August 27, 2016

An Extreme Instance Of How Crowds Can Go Crazy

Two unrelated items for weekend reading, starting with MarketWatch. “It says a lot about human nature that the scientist responsible for the law of gravity was sucked into an investment that for a time defied gravity. Throughout history, people — especially those at the top rung of society — have been greedy and gullible participants in financial bubbles. And Sir Isaac Newton was only human, after all. But the infamous bubble that ensnared Newton, involving a newly established stock market with a company at its center that was fueled by rumors and information gleaned in coffee shops, holds investment lessons to this day.”

“Coming just a few years after the spectacular Dutch Tulip Bulb mania and crash, the South Sea Bubble of 1720 centered on a company that got its start in slave trading, and which had been promised a monopoly of trade by the British government in what is now known as South America for taking over and consolidating the national debt raised by the war against France.”

“After the South Sea Company got the green light on debt, its shares began soaring, pumped by rumor-spreading and inexperienced executives. Investors at this time had to rely on coffee-shop ‘grapevines’ and the press for share information, and the two were interdependent as Richard Dale, pointed out in his book ‘The First Crash: Lessons from the South Sea Bubble.’ The South Sea bubble eventually took down the French company, though the latter was blamed more on faulty monetary policies.”

“In many ways, Newton and other investors of the South Sea Bubble were not too dissimilar to those taken in by more modern bubbles — convincing themselves they were onto a sure thing only to have it blow up. MarketWatch spoke to him about the South Sea Bubble and what investors nowadays can learn from it: MarketWatch: How did the bubble eventually burst for the South Sea Company?”

“Richard Dale: The South Sea Company did not go bust in the sense of having negative net worth. It suffered a catastrophic liquidity crisis because it was spending so much money on supporting its share price. It had to be bailed out by a combination of debt forgiveness and injections of liquidity by the Bank of England. It survived as a financial holding company.”

“MarketWatch: How did Isaac Newton get lured into such a disastrous investment? Dale: Newton invested around £3,500 in early 1720 and sold out in late April of that year having doubled his money. However, like so many others, he was induced to get back into the market in the summer of 1720 at the height of the bubble and ended up losing £20,000, around £3 million in today’s money.”

“MarketWatch: What modern-day financial bubble is most similar to the South Sea Bubble? Dale: From the standpoint of the South Sea directors, the bubble represented a giant Ponzi scheme (e.g. Bernie Madoff) in that it proposed to pay dividends not from profits but from sales of new shares for cash. From the point of view of investment behavior, the bubble resembles the boom/bust when the valuations of companies lost any connection with underlying value or realistic profit projections. (The Bank for International Settlements pointed this out at the time).”

“Although this was far ago, the period of history the market was in was not so terribly different from today, such as options-forward markets and people buying on margin and so on. These were quite sophisticated markets. Ok, you didn’t have the framework of financial regulation and didn’t have long-term investors, it was a very short term market, allowing for those differences….I think you can draw parallels from today’s markets. I don’t think anything’s changed. I think it is a lesson to us all, a particular extreme instance of how crowds can go crazy.”

The Maryville Daily Forum by Eric Sheehan. “When we decided to move to this happy little Ville almost a decade ago we toured a bunch of houses. One in particular caught our eye. It was a turn of the century (1900) beauty with so much character only a fool could pass it up. Sure it needed a lot of cosmetic work and updates but that is part of being a homeowner, right?”

“We moved in and rolled up our sleeves. Layer upon layer of wallpaper was steamed and scraped to expose the beautiful plaster walls beneath. Sure there were cracks but that was just part of the character of a century old house. We had a check list and started to go room by room doing the what we could while the house built equity so we could afford the larger renovations like remodeling the 70’s kitchen and 80’s bath. Then the housing bubble popped. Our home’s value deflated like a helium balloon left out in the cold. Suddenly the biggest investment of our lives was becoming our biggest mistake.”

“I was bemoaning this predicament with a friend when he stopped me and said, ‘What you have there is a Money Pit.’ I paused and stared blankly at him. ‘You know, Money Pit, with Tom Hanks, came out in the 80’s,’ he clarified, ‘and Neighbors, the family that has a frat move in right next door to them….that’s you buddy.’”

“He was right, our home had become a financial vacuum and to compound things all the houses on our block had become rentals and not just family rentals, pack ‘em and stack ‘em college rentals. Our neighborhood has also become money making property for the most part. This caused a noticeable decrease in our resale value but there are also other benefits. A couple years back my son and mother got to see one of the neighbor kids streak around the house. We have had at least one young man pass out in the driveway and yet another try to come in our back door insisting that it was his house, they are so adorable at that age. Lucky for us since the central air is out it is almost impossible to hear the late night revelry over the window unit and three fans that cool our bedroom.”

“It hasn’t all been bad though. So many memories are held within the walls of that grand old house. She really has served us well, we just happened along 30 years late. Our next home will be a townhouse if I get my way and it will be rented. It’s not that home ownership is all bad, I just don’t think we’re cut out for it.”

“While I’m on the subject any one interested in one heck of an investment property? You could probably get eight kids in it, finish the attic and make that 12 and if they can swim you could fit three more in the basement … don’t worry I fixed all that stuff I mentioned.”

Supply Is Being Drained By Short-Term Scofflaws

The Gothamist reports from New York. “Activists often argue that Airbnb is driving up New York City rents by allowing fly-by-night hoteliers to illegally rent out whole apartments year-round, thus taking much-needed housing off the market. The data news site FiveThirtyEight commissioned data from the for-profit Airbnb data-scraping service Airdna to understand the prevalence of whole-apartment rentals in cities nationwide. The data for New York shows that between June 2015 and May 2016 about 8 percent, or 2,464 of the city’s 30,800 Airbnb listings offered whole apartments for more than 180 days out of the year.”

“A city housing survey in 2014 found that just 3.45 percent, or 75,900 of New York’s 2.2 million apartments were vacant at a given time. Last month, data compiled by the firm Citi Habitats showed that just 1.92 percent, or 16,500 of Manhattan’s about 854,000 apartments were available. In this context, 2,400 apartments (more or less) is kind of a big deal.”

“A recent report by MFY Legal Services and Housing Conservation Coordinators defined ‘impact listings’ as whole apartment listings that are rented for less than 30 days, booked more than once a month, and listed more than either 3 or 6 months out of the year. Their analysis found 8,058 such units in New York, and determined that if all else remained equal and those apartments were returned to the rental market, the citywide vacancy rate would rise to 4 percent.”

“Murray Cox, an activist with the group Inside Airbnb, said that the startup’s resistance to turning over even anonymized data shows that it doesn’t care about concerns that it is adding pressure to an already extremely tight housing market.”

“‘If they were really interested in accountability, they would be trying to work within the intent of [government] regulations and working with cities to protect affordable housing, and addressing what is abuse of the platform and what it is people are interested in protecting about neighborhoods,’ he said. ‘I think that Airbnb isn’t interested in doing that at all. I think they’re interested in defending anything that they see as an attack on their revenue.’”

The Tampa Bay Times in Florida. “Large parties are continuing in a Tierra Verde mansion rented through Airbnb, even as the host faces drug trafficking charges and a Pinellas County commissioner is looking at ways to eliminate abuses of the popular home-sharing site. As the Tampa Bay Times reported in June, the house has been in foreclosure for several years. The elderly widow who lived there deeded the property to Tampa real estate broker Kevin Byrne, who has been renting it for about $3,000 a month since January.”

“With a home in foreclosure, ‘who do you hold responsible in that scenario?’ said County Commissioner Janet C. Long. ‘People spend their hard-earned dollars to live in a lovely neighborhood and they have to deal with that kind of thing and there’s no law against it.’”

Fusion on California. “In the teeny-tiny village of Joshua Tree, California, population 7,000, there are more than 200 vacation rentals on Airbnb. In recent years, visitors to Joshua Tree National Park have soared, and last year the number of visitors hit a record high, surging by more than 27 percent to over 2 million. ‘The short-term rental market is out of control right now,’ said Mark Lundquist, the local field representative for the village from the San Bernardino County government.”

“Over the past year, Lundquist told me, feeding that demand has put a strain on local resources. The local home buyers’ market has all but dried up as property owners put their places on short-term rental sites instead of up for sale. Long-term rental units are scant. And in Joshua Tree, it’s not even peak tourism season—that isn’t until the fall.”

“In May, I worked with the technologist and Airbnb data guru Tom Slee to investigate Airbnb’s effect on the small Icelandic capital of Reykjavik. In Reykjavik, which has a population of 120,000, five percent of the local rental market now belongs to Airbnb. It has made finding a place to live there next to impossible. Since then, both Slee and I have heard from even smaller communities reeling from the impact of sharing economy startups.”

The Williamette Week in Oregon. “When Rebecca Rosenfelt moved to Portland from San Francisco last summer, she and her husband paid $1.6 million for two Boise neighborhood townhouses and almost immediately began renting one of them out on Airbnb for as much as $350 a night. The four-bedroom townhouse is one of six properties Rosenfelt listed on the short-term rental marketplace Airbnb—three in Portland, one in San Francisco, and two in Northern California’s Sonoma County.”

“When Portland began allowing short-term rentals in 2014, City Hall created rules to ensure that Airbnb’s clients wouldn’t add to a citywide housing crunch by taking apartments and homes off the market and renting them out to tourists. San Francisco passed similar restrictions. Among those rules: People can list only properties where they live for at least nine months a year.”

“Rosenfelt’s six properties violate the spirit of those rules—and at least two of her rentals, the San Francisco condo and Northeast Portland townhouse, flout the letter of the law by not having the required city permits and safety inspections.”

“And Rosenfelt should know the law: She’s an Airbnb manager at the tech company’s Portland headquarters.”

“Critics have long complained that Portland’s short-term rental regulations are toothless—two years after the rules were adopted, less than a quarter of Airbnb clients have bothered to get the required $178 permit and safety inspection. Now those skeptics say the rules have become such a joke that even an Airbnb employee ignores them.”

“‘It just makes it look like those rules were only ever for show,’ says Margot Black, an organizer with Portland Tenants United. ‘Even an Airbnb manager is blatantly flouting them. The fact that it’s in the midst of a housing crisis makes it all the more obscene.’”

“An analysis commissioned by WW shows that if illegal short-term rentals were removed from the Airbnb website, as many as 1,718 homes could be made available to Portland residents instead of tourists. Some leaders say the city’s housing supply is being drained by short-term rental scofflaws. ‘If you take thousands of units off the market, it’s going to have an impact,’ says Commissioner Nick Fish. ‘People now have the option of making more money renting to short-term rather than long-term tenants.’”

“About 79 percent of the 3,500 Portland listings on Airbnb don’t have city permits, according to data provided by the city and Murray Cox of the tech website Inside Airbnb. In 2015, WW reported that dozens of Airbnb clients were ignoring city rules by listing multiple short-term rentals—sometimes while living out of state (”Hotel California,” WW, Feb. 17, 2015). A recent examination by Cox shows the problem has persisted even after repeated deadlines from the city and the threat of fines to the company.”

“In one example, one woman has 22 listings all clustered near Northeast Alberta Street, none of them giving a city permit number, according to data from Inside Airbnb. Rosenfelt has worked as a product manager for Airbnb since 2012, according to her LinkedIn profile.

“Rosenfelt’s condo in San Francisco remained listed on Airbnb. She can’t get a legitimate Airbnb permit for the San Francisco address as long as she lives in Portland, because San Francisco also requires Airbnb clients to live in the units they rent out. There’s no record of a permit ever being issued to Rosenfelt, officials with San Francisco’s short-term rentals office say.”

“She’s not the first Airbnb employee to run afoul of the rules. The company’s CEO, Brian Chesky, was busted in January for failing to register his apartment in San Francisco, but he easily rectified the situation by registering his couch, for which he asks $50 a night.”

“But unlike Chesky, Rosenfelt can’t fix her mistake with paperwork—she’s breaking the rules in two cities, including residency requirements. The Boise townhouses Rosenfelt purchased were built just last year. Nearly three years ago, a developer purchased a modest house on Northeast Rodney Avenue for $259,000, demolishing it to make way for Rosenfelt’s two, 3,000-square-foot townhouses.”

“Those new units might have increased the city’s housing supply—but it appears one of them is partly being used as a bootleg hotel. (Airbnb officials say Rosenfelt is renting at least a portion of her second townhouse to a long-term tenant, as well as advertising it as a short-term rental.) Airbnb spokeswoman Alison Schumer defends the company’s record in working with Portland, blaming the city’s ‘complex’ process for getting permits.”

“Schumer declined to comment on why Rosenfelt was allowed to list six properties on Airbnb. ‘We are working with this employee to help her navigate the registration process,’ Schumer says.”