The Housing Bubble

WFAA reports from Texas. “This summer, we have been exploring the extraordinary things happening in North Texas real estate. But the ‘hottest market ever’ doesn’t just apply to owning. Rents — and new rental developments — are rising fast, too. We visited a 400+ unit project being erected in Frisco called Jefferson Stonebriar. Models feature more natural light and an unusually airy feeling for an apartment. In addition, they are increasingly using premium finishes. ‘Today, we have 10-, 12-, 14-foot ceilings,’ said Brad Taylor, the regional managing partner at JPI. And he says JPI is working on a project that includes apartments with even higher ceilings.”

“Taylor acknowledges that the new level of amenities fetches a new level of rent. Many of the apartment units under construction in DFW are considered ‘luxury’ developments. North Texas is a standout in apartment construction. ‘It is the number-one building center in the U.S.,’ said Greg Willet, chief economist for RealPage. He told us there are currently nearly 50,000 apartment units under construction here, which is a staggering figure. That’s is about one-in-ten of every apartment on the way across the country,’ Willet said.”

The Star Tribune in Minnesota. “Homebuilders are slowly gaining ground on apartment developers in the Twin Cities. So far this year, single-family permits are up 10.4 percent compared with the previous year, while multifamily units — mostly rental apartments — have increased only 4.4 percent, a new report from the Builders Association of the Twin Cities said. Those gains signal a major shift for housing development in the metro area. Rental apartments led the construction recovery and have dominated the industry for the past several years. But that’s changing, with demand for new single-family houses on the rise and concerns that some rental markets are on the verge of saturation.”

“But this month proved an exception to the trend because of permitting for two big apartment projects. In August, homebuilders in the 13-county metro were issued 465 permits to build 888 units. That represents a 1.6 percent increase in single-family permits and a 48 percent increase in multifamily units.”

The Denver Business Journal in Colorado. “Where is Denver’s most expensive neighborhood to rent? Right where it’s been for awhile: In the Golden Triangle neighborhood near downtown, where the median (half rent for more, half for less) monthly rent is $2,200 in August, according to apartment rental website Zumper. And prices are falling across Denver: The median price of one bedroom units fell 3.2 percent to a median of $1,200 in the city, while two bedroom units dropped 2.9 percent to $1,650, Zumper said this month.”

“That $2,200 monthly median rent in the Golden Triangle is actually down $100 from June, according to Zumper’s numbers.”

The Houston Chronicle in Texas. “The average rent for a Houston-area apartment fell in July as developers added units at the same time job growth has slowed, a new report shows. The average rent of $1,082 in July was 2.2 percent lower than the average of $1,107 a year earlier, according to research firm Axiometrics. Rents fell in 12 of the 25 local regions tracked by Axiometrics.”

“This year, 24,863 new units are expected to be completed across the Houston area and another 11,678 in 2017, according to Axiometrics. Annual job growth, meanwhile, slowed to 5,200 in June, down from a recent peak of 117,800 in 2014.”

From Hawaii News Now. “Hawaii’s hot housing market is only getting hotter. But there’s one group of renters who are faring quite well: College students. Jillian Glenn, a University of Hawaii at Manoa political science major, started her senior year on Monday. And after a month of searching for the perfect place, she and her roommates just signed the lease on a rental home. ‘I used to live on campus. I think it’s like $800 a month for not very good conditions,’ he said. ‘So for me, I’d rather pay the same price to pick the place I want with nicer conditions.’”

“College students are finding that their strength is in their numbers. Developer Peter Savio privately operates off-campus student apartments, and this is the first school year he’s seeing vacancies. He says the reason for the empty rooms is simple. ‘A dorm is more expensive. Students can actually rent a two-bedroom apartment for $1,500 and they can put four kids in it and they are each spending between $400-$500,’ Savio said.”

“Meanwhile, there’s no shortage of rooms on campus this year. University of Hawaii officials say the school was able to accommodate every student in need of a dorm. Looking ahead, it appears UH-Manoa could get even more housing competition. A developer has taken out permits to demolish a nearby shopping center to build another private high-rise dorm.”

A report from the Jackson Hole News & Guide. “In an unprecedented move for the Federal Reserve Bank, a group of 10 high-ranking officials met with more than 120 activists Thursday evening at Jackson Lake Lodge, providing inspiration to local organizers. The normally tight-lipped Fed fielded questions regarding a lack of diversity among the leadership and racial disparities within the economy. Officials included Stanley Fischer, vice-chairman of the board of governors, as well as Gov. Lael Brainard and eight of the 12 district presidents.”

“The face-to-face was organized by a wing of the Center for Public Democracy, calling itself Fed Up. Though mostly comprised of community organizations from around the country, many of which deal with far worse unemployment rates than Teton County, their plight rang true in Jackson Hole, recently ranked the most unequal metropolitan area in the nation.”

“While officials from the Federal Reserve said they sympathize with those still struggling, they said raising interest rates will help stave off another recession by reducing the potential for inflation and safeguarding the long-term stability of the economy. ‘If you look at those periods [with very low unemployment rates] we have a recession shading shortly thereafter,’ said Eric Rosengren, president of the Boston Federal Reserve Bank. ‘The reason is because we were overshooting during several of those periods.’”

“‘My goal,’ he said, ‘is to actually make sure we do get maximum employment, and one of the ways you do get maximum employment is to make sure you don’t allow excess to build up to the point that you actually have another recession, which hurts everybody in the room, including the populations you’re most concerned with.’”

From CNBC. “As jittery businesses and tight-fisted governments cut spending this spring, American consumers went shopping. That helped keep the U.S. economy moving ahead, but just barely. In a closely watched speech Friday, Fed Chair Janet Yellen offered a fairly upbeat assessment of the latest data and other recent reports, pointing to the strength in consumer spending despite the overall weakness in GDP. She also noted that the job market continues to improve.”

“‘In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,’ Yellen said.”

“The government’s latest read on the gross domestic product pegged the second-quarter advance at just 1.1 percent, a bit slower than the original estimate reported last month. Most of the weakness is coming from big cuts in spending and investment by businesses — down 9.7 percent in the second quarter. That belt-tightening by businesses on investment in new equipment and buildings could be a sign of a deeper slowdown ahead, according to economists at Credit Suisse.”

“‘Extended periods of falling real business investment are strongly associated with U.S. recessions,’ they wrote in a note to clients. ‘That’s why the recent three consecutive quarters of contraction are concerning.’”

“The latest data also showed that after-tax corporate profits fell at a 2.4 percent rate last quarter after rising an 8.1 percent pace in the first quarter. Weaker profits could make it harder for businesses to limit an anticipated rebound in business spending. Businesses have also been slashing inventories, which dropped by $12.4 billion in the second quarter. The drop in inventories lopped 1.3 percent from GDP growth, the biggest drag in more than two years. It was the fifth straight quarter that inventories weighed on output.”

“Thanks to a rebound in the housing market, the construction industry has enjoyed strong gains, with overall output up 29 percent over the last three years, based on the latest GDP numbers. Other big gainers include hospitality and health-care companies. The biggest industry slump has come from the mining sector, where the plunge in oil prices has produced a 50 percent contraction over the last three years, forcing sharp cutbacks in hiring.”

From MarketWatch. “The U.S. economy, by some measures, has recovered from the Great Recession: The unemployment rate is only half what it was at the worst, real gross domestic product is about 10% larger than the previous peak, and personal wealth has risen by more than $20 trillion as the stock market and the housing market have bounced back. But everyone knows the recovery has been uneven.”

“Most troubling, there’s still very little investment in the buildings, equipment and intellectual property that we ought to be putting into place today as the foundation of our prosperity tomorrow. Who’s preparing the United States for the 21st century? Nobody, really. Not the 22 million private businesses, not the 118 million households, and not the 90,000 state, local or federal government agencies.”

“Since the recession, investments have fallen sharply, and they haven’t gotten back up again. It seems that everyone is still scarred by the Great Recession, and by the collapse of asset bubbles in 2000 and 2006.”

“Gross domestic investment totaled about $3.6 trillion in the second quarter of 2016, about 20% of gross domestic product. That may seem a large sum, but it’s the lowest share of GDP, except during recessions, since 1947. And, unfortunately, even that weak number grossly exaggerates the actual contribution of this investment in creating new productive capacity for the economy. Why is the figure exaggerated? Because these data are reported on a gross basis, without subtracting the depreciation of capital assets such as equipment, buildings, software and the like.”

“After you subtract the capital that’s used up, net investment totaled only about $750 billion in the second quarter, or 4% of GDP, about half of the average over the post-war period. In fact, net investment has been running at the lowest rates since the Great Depression of the 1930s, suggesting that U.S. investment itself is in a depression.”

“Business fixed investment has fallen for three quarters in a row, the first time that’s happened outside of a recession or its immediate aftermath since the mid-1980s. Investments in oil-drilling equipment and structures tanked in 2015 when the price of oil fell, and haven’t recovered. Investments in information-processing equipment (such as computers and semiconductors) have risen at the slowest pace in the post-World War II era.”

“Why aren’t businesses investing more? Because there is already too much productive capacity in the world for the level of demand. Prices are generally falling or growing only tepidly, especially for manufactured goods. Vacancy rates for stores and offices are high. There is no great need to invest in high-tech equipment such as computers or chips because there haven’t been any great leaps forward recently. The old equipment works fine. (I’m using a six-year-old computer to write this.)”

“The business investment story is well-known, but fewer people are aware that investment by households and government agencies is equally bleak, but for different reasons. What do households invest in? Mostly real estate. After the housing bubble burst about a decade ago, home buyers became more cautious. Few buyers believe today that real estate is a sure-fire way to double or triple their money. Slower population growth is also working to reduce the need for additional housing units.”

“As a result, net investment by the household sector was just 1.3% of GDP in the second quarter, about half of the post-war average. New construction will probably increase modestly in coming years, but no one expects the same level we saw in the bubble years, or in the 1950s and 1970s when millions of housing units were built each year.”

“We have an economy that’s underperforming, but no one is willing or able to invest the sums needed to build the offices, factories, mines, computers, machinery, roads and airports we’ll need in the future. Business leaders don’t see a quick payoff in long-term investments, and public officials can’t fill the gap because the public thinks austerity now is better than growth tomorrow. Somewhere, someone needs to find some courage, or we’ll be doomed to decades of disappointing growth.”