Hotel REITs

I am bullish on reopening, especially when you combine it with a money-printing stimulus bill that is so gigantic I am wondering whether it might feel like an abrupt currency devaluation this summer.

The challenge is to find investments that aren't already pricing-in the reopening. Things like airlines and cruise ships are very obvious to retail, and they have never been my favorite investments anyway. I prefer to find things that are royalty businesses or some kind of real asset (e.g. real estate) rather than a low-margin "spread" business that could just as easily be challenged by higher input costs associated with the shock of the reopening.

One idea is hotel REITs. As real estate property, hotels are real assets. We have some reopening plays that are nominal assets, like banks. We bought Carter Bank & Trust (CARE) which has a large portfolio of loans to hotels and was trading at a deep discount to tangible book value. The valuation of Carter was lagging the reopening progress which made it compelling to buy.

Perhaps hotel REITs are lagging now. Here are three candidates that seem interesting. We always like the method of paired comparisons as a way of illuminating value.

Apple Hospitality REIT (APLE)

• $3.23 billion market cap, $1.8 billion debt, $5.03 billion enterprise value
• 30,000 rooms = $165k enterprise value per room 
• 3% upside to 52wh
• 2019 EBITDA $427 million (EV/EBITDA 11.8x)
• 2019 ADR $137 (room is 3.3 years of ADR)
• 2019 net income $172 million (19x P/E)
  

Sunstone Hotel Investors (SHO)

• $2.7 billion market cap, $0.69 billion debt, $3.39 billion enterprise value
• 7,503 rooms = $452k/room 
• 9% upside to 52wh
• 2019 EBITDA $311 million (EV/EBITDA 10.9x)
• 2019 ADR $240 (room is 5.2 years of ADR)
• 2019 net income $143 million (19x P/E)
  

Host Hotels & Resorts (HST) 

• $11.7 billion market cap, $4.1 billion debt, $15.8 billion enterprise value
• 46,142 rooms = $342k per room
  
• 5% upside to 52wh 
• 2019 EBITDA $1.475 billion (10.7x)
• 2019 ADR $324 (room is 2.9 years of ADR)
• 2019 net income $920 million (13x P/E) 
  

It is interesting that Host is the cheapest EV/ADR, EV/EBITDA (2019), and P/E on 2019 earnings.

Host owns really nice properties - I have been to four of their properties and they are the highest overall quality to the discerning traveler, although Sunstone has some trophy properties that would appeal to rich proles.

Real Estate Market

I had a sense that the expensive spec houses that builders have built recently in the neighborhood were not selling, but I just checked on Zillow and confirmed it. I assume they thought these would find buyers before construction was complete, but they have been sitting finished for many months unsold. Did they overshoot the mark on pricing? Or maybe got caught by the interest rate increases? (Mortgage rates are up >100 bps since mid to late 2016.) So now the developers are doing price reductions, which is a change to the post-recovery tempo. I think it will be an interesting sign if they do not move this inventory by fall.

"I attended the top of the Canadian Housing Market, so you didn't have to"

Amazing, read the whole thing:

"Originally, I thought this would be a bit of a joke. There were billboards in all the Toronto subway cars advertising the Canadian Real Estate Wealth Expo - learn how to become a millionaire. I thought this was so ridiculous, it may be fun. What better way to experience the top of the housing market than watching Tony Robbins and Pitbull along with a bunch of US real estate professionals explain how Toronto real estate is the path to riches.

Prices were originally $150 per ticket, but I was able to buy for $50. While it deeply bothers me that I paid $50 to these shameless (amoral) self-promoters, I thought it would be worth it to witness, in person, the top of the housing market.

I had thought, there can’t be that many people stupid enough to attend this, but I was very wrong - 15,000 people were there! I was blown away. Bubbles are largely psychological. This crowd was tangible proof of that. 15k people in one spot listening to Americans explain why real estate in Toronto is an exceptional investment. The whole experience was horrifying. The crowd was very well-dressed, middle- to upper-middle class (from appearances), and super excited to hear how much money could be made if you just buy real estate (most of them clearly already owned)."

Followup posts about Canadian lenders and then HCG blowing up.

"'Alpha' in Real Estate"

Great essay in PIB about real estate investing:

I’ve met many rich men in my long life, and I must confess that the category of rich man that most annoys me is the real estate landlord, simply because he seems to do the least work for his wealth. I’m not talking about visionary developers who create buildings out of nothing, but rather those who allocate their capital—or, often, the capital of their ancestors—to existing real estate, leverage it up, and sit back passively for years collecting rent checks and refinancing along the way, secure in the knowledge that the government offers explicit and implicit subsidies to their “efforts.” It’s both amazing and annoying how well you can compound wealth over time in this way, provided you’re lucky enough to avoid a downturn in which your leverage kills you.

I've seen many real estate investors blow up. They seem to operate under the philosophy that they should have as little equity as possible in their holdings, constantly tapping it with refinancings and using the proceeds to buy more property.

Macy's Real Estate Situation: Book Value vs Market Value

In October 2016, the Company announced the sale of five locations to General Growth Properties: one store location was closed in early 2016, three locations will close in early 2017 and one location will continue to operate under a lease agreement. The Company recognized a gain of $32 million during the third quarter of 2016 from this transaction. In addition, as a result of lease terminations or expirations, the Company will be closing Macy’s stores in Douglaston Mall, Douglaston, NY and Lancaster Mall, Salem, OR in early 2017. The Company has also signed an agreement to sell its downtown Portland, OR store for $54 million. The transaction is expected to close in the fourth quarter of 2016, at which time a gain of approximately $36 million will be recognized. The downtown Portland store will continue operations through the holiday season and will be closed in spring 2017.

In November 2016, the Company announced the formation of a strategic alliance with Brookfield Asset Management, a leading global alternative asset manager, to create increased value in its real estate portfolio. Under the alliance, Brookfield will have an exclusive right for up to 24 months to create a “pre-development plan” for each of approximately 50 Macy’s real estate assets, with an option for Macy’s to continue to identify and add assets into the alliance. The breadth of opportunity within the portfolio ranges from the additional development on a portion of an asset (such as a Company-controlled land parcel adjacent to a store) to the complete redevelopment of an existing store. Once a "pre-development plan" is created, the Company has the option to contribute the asset into a joint venture for the development plan to commence or sell the asset to Brookfield. If the Company chooses to contribute the asset into a joint venture, the Company may elect to participate as a funding or non-funding partner. After development, the joint venture may sell the asset and distribute proceeds accordingly.

In November 2016, the Company announced that it had signed an agreement to sell its 248,000 square-foot Union Square Men’s building in San Francisco for $250 million, and will use part of the proceeds to consolidate the Men’s store into its main Union Square store. The Company will lease the Men’s store property for two to three years as it completes the reconfiguration of the main store. The Company expects this transaction to close in January 2017 and expects to recognize a gain of approximately $235 million in January 2018. The Company continues to explore options for its New York City (Herald Square), Chicago (State Street) and Minneapolis (Nicollet Mall) flagship stores.

In addition, the Company continues to pursue other selected real estate dispositions to monetize assets in instances where the store is being closed or where the value of real estate significantly outweighs the value of the retail business.

In January 2016, the Company completed a $270 million real estate transaction that will enable a re-creation of Macy's Brooklyn store. The Company will continue to own and operate the first four floors and lower level of its existing nine-story retail store, which will be reconfigured and remodeled. The remaining portion of the store and its nearby parking facility were sold to Tishman Speyer in a single sales transaction. As the sales agreement requires the Company to conduct certain redevelopment activities at Macy's Brooklyn store, the Company will recognize a gain of approximately $250 million under the percentage of completion method of accounting. Accordingly, $107 million has been recognized to-date and the remaining gain is anticipated to be recognized over the next two years, with approximately $4 million expected to be recognized during the remainder of fiscal 2016.

"Granola Shotgun" and the Eventual U.S. Sovereign Debt Crisis

Some highlights from "Granola Shotgun", I think the entire blog is worth reading.

• As I went through life I watched as another boom and bust cycle played out with the crash of October 1997 and then again in the crash of September 2008. The interesting thing to me is the way different generations interpreted these events. The older folks never adjusted their penny pinching when times were good. They reflexively saved against lean times regardless of the current abundance. Boomers never learned to restrain their enthusiasm no matter how often they screwed up. They held firm to their buy-now-pay-later ethos decade after decade. A dog doesn’t change its spots. -"The Lost World of the Solvent American"
• The solution is always the same – work harder, earn more money, wait longer, take on more debt, buy something that someone else built, and feed the existing system regardless of how inefficient or pointless it might all be. - "Building Codes and the Self Built Mortgage Free Home"

He has a number of examples of how crushing regulatory burdens - at the county level - make it very difficult to build small, efficient commercial or residential properties. [See: 1, 2, 3, 4, 5 for examples.]

I've been looking quite a bit at the projected budget deficits over the coming two decades that will be caused by Social Security, Medicare, Medicaid and state pension obligations. State pensions are massively underfunded - to the tune of several trillions of dollars. Social security and Medicare represent liabilities of tens of trillions.

The federal budget deficit is now over a trillion dollars per year. Using accounting tricks, the government claims it's less than that, but look at the amount that the public debt grows every year. The increase in debt = expenses less revenue = true deficit. Simple check: the federal debt grew by $10 trillion in Obama's eight years. I think we can count on $1 trillion as the baseline going forward.

Using the government's own projections, Medicare will cause the deficit to increase by another $500 billion annually by 2026, Social Security will have the deficit increasing by a bit less but still several hundred billion, and Medicaid an extra couple hundred billion. (This assumes, of course, other federal expenditures and revenues held constant.) The total increase is a trillion dollars per year, which means eventually $2 trillion annual deficits for the federal government.

The current plan is just to borrow this. But these are enormous amounts of money. To put it in an individual perspective, there are fewer than 100 million federal income tax payers in the U.S. The current public debt of $19 trillion is $190,000 per taxpayer. Outspending revenue by $2 trillion annually is $20,000 per taxpayer.

If this sounds crazy, it is because you're looking at the endgame of a Ponzi scheme that ended when it caused the total fertility rate, and thus - eventually - the worker retiree ratio, to drop too much.

To put in a different perspective, the total equity value of the S&P 500 companies is less than $20 trillion. Imagine the federal government exhausting that much capital in ten years. I don't know when it will happen, but I think the bond market will choke. Occasional spikes in bond yields will be the signal that no more can be borrowed. (Ask James Carville.)

The alternative to borrowing is to get expenses back below revenues. There seem to be hard limits to the percentage of GDP that a government can collect (Laffer curve), although I'm sure it could collect more than it does now. If so, corporate taxes will be higher, not lower, and corporate profits will decline. Disposable income will fall significantly when income taxes rise. (Think: luxury cars, Starbucks, Amazon, Apple, cable TV bills, restaurants and breweries.)

In terms of cutting expenses, the federal government's largest expenses are these retirement Ponzi schemes. (And why would any baby boomer continue to support the federal government if these promises are not paid?) The only other expense that comes close is the military.

Interestingly, only a third of the military budget is for personnel. You could save maybe $200 billion a year if you stopped all materiel purchases and brought them back to bases in the U.S. to do pushups all day. If you want to get really clever, retrain them to do infrastructure repair of roads, bridges, water, sewer - another multi-trillion dollar can that has been kicked down the road and I am not even going to talk about in this post.

These cuts and tax increases are going to be very painful. I would imagine they will be the only political topic under discussion. No more neocon wars, no more gay marriage disputes. I would not bet on selling a new jet fighter or a 1,000 ship Navy. The Ponzi scheme disputes will have a racial identity politics dynamic because the older Ponzi participants are much whiter than the working age population.

Thus, my overall impression is that the U.S. is less rich than people currently believe or people's behavior currently implies. Stocks aren't worth their current multiple of earnings at peak profit margins; bonds shouldn't be yielding so little given that there is a recipe for a sovereign debt crisis. People's thinking right now is clearly delusional: Uber apparently subsidizes rides to the tune of 60% of the fare, so logically it is not worth the ~$100 billion that people think.

And in a period of rising property taxes, income taxes, and interest rates, people are going to find out that residential housing is not an investment. Depending on state law, it may be possible for retired municipal employees to expropriate significant amounts of home equity to maintain their pensions.

What do people say to this? I find that the rebuttal is that the Fed will print money and buy the government bonds to fund the deficit. That is what is going to look really delusional in the history books!

I realize that people have been talking about this for decades. I guess the mistake then was thinking that this would matter as long as interest rates were still falling. But I think it will be a mistake to assume it will never matter.

Finally, note the scary conclusion from the Granola Shotgun blog is that, at least at first, people are not going to be allowed (allow each other, really) to do a lot of the belt-tightening that will be needed to cope with the loss of illusory wealth. Can't build a little accessory dwelling in the backyard for your parents to live in.

Choice Comment on the "Housing Eating the World" Essay

On the WaPo version:

DavidRich
9:29 AM MST
Let me get this right, unemployed men with no college education are so scarce that the housing industry can't grow to meet the needs of the millennials living in their parents basements. Who writes this stuff? Probably the same people who believe the unemployment rate is 4.7%. These writers and academics should try living in the real world where tens of millions of working age Americans are so discouraged that they have stopped looking for work.

Real Estate Is Great, Unless You Pick Wrong

I mentioned in my review of Maritime Economics that ships were a bad investment and had underperformed Manhattan office real estate, which apparently quadrupled between 1980 and 2000.

That was, of course, an unfair comparison. After all, what if you passed on dry bulk carriers in favor of real estate, but bought real estate in Detroit or St. Louis instead of Manhattan?

If you have ever been to the northern Wisconsin towns along Lake Superior, it is obvious that their fortunes peaked in 1900 or so, based on the dates that (quite impressive) churches and public buildings were put up.

One town had a population of 6,000 in 1900 (now 2,000) and at that time had three daily newspapers!

This particular instance of decline is because the exploitation of iron bearing minerals in the Gogebic Range reached its conclusion, but it reminds me of Steve Sailer's observations of a winner take all effect in cities.

I don't think a person in Ashland, WI would have felt like he was missing much that could be had in Minneapolis in 1900. But that has changed, and in the winner take all contest in the midwest, the northern Wisconsin towns lost and Minneapolis won.

A house in northern Wisconsin goes for only $60k now! Very poor 100-year return compared to Minneapolis or even Duluth.

How do you know if your local industry is going to dry up and blow away, crushing your real estate value and personal earning prospects? (Also devaluing your social capital because two-thirds of your town is forced to move away.)

What if northern Virginia is the next Gogebic Range? They're remarkably good at extracting money from the taxpayer, but what if the taxpayer became more reluctant or simply has less to give? Better people have suffered worse business misfortunes than that.

ParaPundit On The "Protected Bubble Life"

Link:

"Millions of very decent and good people can't afford to live in upper middle class cocoon cities like what San Francisco is becoming. We need to allow the responsible members of the shrinking middle class and growing lower classes to isolate themselves from the worst members of the lower classes. People who lack the buying power to move to nice protected towns full of professional workers need ways to separate themselves from social pathology. Our current elites inflict section 8 housing and a growing immigrant lower class on the responsible people who can't afford bubble city life. This is just so wrong of them. Our elites are our enemies."

"Empty big boxes are finding new purposes in Minnesota"

"Abandoned stores are coming back to life as new owners fill the space with museums, mini-golf and other reuses."

A correspondent writes,

"Big box retailer museum ride - have little recreations of circuit city, best buy, borders, etc and a train that drives patrons through while playing music"

Evidence That Interest Rate Increases Are Self-Limiting

From a WSJ blog post:

You can see that the increase in average monthly payment, which was caused by a huge increase in the 10 year bond yield (almost doubled in four months), stopped the housing rally in its tracks.

I think there is a low probability that the 10 year yield could rise to the 4% level that bond bears were predicting, because of the effects that even a 3% yield had on the housing market.

What would another 100bps on top of that do to housing, or car purchases, or business capex decisions?

If my self-limiting hypothesis is correct, then 10 year bonds have more upside than downside, and they are not asymmetrically unfavorable as bond bears believe but rather asymmetrically favorable.

A Correspondent Visits Sears and Radio Shack at the Mall of America $SHLD $RSH

The Mall of America is grim, except for a limited area on the ground-floor that has been brightened. The 3rd-floor is dark and dingy. Many of the business locations on the 3rd-floor are fast-food outlets offering food you wouldn't want to eat, prepared by people you wouldn't want to touch your food. The 3rd-floor also has T-shirt shops, jewelry stores offering necklaces for $2.79 and a Radio Shack store.

When we visited the Raadio Shack store on Monday afternoon, there was a homeless man and a kid looking at some antennas. There were no other customers in sight until two people entered the store as we were leaving it. About a third of the merchandise was cell phones. There was a display of Beat headphones at the front of the store. It looked like a jukebox with flashing lights. There were few radios and very few TVs. There were cables and connectors for linking various already-manufactured electronic objects. There were no raw materials for making anything.

We entered the mall's Sears store from the 3rd-floor level. There were narrow aisles clogged with display tables laden with clerance merchandise--dull, low-quality clothing. Regular display tables had aimless, messy piles of clothing. There were no customers in sight on the whole floor. There was one sales person. Otherwise, we were alone in this desolate space.

We next went to the 3rd-floor level of Nordstrom for comparison with Sears. Its aisles are wide and comfortable. The space is neat, clean and well-lighted. Clothing merchandise on Nordstrom's 3rd-floor level is stacked in squared-off piles on counters or neatly hung from racks.We saw half-a-dozen customers and several Nordstrom clerks.

Next, we went to the 2nd-floor level of Sears. It was grim. Listless, unappetizing piles of clothing lay jumbled together in messy piles on counters. We saw no customers. There was one clerk. There was a new sign of low service. It was a check-out station next to the main entrance to 2nd-floor Sears. There were no cashiers at the check-out stations. 2nd-floor Sears had one sad little sign of quality, an 800-square-foot area that sold Land's End-brand clothing for children and women (nothing for men, however). The Land's End clothing seemed lighter and brighter and of a bit higher quality than the rest. The stacks were neat and squared-off, too. Someone was trying.

Next, we went to 2nd-floor Nordstrom. It was a light and bright, neat and clean space. There were quite a few customers and quite a few clerks. Merchandise was well-chosen, in tune with the season  and well-cared-for. Somebody smart and skillful cared, all along the line.

Next, we went to 1st-floor Sears. It startled us, and not in a good way.

Right at the main 1st-floor entrance, where you would see a cosmetics department if you were in Macy's, was an appliance department: refrigerators, washing machines and kitchen ranges. Amazingly, there was a riding lawn mower and various other merchandise one might find in a hardware store--hand tools, for example.

So the Sears store at Mall of America is two floors of low-quality clothing, possibly from Bangladesh, and a ground floor combination hardware store and appliance store--and this is decades after the merchandise mix at covered malls has evolved away from hardware stores. The Mall of America Sears store shows no grasp of merchandising at any level. It's a chain on the way out.

Canadian Real Estate Bubble

A correspondent writes in,

1. In Vancouver, offered by a credit union (so evading the lending restrictions put on banks), for first time buyers, 95% LTV loans – the bank put up half the down payment and give you $1500 back toward closing costs.
2. Seems like what we used to call layered risk in the US.   Subprime, stated income, 2nds allowed up to 90% LTV.  Focus on the “story” behind the numbers.  Targeting, among others, “professional landlords” who exceed “concentration limits” ie, number of properties owned – and they can be stated income.  Hmmm. 
3. Raising the LTV limit on 2nds to 90%.  The fee that you pay instead of CMHC premium is rolled into the loan amount, naturally.

Wall Street is Back - Hamptons

NYT:

"The nexus of the Hamptons McMansion production line, the Farrell Building Company, currently has 30 spec homes in various stages of construction, mostly in the $3 million to $10 million range, and mostly in Amagansett and Bridgehampton."

Comment on South Gate Field Trip / Los Angeles Construction Bubble

A correspondent writes in about the Los Angeles real estate field trip and observations about the new construction project in blighted South Gate, CA,

Two points
(1) There is a whole world of subsidized housing, transferable tax credits and tax-free muni financing. The developers will often have a captive (they don't like the term of course) non-profit that runs the properties they buy (sometimes they buy the defaulted loans). Local housing authorities don't like "for profit" entities running the housing sometimes so they have their non-profit run things (very well) and the fund gets the tax-free loan (secured by the property and at very, very attractive rates). So suboptimal location/properties might be very profitable to build. Then you probably have the retailers incentivezed to move there by some politically correct economic development authority. They also get special credits for hiring in certain areas.

(2) Where I was exposed to "good retail" in places where it does not belong was when I was taking the bus from Columbia across 125th street in Harlem over the Triboro to Queens. You probably would not walk on the sidewalk on 125th but there were big national chains all along the strip. Now there's even more coming.

Our financial system (which is not capitalist or free market) seems to be making horrific misallocations of resources.

The city of Cudahy is a mile away from the new 400,000 square foot property in South Gate. There's an LA Weekly article called The Town the Law Forgot,

The cities around the 710 freeway — a gateway from the Port of Long Beach to the rest of the nation — are so small they share freeway exits. Graffiti is scrawled on overpasses, exit signs and the concrete banks of the L.A. River, informing visitors that they are about to enter gangland. The grimy strip malls, auto-body shops and fast-food joints further speak to a loss of prosperity.

Cudahy, the smallest, poorest and most violent of these cities, feels like a place the law has forgotten — a feeling that intensifies along Santa Ana Street, where a large “18” is spray-painted on a telephone-utility box at one end of the block, and another large “18” is tagged at the other end — on a government dumpster, no less, at Cudahy City Hall.

And I'm crazy for thinking you wouldn't want to build a new shopping center here?

Another Construction Bubble? Evidence from Los Angeles

Driving around Los Angeles, I saw the following collection of retail storefronts along the south side of Firestone Blvd west of Atlantic Avenue.

This is in the city of South Gate, which borders Watts and Compton. It is a zip code (90280) that is much poorer, younger, and less educated than the California or U.S. averages.

Now, I know what you're thinking: this street obviously needs more retail square footage.

Fortunately, the good people at Primestor Development appear to be willing to help out. Their new 400,000 square foot project Azalea is directly across the street from the storefronts above.

Now maybe they are correct that there aren't enough fast casual restaurants within a five mile radius. But with a per capita income of $12,000 - $33/day for food, clothes, housing, transportation, utilities, cell phones (!), etc - is this where you want to place your bets?

As I was writing this, a paper called "The global cycle: A cycle of construction and not business investment" [pdf] happened to come across my desk. They point out that the economic recovery is concentrated in construction and not in capital goods, except those necessary for public infrastructure. Activity is concentrated in real estate because of low interest rates and probably because of the perception that making buildings is "low risk". However, the authors warn,

"An economic recovery due to investment in construction and not productive investment is atypical. It is probably due to the powerful effect of monetary policy on investment in construction. It is likely to be vulnerable [because] it is threatened by more restrictive monetary policy, it creates no additional production capacity, [and] it is not relayed by a pickup in international trade"

It looks as though the Fed has blown another construction bubble, because blowing bubbles is all they know, and the proof is in the sudden explosion of construction projects in very marginal locations.

Building Bubble - Topping Indicator

"Washington reversed a decades-long decline in population, and has for several years been growing as fast as any of the fastest-growing states. Long-neglected neighborhoods have been gentrified, real estate prices are skyrocketing, and the Office of Planning predicts that we could run out of attractive places for developers to build. [...] All of that has made the current conversation about raising the District’s height limits, codified in federal law more than a century ago, different from past efforts."

Washington, DC is running out of office space because of productive enterprises making things? Or because of grifters, lobbyists, regulators, and contractors? Does it matter, since "it all goes in to GDP"?

The Landlord's Game

"Monopoly was invented not by an unemployed man during the Great Depression but in 1903 by a feminist who lived in the Washington, D.C., area and wanted to teach about the evils of monopolization."

Monopoly is a profoundly stupid game compared to, say, poker.

Paper: "Market Risk of Real Estate"

From a new paper, "Market Risk of Real Estate",

"Direct real estate is the largest asset class without readily available prices. The market capitalization is comparable to that of equities and fixed income [but] because of the missing price information, it is difficult to estimate the market risk of direct real estate. [...] We find that the existing direct indices understate real estate market risk. Indeed, using data from the UK, the volatility of the real estate asset class that our model entails is almost three times that of appraisal-based indices, and two times that of transaction-based ones. In addition, the correlations to other asset classes are materially different and higher, which is important in a portfolio context."

Yet real estate seems less risky because you don't have to hear about prices as often. Ignorance is bliss.

Hussman's Analysis of Why the Real Estate Market Isn't Clearing

From his latest weekly market comment,

"[A]bout 22% of mortgages are underwater, with mortgage debt that exceeds the market value of the home. Likewise, banks have taken millions of homes into their own 'real-estate owned' or REO portfolios, and have dribbled that inventory into the market at a very gradual rate. All of that means that the availability of existing homes for sale is far smaller than the actual inventory of homes that would be available if underwater homeowners were able, or banks were willing, to sell. Accordingly, much of the volume in 'existing home sales' represents foreclosure sales, REO and short-sales (sales allowed by banks for less than the value of the outstanding mortgage). That constrained supply of homes available for sale is one reason why home prices have held up. At the same time, constrained supply means that new home buyers face higher prices and fewer choices for existing homes than they would if the market was actually clearing properly. Given those facts, buyers who are able to secure financing (or pay cash) often find it more desirable to build to their preference instead of buying an existing home."

I'm seeing this in the former bubble markets. Sold out new developments, while tons of vacant (but not for sale!) property rots, unused.

All the same, this strategy might actually work, if they can slooowly bleed those REOs out. The good news is that REOs don't cost much with interest rates this low.