Why not go vegan when you’re preparing for the apocalypse?

HBR: Are Your Company’s Leaders and Data Scientists on the Same Page?

“Unfortunately, what’s far more common is misalignment between expectations at the top of the organization and the foundation of what data science can realistically deliver. The best mental picture of this dynamic is an inverted pyramid. The wide top reflects the C-suite’s oversized expectations for data science impact. The small point at the bottom represents the data science team’s current capabilities, which are often far more modest and develop over time.” (from HBR)

Something fishy with Zillow's revenues

Great analysis by Mike DelPrete.  It’s as if an investment bank reported revenues based on the gross value of securities sold through its brokering business.  Another sleight of hand relates to ‘holding cost’ since the reported amount ‘excludes expenses incurred during the period that are not related to homes sold during the period.’  The good news is that Zillow sold 115 more homes than it bought in 4Q19; the bad news that ended 2019 having bought 2,198 more homes than it sold.  What’s clear is that the company’s balance sheet has changed dramatically, with Inventory ending the year at 13.6% of assets, up from 3.8% at 2018 year-end.  Since the $1.5B of credit facilities is already at 46% utilization, I’d keep a close eye on the velocity of homes inventory in 2020.  Zillow may discover that what they thought was a ‘shipping’ business was, in fact, a ‘storage’ business.

LendingClub's acquisition of Radius Bank

“The monoline marketplace lender model is a dead end for fintechs and they know it.”

Comprehensive analysis by Todd Baker on the LendingClub Radius Bank, hitting on all the issues that surfaced when we investigated making a push into personal loans a while back.

"It’s impossible to build a consistently profitable and resilient business without providing customers with a broader range of products and services--with their attendant revenue streams. There just aren't enough savings from automation to make up for lost revenues and financial intermediation costs."

Is Zillow in the shipping or storage business?

Much ink has already been spilled about the losses racked up by Zillow as it aggressively grows  revenues from its Homes segment.  Mike DelPrete further points to how the reported revenues are misleading because its basis is that of the home sale price.  It’s as if an investment bank reported revenues based on the gross value of securities sold through its brokering business.

Another sleight of hand relates to ‘holding cost’ since the reported amount ‘excludes expenses incurred during the period that are not related to homes sold during the period.’  The good news is that Zillow sold 115 more homes than it bought in 4Q19; the bad news that ended 2019 having bought 2,198 more homes than it sold.

What’s clear is that the company’s balance sheet has changed dramatically, with Inventory ending the year at 13.6% of assets, up from 3.8% at 2018 year-end.  Since the $1.5B of credit facilities is already at 46% utilization, I’d keep a close eye on the velocity of homes inventory in 2020.  Zillow may discover that what they thought was a ‘shipping’ business was, in fact, a ‘storage’ business.

More on The Economist's year of residential real estate...

"In the 1950s, 20% of households in a county moved each year. Today 9% do."  This one point about the decreased mobility of Americans may explain why The Economist seems to have made 2020 thus far its "Year of Residential Real Estate."  What’s evident is the publication sees real economic and societal costs from the ossification of “world’s biggest asset class,” abetted by government actions that have rendered an obsession for home ownership its “biggest economic policy mistake.”

The problem is that the US has some of the highest real estate commissions in the world, and antiquated "rules on commissions and data-sharing have so far kept fees higher than in other rich countries."

Thus begins the newspaper's the latest piece around real estate, about how "technology is poised to upend America's property market."

Glengarry Glen Ross in Mortgages 2019

The mortgage sector rocketed to a close in 2019 with $2.4 trillion of total production (up 46% year-over-year).  The recent trends of increased concentration at the top and the rise of the non-bank originators continue, with the Top 25 accounting for nearly 60% of the market (up 2 points) and non-banks accounting for 57% of that cohort (up 7 points).

"...first prize is a Cadillac Eldorado... Second prize is a set of steak knives. Third prize is, you’re fired.” (Alec Baldwin as Blake, Glengarry Glen Ross)

Just as important for the non-banks is the "Glengarry Glen Ross" nature of the competition.  In the past year, the top three non-banks (Quicken, PennyMac, United Wholesale Mortgage) accounted for 38% of the increased production amongst the entire Top 25, growing at 2.4x the rate of others in the cohort.

How did they do that?

Each of the top three non-banks have spent the better part of the past decade creating substantial technology platforms that seems to have able to mitigate the capacity constraints that have traditionally characterized US mortgage lending.  A 2018 study by the New York Fed ("The Role of Technology in Mortgage Lending") provides some some early intel on this topic.  In assessing the role of technology in mortgage lending, the study found that lenders whose business model incorporates "an end-to-end online mortgage application platform and centralized mortgage underwriting and processing augmented by automation" were able to "respond more elastically to changes in mortgage demand."

It further found that a doubling of application volume raises loan processing time by 13.5 days for traditional lenders, compared to only 7.5 for technology-enabled ("FinTech" in the study), with reduced denial rates,"suggesting that their faster processing is not simply due to credit rationing during peak periods."

The data set used in this study spanned 2010 through 2016, suggesting that these advantages would have increased substantially with the tech maturation of the past few years.

What does this mean for the rest?

Focusing on the field of non-banks below the top three (the "herd") for the moment since banks view their mortgage units as a part of a larger portfolio and have manifold considerations aside from just maximizing mortgage production, what are these institutions doing to with this past year's unexpected bounty.  Which ones are playing the ant of Aesop's Fables fame, diligently preparing for the inevitable lean times to come?  Which ones are the grasshoppers, enjoying the bounty and living in the present?

Just as importantly, how can the herd seek to close on capabilities when the leaders have substantial head starts that have moved them far down the experience curve?

Disruption!

In my next piece, I will investigate how the herd can marshal disruption to close the gap since traditional means will only get them to an infinite "follow the leader" loop.

Single family homes on their way out?!?!

Is it time to "accept the single-family home is outdated?"  Farhod Manjoo's pronouncement might seem a rather over-the-top reaction to the failure of SB50 for those outside the SF Bay area, but with situations like 2:30 AM shuttles out of Salida for morning shifts at the Tesla plant or Google shuttles providing a total of 4 million rides annually across an area the size of the New York City to Philadelphia corridor, I'd hesitate before calling him out as being histrionic.

Disrupting real estate brokering

Philadelphia-based Houwzer, a tech-enabled real estate brokerage & home services startup, raises $9.5 million from Edison Partners to fund geographic expansion in the Mid-Atlantic region.  Ventures seeking to disrupt the real estate brokerage business, which also include Fly Homes, Redfin and REX, have come a long way from the days when YHD Foxtons tried to reboot the space with low fees, leveraging technology for product and experience differentiation.  The challenge they face, is that these plays, as they internalize and optimize large portions of incumbent brokering capabilities, exist in the middle between those who seek to:

1. Leverage readily available external antecedents, but exert substantial control (e.g., Homelight) on one end; and
2.  Fully disrupt the incumbent model by inserting the company as counter-party into the real estate sell/buy transaction.(e.g., OpenDoor, Knock, Offerpad) on the other.

Is this middle defensible ground or is this no-man's land?

Is the US prepared for the Coronavirus?

"In 2018, the Trump administration fired the government’s entire pandemic response chain of command, including the White House management infrastructure.” (Foreign Policy)

According to Foreign Policy, the actions taken to essentially gut the reforms to epidemic response made by the Obama administration in the aftermath of the faults made apparent by our handling of the 2014 Ebola outbreak will likely impair our ability to react to the emerging likely pandemic in a coordinated manner.  These actions have included:

1. Reducing $15 billion in national health spending and cutting the global disease-fighting operational budgets of the CDC, NSC, DHS, and HHS.
2. Eliminating the $30 million Complex Crises Fund.
3. Ordering the shutdown of the NSC’s entire global health security unit.  Pressured DHS epidemic team to resign.  “Neither the NSC nor DHS epidemic teams have been replaced.”
4. Cutting the global health section of the CDC so “that much of its staff was laid off and the number of countries it was working in was reduced from 49 to merely 10.”

Moreover, the US Agency for International Development (US AID) has come under repeated fire from both the White House and Secretary of State Mike Pompeo. And while Congress has so far managed to block Trump administration plans to cut the US Public Health Service Commissioned Corps by 40%, the “disease-fighting cadres have steadily eroded as retiring officers go unreplaced.”

The administration’s actions on this front sound distressingly familiar, a government led by the “uninterested,” as chronicled by Michael Lewis’s book, The Fifth Risk.

...Or one where political machinations are primary drivers of action, as demonstrated by the imbroglio over the phantom Alabama leg of Hurricane Dorian.

Facts about our housing supply explain high rents and home prices

Urban Institute's latest dissection of the US residential housing sector indicates that, essentially, we’re not creating enough housing stock and what is being created costs evermore to build and tends not to be the right type of stock.