. McMansions haven’t disappeared nor are they ruining the housing market now. My take is that it is that it is convenient to blame McMansions but there is a complex story of how the housing bubble built and burst that includes McMansions but not as a primary cause.

A second area in which the McMansion is used as a symbol has to do with referring to the sort of people who purchase or support McMansions. This is usually done in a negative manner. Who are these people who keep buying McMansions? They are people like Brock Turner. They are conservatives living away from cities. The culture wars may even include McMansions.

And yet, people keep building and purchasing such homes. The critique of McMansions, like that of suburbs, seems a bit elitist as the aim is not just at the houses but rather at the uneducated rubes that desire them. Some think that shaming McMansion proponents is the answer; make fun of their homes and priorities and they will change their ways. I would guess this is not a very effective strategy and other options might work better. Admittedly, some of these other options would take some time, such as educating Americans about architecture or working to enact local regulations that allows certain developments and home styles or promoting denser forms of urbanism that trade the private goods of McMansions for vibrant social contexts.

One danger of using an object as a symbol for other concepts is that the connection doesn’t always apply even if there is a grain of truth. McMansions were indeed part of the housing boom of recent decades but did they cause the economic crisis? Are all people who buy McMansions – homes that offer a lot of space as well as an eye-catching facade – conservatives with backward ideas and no interest in the common good?

Coming soon: a wrap-up to this four part series of McMansion traits.

Investing in foreclosed homes goes public

Here is a new business model: buy a lot of foreclosed homes after a housing bubble bursts, plan to rent out many of the properties, and watch the money flow in.

Though Blackstone is unlikely to sell much or even any of its stake in an IPO, the stock market debut will test investors’ interest in the idea that the rental-home business can be institutionalized as apartments, shopping centers and office towers were before.

Blackstone and others investors believed that the housing collapse presented a rare opportunity to acquire homes for less than it cost to build them. Millions of foreclosures created a market large enough to justify investing in large systems to manage and maintain sprawling portfolios of rental homes…

To generate the revenue growth that shareholders will demand, they must pace rent hikes to avoid spooking tenants into becoming home buyers themselves. And now that foreclosure rates have returned to normal levels and prices have rebounded, they could find it difficult to add new houses at attractive prices.

They also must convince investors that huge home-rental companies are viable long-term businesses, not just massive portfolios of properties that need to be sold off.

I imagine there will be some particular parties (not just investors) interested in how this works out:

  1. Nearby residents. What happens if this leads to significantly more renters of homes in certain places? Americans tend to view renters more negatively than homeowners – though this might change in the future if the country shifts to fewer homeowners. How well will Blackstone do with having quality renters and following up with issues?
  2. Communities. Having renters is probably preferable to having vacant homes. But, they might have similar concerns as nearby residents as well as other interests in how Blackstone uses the properties.
  3. Advocates for affordable housing. There was some concern a few years ago that having large firms like this purchase cheap homes could limit lower priced housing. The lower end of the housing market could use more stock but investors may need to pursue higher rents in order to generate profits.
  4. Renters and homebuyers. What kind of rents will Blackstone charge? Will they eventually sell these properties and at what price? What kind of landlords will they be.

Additionally, I wonder what would happen if this does not prove to be a viable business plan. Are there others who would be interested in purchasing these properties? What if foreclosure proceedings begin with an institutional investor?