February 15, 2016

A Formula For Overdevelopment

The Daily Democrat reports from California. “Whether they are first-time buyers or hoping to get back into the red-hot housing market, David Setti with TurnKey Mortgage Solutions in Campbell, takes the opportunity to educate them. While lenders will allow 43 percent of gross income to be dedicated to debt, Setti asks his clients to think about the kind of life that debt will leave them with and whether they are comfortable with the bills they will be paying each month. ‘We think the industry is broken and it’s up to us to fix it,’ Setti said. ‘For example, I met with a couple who make $300,000 a year. First we talked about what they felt they could afford, figuring in their other expenses, and they settled on 1.2 million.’”

“Although they knew how much money they were comfortable spending, the couple was curious as to how much a lender would be willing to loan. They were surprised to hear that it was more than twice the amount they were planning to borrow. ‘He asked if the lender figured in their expensive eating habits, his kid’s private school education, or the money they spent caring for their horse. I told him, no, they don’t figure those expenses in and that we can only fix mortgages one at a time by educating clients.’”

The Chicago Sun Times in Illinois. “Thomas Morabito, Seneca Real Estate Group’s president, spoke with reporter Sandra Guy about Chicago’s housing market — and why he thinks people are paying too much for properties these days. Q: What’s the downside? A: People today are overpaying for properties. If they bought in 2009, 2010 or 2011, they got an unbelievable opportunity to buy something at 60 to 70 cents on the dollar. Today, owners and lenders are less likely to write down their assets. We’re getting to a tipping point where people are paying, say, $3,000 a month in rent — that’s akin to what you’d pay with a $450,000 mortgage — and thinking, ‘Maybe I should go buy.’”

“So I think, in the next 24 months, you’ll see a lot more condo projects. Also, interest rates for residential apartment buildings have been fueling demand for those investments. When interest rates go down, prices go up. I believe we’re in a mild bubble in terms of apartment buildings being acquired as an investment. I don’t think this bubble will be as severe as in 2008-2009.”

The Hartford Courant in Connecticut. “Home sales in Connecticut regained strength in 2015, surging nearly 17 percent compared with the previous year, a new report showed. The median sale price of a single-family house — in which half the sales are above, half below — slipped 2.2 percent in 2015, to $246,000, from $251,500 for 2014, said The Warren Group. Curt B. Clemens Sr., owner of Century 21 Clemens & Sons Realty in Rocky Hill, said he considered it surprising that strong sales did not push up the median price. ‘There is a lot of inventory out there,’ Clemens said.”

The Wichita Eagle in Kansas. “These are pretty good days for Wichita-area landlords, but trouble is brewing. Some in the industry expect landlords to start having more trouble finding enough tenants because of an avalanche of new apartment projects set to open this year and next. Very low interest rates have altered financing formulas, making borrowing money to build apartments cheaper while also punishing the returns on other types of investments.”

The result is more than 2,500 units built, under construction or planned for the Wichita area last year, this year and next year. That’s roughly a 10 percent increase in units overall, and a much larger increase in Class A – the newest, nicest apartments. ‘When developers are optimistic and the lenders are motivated, that’s a formula for overdevelopment,’ said Randy Johnston, an agent for J.P. Weigand who handles a lot of multifamily real estate.”

The Real Deal on Florida. “Related Group has started pre-construction sales of condos at the Auberge Residences & Spa Miami at lower prices than many rival condominium developments. Carlos Rosso, president of Related’s condo division, told the South Florida Business Journal the company is selling Auberge Miami units at an average price of $575 per square foot. Many condo developments in downtown Miami are selling at unit prices exceeding $700 per square foot.”

“‘Gran Paraiso and SLS LUX are suffering because we are going out at a great price on this project [Auberge Miami]. But we are fine with that because at those other jobs we already have met our pre-sales,’ Rosso told the Business Journal. ‘Now if you sell condos, it has to be at an attractive price.’”

From Biznow New York. “With nearly 600 attendees, Bisnow’s seventh annual Multifamily-Residential Rundown yesterday was not to be missed. Speakers discussed a range of trends and deals influencing the market, but the ramifications of a supply glut for ultra-luxe condos and a possible supply shortage for affordable housing dominated the discussion. ‘For projects with a sky-high price PSF, that market is really oversaturated and it worries me,’ says Bruce Eichner of The Continuum Co.”

“To make money in a condo market that’s ‘hit the pause button,’ as Bruce puts it, you need to get creative. New York City was built on rental units, and now that the condo market is starting to turn frothy, it’s likely developers will consider returning to their roots until the dust settles. ‘The first love of residential developers is never condos, it’s rentals,’ MaryAnne Gilmartin, CEO of Forest City Ratner, said.”

Bits Bucket for February 15, 2016

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