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The Institutional Risk Analyst

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Housing & Mobility

"When we get piled upon one another in large cities, as in Europe, we shall become as corrupt as Europe."

Thomas Jefferson

New York | When William Clay Ford Jr., Chairman of Ford Motor Co. (NYSE:F), fired CEO Mark Fields earlier this year, he in part confirmed the view expressed in our book “Ford Men: From Inspiration to Enterprise,” that figuring out which supposed techno trend to believe (and invest in) will be a challenge.

After surviving the automotive equivalent of nuclear winter in 2008-2011, Ford and the rest of the auto industry rebounded nicely in terms of sales and profits, peaking last year at 18 million units sold in the US. But beyond next quarter’s financial results, every leader of every major global automaker is worried about one greatly glorified word: mobility.

“If there’s one takeaway from Ford ditching Fields,” concludes Wired magazine, “it’s that in our current transportation environment, ‘mobility’ isn’t so much a strategy as it is a euphemism for ‘we have no idea what’s happening next.’”

Bill Ford recently told The Wall Street Journal that his company lacks vision, but he’s going to fix it – by bringing in yet another new Ford Man, Jim Hackett. We warned in “Ford Men” that Fields was starting to sound like Jacques Nasser, a view that turned out to be prescient. But Bill Ford’s prattle about vision also sounds like some of his ill-considered comments about safety and the environment of a couple decades ago.

For long-term observers of the auto industry, this leadership transition at Ford Motor Co. raises concerns, in part because of what it says about the Blue Oval in a period of technological consolidation. We worry that Ford’s board of directors clearly liked the style of leadership under former CEO Alan Mulally, but still does not fully trust Bill Ford, especially given the widespread confusion over how to deal with the challenge of “mobility.” Alan Murray wrote for Fortune in May 2017:

“Mark Fields’ ouster as CEO of Ford yesterday is another example, if anyone needed one, of just how hard it is to lead a company in the midst of disruptive change. The auto industry is actually riding the waves of three separate disruptions, all at the same time: electric engines, ride sharing, and autonomous vehicles. Fields enthusiastically embraced all three, investing in a Silicon Valley research center, becoming a regular at the CES tech fest, and talking of making Ford a ‘mobility company,’ with one foot firmly in the present and one boldly in the future. But shareholders weren’t buying it.”

The mainstream auto business is being distracted by a growing number of irrational players and attendant consultants. The most obvious of these is Tesla (NASDAQ:TSLA), the love child of serial entrepreneur Elon Musk, who has spent billions pursuing the dream of an electric car powered by a battery with little hope of generating a profit. TSLA is in the high yield market even now borrowing another couple of billion, funds which will cover well less than a year of the company’s prodigious capital burn rate.

TSLA cars are heavily subsidized by US taxpayers and are not especially green either, especially when you consider the manifold inputs needed to make these pricey toys for wealthy car aficionados. There is no question but that DC motors powered by the appropriate generator are the best way to propel a train or a ship, but using batteries to power an automobile is a strikingly retrograde development. As we note in "Ford Men," a century ago Thomas Edison was fascinated by battery powered electric cars, but ultimately advised Henry Ford to use gasoline as a power source.

But specific to the idea of mobility, there are a growing number of players outside of the auto industry that have decided to ride a wave of changing consumer preference when it comes to how people use transportation. These new entrants to the world of conveyance include global limousine network Uber, online search engine provider Alphabet (NASDAQ:GOOG) and computer giant Apple (NASDAQ:AAPL).

None of these names have any competency in manufacturing cars and trucks, but all are attracted by the relevance and potential audience for mobility worldwide. The tech incursion into the auto sector marks a strategic attack by one industry against another in a contest for consumer attention.

Like TSLA, AAPL, GOOG and Uber are not particularly focused on making a profit – thus providing a serious problem for F and other incumbent automakers. The culture of growth that surrounds all of these new economy interlopers does not require profit – only liquidity and, for the profitless, a steady supply of greater fools. This is the economic environment defined by a growing list of money eating global monopolies – Amazon (NASDAQ:AMZN first and foremost -- that are managed for expanding market share rather than operating income and equity returns.

Part of the “collateral damage” from the Fed’s zero interest rate policies (referred to by economist Paul McCulley in a past IRA comment) is that investors how readily accept the idea of deploying capital into big, new ventures with no expectation of income or even the immediate return of principal. GOOG and AAPL spend billions of shareholder cash annually pursuing various speculative notions, while TSLA spends both equity and the proceeds from debt raised with its “B“ junk credit rating. But investors don’t seem to mind. The fact of growth drives valuation ever higher.

How does Bill Ford or any sane leader in the auto industry plan strategy when surrounded by seemingly irrational competitors such as these?

One of the interesting threads driving the mobility narrative in the auto industry is the idea that everyone is moving into the revived inner cities and fleeing the suburbs. Retailing clearly is in a state of apocalypse, but in part because of a huge surfeit of retail space built with cheap money. The debt placed upon the major retailers and their commercial real estate was “crazy”, to paraphrase retail expert Howard Davidowitz, “built by the lunatic ideas for growth led by Wall Street.”

The other factor in the deflationary spiral in commercial real estate for retail is AMZN, which is leading the world in online fulfillment for consumer purchases. But is it really the case that the suburbs are being abandoned?

We spent some time with our friends at CoreLogic recently, specifically deputy chief economist Sam Khater, who has done a lot of work on trends in population and pricing for residential housing. No surprise, Sam confirms that house prices in the outer rings around major cities have displayed more weakness than cities. He also notes that prices in the cities and inner suburbs have skyrocketed in recent years. But do these data points necessarily suggest that we are headed for a sharing economy where we’ll never own a car or go to a suburban mall or own a single-family home or travel long distances by car?

What Sam’s work does suggest is that prices in the outer rings around major metros are starting to accelerate after years of under-performance. He also identifies some interesting areas of risk for lenders, investors and loan servicers (aka “asset managers”) involved in consumer lending for things like homes, automobiles and other significant credit exposures. The weakness of home price appreciation (HPA) in the outer bands around major cities could support a couple of conclusions:

  • High HPA in cities will intensify the relative attractiveness of the outer suburbs, causing an acceleration of the long-term shift in populations that is already underway. Households with lower incomes and with young children will continue to be attracted to the relatively lower cost and greater living space of suburban housing, but will also face the cost of commuting into the city center for work and to access services.

  • Lower price appreciation in the suburbs means less equity accumulation for home owners and thus higher spatial income inequality compared with inner city households. CoreLogic shows that HPA in outer suburbs is half the rate of cities. Changes in home buyer behavior, such as the shift to a multi-family model in heretofore single family communities, suggests pressure on outer suburban localities in terms of zoning and taxes.

  • Lending to lower income borrowers in urban areas has fallen dramatically since 2008, one side effect of the Dodd-Frank legislation, forcing many potential home owners into rentals. These households are not able to purchase a home, meaning that they will not even be able to participate in the increase in urban home prices. The low income share of suburban home purchases is slowly rising, but still trails the overall rate of lending to all home buyers.

  • For lenders investors and managers, the movement of less affluent populations to the suburbs suggests that the credit profile of these geographies will decline accordingly. To paraphrase Sam: “The credit risk gradient is shifting to the suburbs.” Whether the household is in a home with a mortgage or a rental, the changing demographic of the suburban dweller will be of concern to investors in mortgages and REITs specializing in residential rental properties.

And for the car industry? The future is unclear. Bill Ford apparently shot long time Ford Man Mark Fields because of F’s slumping share price vs. aspirational and irrational competitors like TSLA, GOOG and Uber. AMZN will probably get into the mobility game too at some point. But the bigger problem at Ford is that the board of directors still does not have confidence in either Bill Ford or the incumbent management culture. John Baldoni wrote in Forbes:

“When a company hires from the outside it is an acknowledgement that things are not working well. What the board is really saying to senior management: “We don’t trust you guys to run the company.’ No matter how you spin it, bringing in a new CEO is a slap in the face to the people already there.”

For our money, we think Bill Ford ought to focus on making cars and leave the vision thing to the markets. And Jim Hackett may turn out to be a great CEO, whether he’s got the idea on mobility or not. If Ford and the other automakers listen carefully (and ignore the consultants), their customers will inevitably tell them what type of mobility solution is required for their needs. Those families rotating out to the suburbs will all need wheels, whether powered by gasoline, hybrids or batteries, private car or public transportation.

But for investors focused on housing, no matter how you cut it, the dramatic trends in HPA and demographics already suggest big changes in the years ahead. The wall of hot money created by the Fed has so inflated urban commercial real estate values from London to New York to Hong Kong that the repricing of housing is likely to drive many low income households out the cities for good, what one activist likens to “ethnic cleansing.” Mobility, at the end of the day, is a trend that favors the most affluent members of our society.


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