The Housing Bubble

Bloomberg reports on California. “With its 40 stories and monthly rents of as much as $25,000, a new Los Angeles apartment tower is reaching Manhattan’s heights. And its amenities may make New Yorkers jealous: a chauffeur-driven Rolls-Royce, in-house Botox and your latte brewed to order before you even ask for it. In a city known for sprawling mansions, the 283-unit Ten Thousand, scheduled to open in January on the border of Century City and Beverly Hills, is testing the market for high-end living with high-rise views. It follows the success of the nearby 8500 Burton Way, which opened almost four years ago as one of the city’s first ultra-luxury rental buildings and is now fully leased with rents of $12,000 to $40,000 a month.”

“While the $8,500 starting rent at Ten Thousand isn’t unheard of in New York, it’s uncommon in Los Angeles, where a mortgage payment of that amount could pay for a $2.1 million villa with six bedrooms and guesthouse in the Hollywood Hills. But for a wealthy millennial, an international visitor or a bicoastal executive, Ten Thousand’s two- and three-bedroom rentals provide an alternative to a five-star hotel or buying a mansion and hiring a team of servants.”

“Developer Rick Caruso, whose 8500 Burton Way has even higher rents, said the biggest challenge for Ten Thousand will be getting its almost 300 units filled. ‘There’s a bit of an amenities arms race, where each building wants to have the latest, greatest and newest features to outdo each other,’ said Krishna Rao, an economist at real estate listings website StreetEasy.”

The Union Tribune in California. “The median rent at the bottom rung of the San Diego County apartment market rose nearly 16 percent faster in the last year than the market as a whole, said Zillow. Eleven percent of new construction since 2014 has been at the low-end, but high-end has accounted for 64 percent of building — leading to more competition for cheaper places. The study illustrates tension between builders, who say they need to construct high-end units to pay for permits and regulations, and housing advocates pushing for more options across all income levels.”

“At the same time, there continues to be no shortage of renters who are willing to pay for luxury apartments. San Diego County’s lowest-income renters spend 69 percent of income on rent, said the latest report from the California Housing Partnership Corp. It said the median rent had increased 32 percent since 2000 while median renter household income, adjusted for inflation, had declined 2 percent.”

“Matt Schwartz, CEO of California Housing Partnership Corp., said curbing regulations in California may not mean builders will decide to build more low-end units. ‘If your goal is to make money, you’re probably always going to chose the biggest margin you can,’ he said. ‘If you got rid of a bunch of regulation, how much do we think builders would then lower their prices to make it affordable for people at 50 to 60 percent of median (income)? No, they would take the profit.’”

The Denver Post in Colorado. “Central Denver is spinning out apartments at one of the fastest rates in the country, according to a national survey of apartment construction. The submarket made up of Downtown, Highland and Lincoln Park ranked 7th out of nearly 1,000 submarkets tracked nationally with a 71 percent growth rate in its inventory of apartments built and under construction since early 2012, according to MPF Research. The 71 percent jump in apartment inventory was eightfold the increase averaged across the nation’s 100 largest metros.”

“The developments, with more bells and whistles than past generations of apartment buildings, aren’t targeting those making the median income. ‘We are seeing dramatic growth in urban areas,’ said Jay Parsons, vice president of research at MPF. ‘These are people who are making good money, working good jobs. This is a relatively privileged class,’ Parsons said of the tenants.”

“Rent gains are slipping and vacancy rates are rising in the areas with the most concentrated apartment construction, raising the risks for developers, especially if the economy slumps. But Parsons argues long-term demographic trends support the construction wave in popular urban areas. And as to the idea that developers will pivot to more affordable suburban projects, Parsons said he doesn’t see it happening in a big way this cycle. ‘A lot of investors require a certain return. Getting that return will require bigger deals in more expensive neighborhoods,’ he said.”

The Wall Street Journal on New York. “Vacancy rates for Manhattan rental apartments reached their highest level for any July in at least 14 years, the latest evidence that the market is softening, according to broker Citi Habitats. The report also said deals that include landlord concessions more than doubled from July 2015. July is usually a strong month for New York City landlords. Analysts attributed the signs of weakness to a disconnect between the rents that landlords are demanding and what tenants expect to pay, at a time when the real-estate market is flooded with newly opened rental buildings in Manhattan and Brooklyn.”

“New buildings often offer discounts to attract tenants, and such offers are now affecting rentals in nearby older buildings as well, said Nancy Packes, a marketing consultant to many rental developers. ‘Buildings in the area of new buildings need to match the concessions,’ she said.”

“In Brooklyn, the percentage of rentals with landlord concessions nearly doubled, according to a report by Douglas Elliman prepared by Jonathan Miller, an appraiser and president of real-estate firm Miller Samuel Inc.’There is a mismatch between what the demand is and what the supply being created is,’ Mr. Miller said.”

The Williston Herald in North Dakota. “Wednesday morning, a long Atlas moving van was parked outside 2300 25 th St. W. Workers loaded possessions into the truck and by nightfall, another family had departed Williston. The slowdown in oil-based employment has forced many families to leave the area, taking with them school-aged children, making enrollment projections and classroom space needs hard to gauge. Along one block of 25 th St. W, three homes are for sale. In that new section northwest of Dakota Parkway, more than 40 homes, most of which have been built in the last few years, are also on the market. Across Williston, according to Zillow, about 200 homes are for sale.”

“In 2012-13, the city’s population increased 11 percent or 2,851 to 29,595. To put that in perspective, one person moved to Williston every four hours. A North Dakota State University study predicted that then-current trends indicated Williston would grow more than 50 percent to about 40,000 people by 2017. But the frenzied oil drilling has gone into hibernation, taking such predictions with it.”

“That population explosion created the well-documented housing shortage in which, at one point, Williston had the highest rents in the nation at $2,450 a month for a one-bedroom apartment. Now, with thousands of units available, those rents are coming down but still hover at about $1,800 a month for a one- or two- bedroom. As home prices gradually revert to their true value, it means more families are looking to buy homes, says Bill Murphy of Bakken Realty. Those who have the money for down payments and who can qualify for loans would see monthly mortgage and tax payments about equal to the rents they are now paying.”

“Murphy said sellers are more willing to negotiate, enticing families who have been living in apartments to enter the market. ‘There’s a higher inventory of homes on the market than anytime in the past several years,’ he said.”

A report from Reuters. “Over the past four years, the number of entry-level homes for sale – defined as those priced in the lower third of a local market – has fallen by 34 percent, according to a Reuters analysis of data compiled by listings firm Trulia. The market is even tighter in many cities. In Salt Lake City the average number of starter homes on the market has fallen by 83% since 2012, and in San Diego by 71.5%. Cambridge, Mass. and Portland Ore. have both seen drops of more than 60%. As individual and institutional landlords have siphoned off rentals at the low end of the market, new construction has been slow to meet the demand from homebuyers.”

“Average residential land values are up about 79 percent over the last four years, to a level last seen when the housing market peaked in 2007 and 2008, according to the Lincoln Institute for Land Policy. PulteGroup Inc, one of America’s largest home construction firms, says that market forces have pushed it into building more expensive homes. ‘We don’t see a lot of value today in running out into the exurbs and buying a lot of lots,’ PulteGroup Chief Financial Officer Bob O’Shaughnessy said at an investor conference. If there’s another housing downturn, he said, ‘that is the stuff that will shut down first.’”

The Denver Post in Colorado. “Metro Denver home builders are swinging their hammers faster than at any time since the last recession. But production, which remains concentrated on more expensive homes, appears to be ramping up just as the overall housing market is showing signs of cooling off. Measured at an annual rate, starts are running at 10,610 homes, up 35 percent from last year and the fastest pace since 2007.”

“One out of four homes constructed cost more than $500,000, while 64 percent cost more than $400,000. The average price of a new home built in metro Denver the past 12 months is $512,788. As in the existing home market, more signs are emerging that prices have outpaced what most buyers can afford. Visits to new housing developments are down 11 percent in the first half of the year. Builders closed on 2,303 new homes in the second quarter, up 4 percent from the same quarter a year earlier, but far below the percentage increase in starts, the report said.”

“‘In a growing market, starts will always outpace closings, but the gap between annual starts and annual closings is the largest Metrostudy has tracked in 15 years,’ John Covert, regional director of Metrostudy’s Denver office, said in the report. Covert urged builders, especially those selling homes on the higher-end of their given markets, to exercise more caution going forward.”

Bloomberg on New York. “According to real-estate website StreetEasy, 12 of the condos in Manhattan currently listed at over $20 million have had their prices cut by 5 percent or more in recent months, while only 2 of them have seen any increase in their listing price. Among the cuts is a condo at 1 Central Park South. It’s been on the market for more than 250 days, and is now on sale at $45.5 million, $6.45 million less than its price a few weeks ago. That’s just one of the indications that the market may be slowing down.”

“Some sellers are acting cautious amid a perceived glut in supply. One developer had all the approvals he needed to start listing luxury units at 111 W. 57th St., but he has decided to hold off, saying ‘if you have a market where you think marketing would be ineffective for now, why would you launch and spend the money?’”

The Houston Chronicle in Texas. “Houston-area home sales fell 8.8 percent in July, the most severe decline since last winter and a sign that the oil slump finally may be catching up with the housing market. For now, economist Ralph McLaughlin calls the July downturn a ‘cautionary yellow flag.’ ‘If the year-over-year drop continues over the next two months where it’s becoming a trend, that’s where the yellow flag should turn into a red flag,’ said McLaughlin, chief economist for Trulia.”

“The high-end market in The Woodlands, an area that saw a big run up in prices during the boom, is now hurting. The average sales price among the top 5 percent of the market was off 24 percent, according to Redfin. Sales are down in the Greater Heights neighborhoods, and properties aren’t selling as fast as they were a year ago. In 2014, Elizabeth Winston Jones and her family decided to list their Heights home when they saw how hot the market was. But as they were preparing to sell, they realized they needed to make repairs. By the time they were ready, the market had started to soften.”

“They were told not to worry, that their house may take longer to sell but that they would still get the top range of what they were hoping for. By the time the for-sale sign hit the yard, ‘it really felt like a buyers’ market,’ Jones said. ‘Clearly we missed the sweet spot,’ she said. ‘We were still able to sell our home, but it certainly wasn’t the high end.’”

“The market had been holding up for much of this year because pent-up demand from Houstonians edged out of the market during the boom continued to fuel sales. ‘That pent-up demand is just about gone,’ said Patrick Jankowski, chief economist for the Greater Houston Partnership. Sales last month were off in all price ranges, with the worst declines in the lowest and highest ends of the market, according to the local realty data.”

“Housing inventory, while still low by historical standards, reached 4 months in July, the highest it’s been since the fall of 2012. Conventional wisdom holds that anything higher than six months of inventory is a buyers’ market. If it’s below six months, sellers typically have the upper hand. That won’t be true this time around, Jankowski said. ‘As people recognize the direction the housing market is going, sellers are going to be more in a hurry to make a deal before things get worse,’ he said. ‘Buyers will have more options.’”