Our Firm
Resi Wrap - Investments and Consumption
February 2021

Friends of ResiShares -

Apparently, friends of ResiShares have not been obeying the second rule of Fight Club, because inbound subscriber requests have begun to overwhelm our ability to manage this newsletter through email alone. So don’t be alarmed by the logo, the “unsubscribe” button, and other trappings of institutionalization. Same bat time, same bat channel, new format.

Investment, Consumption, Positions, and Assets

One simple heuristic that appraisers use to value real estate is the separation of value into “land” and “improvements”. This makes sense for a variety of practical reasons. For instance, your insurance company only needs to underwrite the value of your improvements, because the land underneath the house doesn’t disappear in a fire or earthquake.

This distinction is a helpful lens for economic analysis as well. To paint with a very broad brush, land tends to be an appreciating asset, whereas improvements tend to be depreciating assets, requiring maintenance and capital expenditure and facing obsolescence risks over time.

Colloquially, we tend to think of appreciating assets as investments, and depreciating assets as consumption, but this really isn’t true. An asset is really anything that has the potential to produce cash flows (as so well-put by a friend of ResiShares, currently employed by a major state pension, in his explanation of why gold is not an “asset,” but a “position"). Even the most famously depreciating asset, the automobile, can be a cash-flowing, value-accretive investment for Hertz or Uber (um….at least in theory).

Dinesh new Tesla Car (Silicon Valley S5)

So one way to think about real estate investing is that an investor is speculating on the appreciation potential of the land, as well as the ability for the improvements to generate net income that outpaces their depreciation costs. The reason for this long preamble is that two stories came across this week that speak a bit to every homeowner’s favorite topic: how much money do we get back when we “invest” in our homes.

Apparently, beige, gray, and taupe lead to the best resale value, according to Zillow. All programmatic buyers have put some degree of science around their home improvement process, even if it only amounts to codifying rules of thumb. What’s interesting to think about here is the time horizon.

Paint color and fixtures are really important to Zillow, because Zillow, as an iBuyer has a hold period measured in weeks. Matching the look of the home with the latest fashion trends from HGTV can therefore be highly accretive. By contrast, when any homeowner makes a more permanent change to any hedonic attribute of a home, they are implicitly making a bet on the relative value of that attribute at the indeterminate future time when they are likely to sell or rent it.

Unless the future value the homeowner can monetize from installing a given feature can outrun its depreciation, it’s not an investment. So maybe think about delaying your home addition:

Speaking renters want:

Rest of Resi - NY Times opinion piece on the shortfalls of section 8 vouchers as a vehicle for social mobility.

So I get that this is an opinion piece. There is one paragraph about halfway down that makes it worth a forward. Specifically, I’m referring to the author’s mention that Section 8 vouchers are desired by low-income landlords who value the consistent rents they produce.

Stripping away the opinion part, this is a really interesting policy point. Housing markets are famously inefficient, but they ARE efficient in certain ways. Notably, assets and neighborhoods with higher income volatility need to compensate asset owners (landlords) for that volatility with higher top-line rental yields.

Rural neighborhoods with less consistent rental demand offer higher yields than downtowns to compensate for vacancy risk. Similarly, low-income neighborhoods offer higher yields than more affluent neighborhoods to compensate for non-payment and eviction risk.

A section 8 voucher significantly reduces non-payment risk and eviction risk for a landlord. It is therefore economically obvious that a landlord sitting on an asset with a 12% headline yield should value that stability far more than one sitting on an asset with a 6% headline yield.

In other words, per the author’s very good (but likely unintentional) point, rental payment assistance is probably not an effective policy tool to advance social mobility. - Want more space? Move into an RV. - The tiniest of tiny spaces. - REX lawsuit. - “Winter of death” in mortgage. One of these folks is going to get the timing right and look like a genius, but the past decade suggests that no prior lessons from history will be applicable to guide us on the timing. Take it from a guy who has been waiting for rates to rise since 2014.

Have a great weekend,

Michael Greene

Co-Founder and CEO

ResiShares |

415.748.9635 |