Mark Dow’s Behavioral Macro blog has a great post illustrating some of our most persistent cognitive errors in real time. The sad thing is that our cognitive errors tend to magnify under pressure which must have worked back when we were dodging saber-tooths out on the savanna but doesn’t help in our current culture which is built on the (mistaken) idea of rational actors doing what’s best for them. Here’s Mark:
Big, Fat Cognitive Illusion (and all of us are more Greek than we think)
Joe Wiesenthal at Business Insider put out a quick post this morning on the Pew Research Center study, “European Unity on the Rocks”, released today. It is an eye opening read.
To start with, it strongly supports the working hypothesis of many that the political forces now unleashed in Europe are centrifugal, not centripetal. This reality makes betting on solving the crisis through a deepening of the EU a longshot whose odds are getting longer by the day.
The main thing the report underscores to me, however, which is also jumps out from Wiesenthal’s post, is the extent to which human nature is gifted in self-deception, especially when under duress. But more on Europe below the fold. First, a word on behavior.
Starting about 15 years ago, I developed a strong interest in behavioral economics and evolutionary psychology. This came about when I started working in asset management and realized (1) how poorly economics was served by the assumption of ‘man as a rational maximizer’ and (2) how emotional and inefficient markets really were.
In the literature I ran into four takeaways time and time again. Specifically:
- We overestimate our abilities, our uniqueness, and our objectivity, even more so when under emotional strain. We have all seen the studies: 90% of people say they are above average drivers. Rarely do people think those around them work harder or better than they do. And so on…
- We systematically understate the role of ‘random’. We crave order, and we are willing to torture the facts to get there. But sometime things just happen, and sometimes problems don’t have solutions. No fundamental cause, no guilty party, no concrete answers. Moreover, on the up side, when random does break our way it’s appropriated as skill. The investment world is shockingly bad at separating outcome and process—yes, even those who drone on and on to prospects about their processes.
- People will find a way to believe what they are incented to believe. As the saying goes, “The most dangerous place to stand is in between someone and what they want to believe”. In my experience, it’s hard to overestimate the power of this statement. Starting with the conclusion and reverse-engineering the supporting arguments is central to the human condition and, surprisingly, serves and important role in our evolution.
- When presented with points 1, 2, and 3, almost everyone recognizes their validity, but believes at some level that he/she is exempt. The typical reaction is “Yeah, for sure, of course that’s how [other] people act”. It is always easier to see others’ mistakes than one’s own. And this is one of the reasons we have a very hard time changing our cognitive biases. All of us.
Now, back to the Europe and Greece.
Here’s the table that was screaming of self-deception: Continue reading Our Big, Fat Cognitive Illusion PLUS free campaign template for always getting elected
A WSJ article on the flubbed Facebook IPO article linked by Barry Ritholtz on the TBP blog had this quote: “Since the flash crash [ in May 2010], $370 billion has been withdrawn from U.S. stock funds by small investors, according to EPFR.”
The article contains a host of reasons and stats on why and how retail investors are abandoning the stock market but it all comes down to this: Continue reading $370 billion withdrawn from US stock funds since the May 2010 flash crash Via TBP blog
The recovery from the ‘Great Recession’ has been anything but slow for apartment building investment. During the recession many of the prime renters (age 20 t0 34) were hit hard by unemployment and m0ved back in with their parents. Others ‘bundled up’ by moving in with their friends.
“Sometime between 2010 and 2011 the number of doubled-up households started to decrease. This reversal released a great deal of pent-up demand for apartments. A greater number of people sharing multi-bedroom apartment units, as well as a greater number of young adults living at home, were able to move out and rent their own units. Moreover, these young adults largely did not purchase homes.”
After being hit hard by the recession, younger workers have benefited more than others from the recovery in hiring. Since the bottom in late 2009/10, the prime age cohort for rental apartments (ages of 20 and 34) has a net gain of more than 1.5 million jobs. This has enabled many of these young workers to move into their own apartments.
But will it continue?
“The 2010 decennial census estimates that roughly Continue reading Apartment building owners benefit from prime renter group ‘unbundling’, driving rents and occupancy.
From Serguei Chervachidze, Capital Markets Economist at CBRE Econometrics: “What’s the long-term spread between cap rates and Treasurys?” This question, with a few variations, comes from all types of clients—from small investment shops to large hedge funds staffed with many quants.
This is the wrong question to be asking, however, in that it assumes Continue reading Research shows that Apartment Building and CRE cap rate spreads shouldn’t be modeled as constant
A very interesting report on apartment building investment posted on the Freddie Mac website discussing Current Multifamily Values & Cap Rates In Historical Context explores where the market is today and where it is likely to be in five years under a number of different interest rate scenarios. Freddie doesn’t do loans smaller than $5 million (implying a minimum deal size of $6.6-7 million) and many of their borrowers are large institutional investors but the forecasting methods and valuation models they use are applicable to apartment building investing on any scale.
Some takeaways from the report:
Rental growth rates are expected to be Continue reading Freddie Mac sees strong apartment rental growth next five years in valuation report.
2/3rds of those are located in downtown, Capital Hill and Ballard. Owners of existing properties in those areas are about to have a bunch of new competition. With rent growth slowing to just about the national average what does that say about where we are in the apartment building investment cycle?
Click on the image to see the MPF Research video
1) The availability of attractive financing. Plus, the spread between fixed-rate financing and actual year one cap rates is certainly the widest that it’s been in recent history, perhaps ever. (There’s rumor that there was a bigger spread during the Roman Empire, but that may just be an old wives’ tale.)
From a macro perspective, the spreads between the treasury indexes and the premium on multifamily interest rates will almost certainly widen in the near term, but cap rates should remain stable in Class-C properties. They will probably continue to compress to a certain degree for Class-B assets.
2) Job growth Continue reading Two Key Factors for Apartment Building Investment Growth.
“History reminds us that a recovery from the simultaneous shocks of a financial crisis and a major recession require significantly more time and stimulus than a cyclical contraction, a process that could extend five to eight years compared to the more typical two- to three-year span following a cyclical recession. The pattern observed thus far since the recovery began is basically normal if not a bit better than expected.”
Remember that 2.5 million of the jobs lost were in construction and financial services (including mortgage origination mills and RMBS/CDO/CDS manufacture) so that returning to the same level of employment in those sectors would imply another bubble formation.
Now on the other handif job creation continues to fall off… See the whole GlobeSt. piece here: Weak Jobs Report Another Bump in Road to Recovery
Coming soon to these big MSAs, lots of new apartments:
- New York-Northern New Jersey-Long Island
- Dallas-Fort Worth-Arlington
- Washington, D.C.-Arlington, Alexandria
- Los Angeles, Long Beach-Santa Ana
- Houston-Sugar Land-Baytown
- Austin-Round Rock-San Marcos
- San Francisco-Oakland-Fremont
- Miami-Fort Lauderdale-Pompano Beach
For details see: MFE Mag online
Will they be able to fill them all? How will older properties in these markets fare? Let us know what you’re seeing-
Property Taxes can be one of the largest fixed costs in apartment building investing. Properly accounting for them when running the numbers on a potential purchase (called the ‘underwriting’ process) can make the difference between a nicely cash flowing property and an expensive headache. Multi-Housing News has a good article with the five key questions investors should have answered before making an apartment building investment:
- How often are values reassessed? Is there an automatic reassessment triggered by a transaction?
- What is the exact millage rate? How are they set? How often do they change?
- Are there limitations to the increases in assessed values during the hold period (a la Prop 13 in California)?
- What is the timing of the assessments and when exactly are bills due?
- What is the appeal process and how long does it typically last?
Don’t let this happen to your deal: Continue reading The 5 Most Important Property Tax Questions for Apartment Building Investing