The Housing Bubble

A report from The Street. “Since the 2008 crash, domestic capital has been scarce, sitting at just $3 billion in 2009 after hitting a whopping $230 billion in 2007. Naturally, EB-5, an investment program allowing foreigners to essentially buy green cards in exchange for a $500,000 investment, along with the creation of 10 U.S. jobs, became a goldmine for real estate developers, with everyone from the World Trade Center’s Silverstein Properties to Extell Development taking a hit of the crack cocaine of real estate financing. (Seriously. Insiders really call it that.)”

“Altogether, EB-5 investments hit close to $5 billion last year, with nearly 90% of investments coming from China. Interestingly, the development coincided with the Chinese invasion of capital to the U.S. In recent years, Chinese investors have picked up iconic trophy assets at record prices with little-to-no regard for short-term yield.”

“Despite its popularity, EB-5 financing could be seeing a slowdown amid concerns of fraud, not to mention rumors of Congress shutting it down next month. This is forcing developers to look elsewhere for cheap capital, namely Israeli bonds. Berko & Associates holds an exclusive partnership with the main bond underwriter in Israel, which co-managed an all-star list of issuances.”

“‘With all the uncertainties surrounding EB-5 and banks tightening, I see it hitting $3 billion in the next six to nine months,’ said Joe Berko, chief executive of Berko & Associates. ‘In the U.S., [limited liability companies] tend to use mezzanine loans, which carry 12% rates or higher. Israeli bonds generally go in the low-single digits.’”

From Bloomberg. “Extell Development Co. just added another layer of risk for its Israeli bondholders in order to buy more time to find construction financing. Extell announced a joint venture with China’s SMI USA to build its planned Central Park Tower project, a $3 billion skyscraper on Manhattan’s Billionaires’ Row. The deal comes with a deadline: If a construction loan isn’t obtained by May 24, SMI can require Extell to buy out its stake in the partnership — about $300 million — with interest.”

“And if Extell fails to do that, SMI can push the developer to sell the entire project, according to documents filed last week on the Tel Aviv Stock Exchange, where Extell sells debt to investors. Extell gave its Chinese partner a third layer of protection. If SMI is unable to sell the property with no more than a 20 percent discount, it can foreclose on the Extell unit that issued bonds in Israel — allowing SMI to jump in front of Israeli creditors and lay claim to the assets backing their bonds.”

“‘It’s a remote possibility, but it’s a risk that didn’t exist before the Chinese joint venture, Yaniv Saylan, a real estate analyst with Israel Brokerage & Investments, wrote in a report Monday. ‘At the end of the day, another layer of uncertainty and risk was put into these bonds,’ Saylan said by phone from Tel Aviv. ‘If it secures financing, the deal is perfect and everything is alright. If it doesn’t secure financing, we have a big problem.’”

“Extell’s 4.65 percent bonds due in 2019 tumbled to 86 agorot on the shekel Monday to yield 10.4 percent in Tel Aviv today, the biggest drop in nearly two months. Its 6 percent bonds due in 2021 fell to 83 agorot to yield 11 percent.”

“The New York-based company has borrowed 1.65 billion shekels ($434 million) in the Israeli debt market since 2014, according to data compiled by Bloomberg. The bonds began to weaken after the company disclosed to the Tel Aviv Stock Exchange in March that it was forming a joint venture for three New York projects with Scott Rechler’s RXR Realty LLC.”

“Investors are also waiting to hear whether Extell has secured a construction loan for another condo project downtown, One Manhattan Square, Saylan said. The deadline for getting that loan — which is a condition of closing the financing deal with RXR — has been extended since June.”

The Real Deal. “‘What hath God wrought?’ On May 24, 1844, Samuel Morse sent those words in the world’s first telegraph message. By May 24, 2017, though, the industry may be asking: ‘What hath Gary Barnett wrought?’”

“That’s Barnett’s deadline to score a construction loan for Central Park Tower, Extell Development’s $4.4 billion condominium project at 217 West 57th Street. If he can’t by then, SMI USA, his new equity partner on the project, can force him to buy back its $300 million stake, Bloomberg reported Sunday. If he’s unable to, SMI can push him to sell the entire project.”

“Despite making the blood oath, Barnett is, as always, bullish. ‘If I thought there was a more than 1 percent chance of that happening, I wouldn’t put that in there,’ he told Bloomberg. Remember, he did pull it off at One Manhattan Square, and in even more impressive fashion at One57. But this is a very different project, and JDS TRData LogoTINY and PMG, who are building a similarly ostentatious condo nearby, have opted to hold off on sales until the billionaires emerge from hibernation. Banks note that stuff.”

“What a difference a year makes: Investment sales activity hit a record $74.5 billion in 2015, with heaps of trophy deals. Broker commissions (and egos) swelled accordingly. But this year, several factors, not least the death of 421a and global economic uncertainty, led to fewer deals. The Real Deal estimated that broker commissions fell more than 22 percent year-over-year in the first half of 2016. Land deals are way down, and even the hospitality investment sales market, according to JLL’s Jeff Davis, is ‘in the eye of the hurricane.’”

“Brooklyn was hit especially hard, with estimated commissions down more than 30 percent. And that’s after a year in which many of the city’s top commercial firms bet big on the borough.”

“How are brokers dealing? The fly-by-nighters, sources say, are getting out. The resilient ones are making do with a lighter wallet. And while some are stubborn about their compensation on deals — ‘I never take less than 1 percent,’ one prominent broker told me — others are willing to eat humble pie to get deals done.”

From Mansion Global. “The roller coaster that is Manhattan’s luxury housing market took another turn last week when the number of multi-million dollar homes changing hands tumbled 80% in the space of a week. According to Olshan Realty’s latest snapshot of the market, only nine contracts were signed on apartments $4 million and above last week, down from 43 the previous week. However, while that number from two weeks ago represented the highest total since the end of March 2014, the figure was boosted by a slew of signings at two luxury Manhattan buildings.”

“The no. 1 contract last week was 17E at 50 Riverside Boulevard, asking $13.85 million (reduced from $15.35 million when it went on the market in December 2013). The condo has Hudson River views and 4,224 square feet, including a swimming pool off the master bedroom. The apartment was sold by Extell, which developed the building with a robust package of amenities.”

The Missoulian reports from Montana. “The skyrocketing prices of homes in Missoula this year have even long-time real estate agents shaking their heads in disbelief. ‘I’ve never seen anything like it,’ said Brint Wahlberg of Windermere Real Estate. ‘It’s truly an unprecedented market. I’ve been in the business 16 years, my mom has been in the industry 36 years. We’ve never seen a market where sellers have such an advantage to drive sales price and terms of sale.’”

“Wahlberg said that sellers are realizing they can raise their list price. ‘It’s based on what they are seeing in the market and what Realtors are coaching them on,’ Wahlberg said. ‘The Realtor is telling them, ‘You are the only listing in this price range, so let’s go $5,000 or $10,000 higher.’ You’ve got buyers sitting on the fence waiting and they’ll go for it. The numbers we track show sellers are getting as close to the list price as they ever have before the real estate bubble.’”

The Ahwatukee Foothills News in Arizona. “Two houses in Ahwatukee each sold in the last five weeks for more than $1 million. The two two-story homes, both around 5,800 square feet, also are the third and fourth million-plus houses sold in Ahwatukee since June 1. Associate Broker Stacey Lykins said people selling their luxury homes are still facing a buyer’s market both in Ahwatukee and throughout the Valley, because ‘buyers have a pretty big selection of homes from which to choose.’”

“‘As with any buyers’ market, sellers should expect to get less than asking price on their home, unless it’s priced very well and has broad appeal, is located in a desirable location with views, and has privacy and other intangibles that are important to the luxury buyer.’”

News OK in Oklahoma. “Metro-area housing inched toward balance at midyear, then slipped back toward a sellers market — but it’s sort of both, depending on price range. Sales of upscale homes — those priced at $300,000 to $400,000 and more, which is upscale for here — are sluggish. Sales are still brisk at lower prices, according to Realtors. ‘We tend to see it is usually a buyers market or a sellers market and this is the first time that I have seen such a split market,’ said Ginger Prysock, an agent at Metro First Realty Pros.”

“Houses priced at $400,000 and more are hitting the market ‘from a lot of the oil and gas industry workers,’ she said. ‘I’ve held open houses and had several coming in and commenting that they were downsizing due to the oil and gas industry.’”

“Move-in ready homes from $200,000 to $300,000 are selling fast, those from $300,000 to $400,000 ‘are not quite as fast, but the ones that need no paint, no upgrades and so on are moving,’ said Benjamin Floyd, owner of 525 Realty Group in Edmond. ‘There are a lot of them on the market, so it’s really trending buyers market,’ Floyd said. Those priced at $450,000 to $600,000 ‘are still moving but very slow. Over $600,000 is a very tough market now.’”

WSHU in Connecticut. “New Canaan, Connecticut, is one of the wealthiest towns in America. One measure of that wealth is the cost of housing, and New Canaan has hundreds of multimillion-dollar homes. But these days, more and more of them are up for sale.’In a climate where we have 350 houses on the market, sometimes it feels like the whole neighborhood is for sale,’ says John Engel, a full-time realtor.”

“So last month, Engel and some other folks in town suggested to take some of the ‘For Sale’ signs down. One theory was that signs look bad, and could scare potential home buyers away.”

“Right now, Engel is showing a $3.4 million mansion that’s unquestionably luxurious. This home is a couple miles down the road from another house for sale – owned by GE CEO Jeff Immelt. GE’s decision to leave Connecticut for Boston prompted Immelt to move to a condo in the heart of the city. He’s not the only one. ‘Remember, what GE finally said, after they quit posturing,’ says John Glascock, director of the University of Connecticut’s Center for Real Estate and Urban Economic Studies. ‘The reason they’re moving to Boston is the young couples did not want to come to that part of Connecticut to work.’”