James Dondero is one of the nation’s leading hedge fund managers. Unlike many of his high-flying Wall St. peers, Mr. Dondero remained based in Texas and has followed a conservative, value-driven strategy through times of boom and bust. He’s continued to deliver strong returns for his investors by sticking to the basics, not getting too fancy and only investing in assets which he thoroughly understands.
One of Mr. Dondero’s main areas of investment has always been real estate and the syndicated mortgage market. As one of the pioneers of collaterlized loan obligations, Mr. Dondero has gained a profound knowledge of the country’s mortgage markets and the real estate markets which drive them.
Over recent decades, some trends have been hardening into discernible patterns. Many of these trends are first seen in the state of California years or decades before they become predominant in the United States as a whole.
California as the country’s leading indicator
People have often remarked that California is a window into America’s future. From fashion, to consumer technology to automobile regulation and design, this maxim has had more than a grain of truth throughout the last 100 years.
But it has been equally true of demographic and market trends. No place in the country is there a more diverse, dynamic and vastly unequal real estate market than in the state of California. It’s there that we see some fascinating trends emerge. From some of the most expensive cities to some of the most downtrodden, California gives us a glimpse into what America’s future real estate market may hold.
The haves and the have-nots have kids, the middle class, not so much
Perhaps no other trend is so exemplary of California’s housing market than the gaping differences between markets. Take San Francisco, for example. Between 2012 and 2017, the median home price has nearly doubled to $1,158,000. That’s almost $400,000 higher than before the housing crisis of 2007.
Now, compare that with Fresno. There, the average home price is at just $205,000. But in Fresno, the median home price is still $75,000 below where it was prior to the housing crisis. This does make apartments in Fresno quite affordable. The median rent price is just $1,100, as cheap as some Midwestern cities. So what’s the problem?
The demographics of Fresno are almost the mirror image of those of San Francisco. Between 1990 and 2010, the population of whites in Fresno has declined by 40 percent. And there are indications that the rate of white decline is actually accelerating. The portion of Hispanics has exploded while those of Asians and blacks have stayed roughly the same.
However, in San Francisco, the Asian demographic has exploded while whites and Hispanics have stayed roughly the same and blacks have sharply declined. This is a pattern seen over and over throughout the state. Whites and Asians will not buy homes in areas that are heavily black or Latino. But whites and Asians are precisely the groups that make up the vast majority of the state’s and the nation’s middle class. They will not live in the only place they can afford to. This leads to middle class flight from the state and an increasingly Brazil-like gulf between the underclass and the technocratic overlords.
About James Dondero
James Dondero is founder and CEO of Highland Capital Management. Founded in 1993, Highland Capital Management is a diversified fund making investments in CLOs, real estate, leveraged assets and offering a wide range of financial products to its customers. It follows a strategy of investing in credit markets by taking mostly long positions and using fundamental analysis as well as technical indicators to maximally exploit inefficiencies.