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Resi Wrap - Trading Sardines
March 2021

“There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, ‘You don’t understand. These are not eating sardines, they are trading sardines.’”

- Seth Klarman, Margin of Safety

Friends of ResiShares -

It appears that the housing market is….well-supported…these days, as described here:

and here:

We started today’s note with the “Trading Sardines” story because single family real estate is an asset class that expresses the “sardine duality" perhaps better than any other. That is, the owner of a single family home benefits from both the (generally depreciating) consumption of the home (a benefit they can lease out for profit), and the (generally appreciating) store of value represented by the land under that home. It is effectively like owning a car with a gold bar attached to it (for our west coast friends: gold bars are kind of like shiny yellow Bitcoins) . Houses are both “eating sardines” and “trading sardines.”

ResiShares’ opinion on the fundamental undersupply in US housing is well-documented (and self-interested!). As time goes on, however, and we get closer to satiating the market’s hunger, we need to know what trading sardines smell like, so we can identify them before getting sick.

There is certainly some evidence that the “gold bar” component of housing is what’s driving many parts of the market. In addition to the tremendous cap rate compression that we’ve seen in the investor markets, the dominant explanation of suburban flight in the owner-occupied market looks increasingly fraught.

Where is the cash coming from to buy these homes? If it’s coming from cashing out of home equity gains in city-centers, why haven’t New York or San Francisco condos lost value? Who is cashing them out of their prior positions?

The Rest of Resi - If you want to get the Wall Street Journal’s housing news a week early, read Resi Wrap!

Last year, we called for CPI to print above 3% at some point this year. Feb CPI came in at 0.4%. If the trends described in the link above persist, and housing-linked costs represent 40% of the CPI basket, this seems likely to go much higher. Even with the BLS’s ham-handed attempt to separate the “eating sardine” and “trading sardine” components of housing by tracking “Owner Equivalent Rent” instead of home prices, there is only so much they can do to keep this inflation from spreading.

Also, this is happening:

which seems likely to lead to more of this:

Here’s a fun thought exercise: if the government found a way to keep interest rates low forever, institutions would be able to accept permanently lower cap rates. Those institutions would not necessarily have to pass higher rents to tenants, because their lower financing costs would offset their higher purchase prices. It seems to me that you would end up with institutions owning substantially all of the housing in the country (except for a few rich folks who own property as a luxury hobby), and the reported CPI impact would be muted, even if the nominal price of owning a home were to double.

Speaking of institutions investing in this space, our “Oh Canada” note must have trickled across the northern border:

Given the supply chain challenges the WSJ article details above, construction tech would seem a great place for them to deploy some of that capital.

At $590k for a home in the middle of the desert, it doesn’t seem like we are quite at the “step function cost saving” part of the technology growth curve in 3D printing, but the implications for home prices if they get there are profound.

And finally, a home price index explainer for our friends in the UK:

Have a great weekend,

Michael Greene

Co-Founder and CEO

ResiShares |