The Housing Bubble

A report from the Daily Nebraskan. “In the past four years downtown Lincoln has quintupled its number of beds through the addition of several student-marketed apartment complexes, adding the perfect living option for some, but a nightmare for others. Often targeted toward students, the new downtown apartment complexes provide housing and other amenities for those looking for a place to live while in school. They also tend to rent by bedroom, rather than by unit. And with the university aiming to increase enrollment – and by extension, the amount of students seeking off campus apartments – developers smelled a market for apartment complexes.”

“But, at least according to initial numbers, that market may not be developed yet. Vacancy rates reported by student-oriented apartment complexes are higher than the most recent statewide average of 5.6 percent. Aspen and 8 | N reported a 36.7 and 27.7 percent vacancy rate, respectively. Students moving in have found unfinished construction, exposed nails, appliances that don’t work and a host of other problems. After living at Claremont Apartments his sophomore year, Austin Moylan switched to Prime Place in August 2015. Shortly after moving in, he noticed residents weren’t treating the property well.”

“‘People just treated the place kind of how it was given,’ Moylan said. ‘It became kind of a trend to punch holes in the wall. There were entire walls that were just shredded with the insulation ripped out. People kicking walls in and punching walls in, up and down every stairwell in the building.’”

The Los Angeles Times in California. “An Orange County developer is proposing one of the most ambitious developments of the current real estate boom in downtown Los Angeles — a massive mixed-use complex with twin towers soaring 58 stories. SunCal is proposing 1,736 residences, two hotels, shops and creative offices and a school on a lot now the site of two warehouses. About 430 of the residences would be condos, the rest apartments.”

“SunCal’s proposal comes amid growing concern over the level of development in downtown Los Angeles. Though experts don’t foresee a crash as in 2008, there’s debate whether the top of the current cycle has been reached. Some lenders have grown wary of new projects and a handful of recently opened luxury apartments are offering concessions, such as free rent and free parking, to attract wealthy tenants.”

“In all, nearly 10,400 apartments and condos are under construction downtown, according to a July report from real estate firm Transwestern. In just three years, Mike Parillo has watched development in the Arts District explode while rising rents have forced many of his fellow artists out of the neighborhood. He said the proposed project could dramatically change the aesthetic of the area. ‘Sixty stories? That’s crazy,’ Parillo said. ‘That seems out of place. It doesn’t even compute.’”

From Hawaii News Now. “For some time now, Hawaii’s skyrocketing rents have been explained with simple economics – not enough supply, too much demand. But new Census figures suggest something more complicated might be going on. In the second quarter of 2016, nearly 11 percent of Hawaii’s rentals were vacant, Census estimates show. That’s up from 8 percent at the same time last year (and a far healthier 5 percent in early 2015), and is on par with states with far more affordable housing markets.”

“In fact, Hawaii had the sixth-highest rental vacancy rate in the nation during the quarter. Nationally, the vacancy rate was 6.7 percent in the second quarter of 2016. Meanwhile, Hawaii also has the highest rents in the nation, Census numbers also show, and they’re only rising. Eugene Tian, state economist, said the rental vacancy rate might be legitimately increasing in some areas (such as urban Honolulu) because renters are being priced out or moving into homeownership thanks to a construction boom in Kakaako.”

“He said some renters are undoubtedly ‘withdrawing from the market’ because of the rising prices, moving in with family or sharing their housing cost burden by getting roommates. (In the second quarter of 2016, the rental vacancy rate in urban Honolulu was 10.1 percent, up from 7.5 percent in the same period a year ago.)”

“Meanwhile, economists say, the state’s rental housing vacancy rate is also likely going up because of a glut of vacation and seasonal rentals on the Neighbor Islands. The issue is particularly acute on Kauai and Maui. Kauai, for example, has a rental vacancy rate approaching 18 percent (up from 6 percent in 2000). Maui County’s rental vacancy rate is 26 percent, from 7 percent in 2000, according to a 2015 state housing availability report.”

“The report concluded that the significant increases in rental vacancy rates on the Neighbor Islands highlighted the ‘increase in the number of seasonal and vacation units.’”

The Houston Chronicle in Texas. “The glut of new apartments is dragging down average rents in Houston, with rent in August falling the most in six years, a new report showed. Not everyone is getting relief, however, as renters in suburban markets with concentrations of older complexes saw the highest rent increases, Axiometrics reported.”

“‘Though job gains in education, health care and hospitality somewhat offset the continued job losses in the energy sector, the demand for apartments is just not there,’ Stephanie McCleskey, vice president of research for Axiometrics, said in an announcement. ‘With new properties being completed every month, they just won’t be filled as quickly as we would like to see until job growth picks up.’”

The Elko Daily Free Press in Nevada. “One of Elko’s biggest downsides has gone by the wayside. After having a shortage of apartments and multi-family dwellings for most of the past four decades, we now have an ample supply. Today, it’s actually ‘a renter’s market,’ as one real estate manager told us for a recent article on the wealth of new rental properties. The experts were divided on whether Elko has a ‘glut’ of rental housing, but they all agreed there is no longer a shortage.”

“Large apartment complexes have literally been popping up all over town. Instead of a waiting list, newcomers might find themselves being offered a free month’s rent. Like many aspects of living in Elko, prices are geared toward people employed by the high-income mining industry. But the arrival of more upscale apartments also means that more lower-end properties are left open and available for those not making a miner’s salary.”

“The abundance of rentals also frees up motel rooms. Many newcomers have had to live out of motels, some of which offer weekly and monthly rates. At the same time, hundreds of more motel rooms are being added to the inventory. If anyone was reluctant to move to Elko because of the lack of apartments, they now have no reason to delay. We almost wish we didn’t live here already, so we could move here now.”

An interview from the Epoch Times. “To make outsized returns or avoid some nasty losses in investing, you have to go against the grain. There are few people who live that principle more than Reggie Middleton, the CEO of fintech (financial technology) company Veritaseum. On his independent research website BoomBustBlog, he called the demise of Bear Stearns, Lehman Brothers, and BlackBerry maker Research in Motion, the subprime market, and a correction in Apple. In this exclusive interview with the Epoch Times, Mr. Middleton tells us why he is getting worried about U.S. real estate again in 2016.”

“Epoch Times: You called the latest housing crash in 2007 and 2008. Why are you worried about U.S. real estate in 2016? Reggie Middleton: After the bubble had popped, you had corporate welfare come in where regulatory agencies and central bankers insisted that they did not want the markets to go down to their clearing level. So you had quantitative easing, zero interest rates, TARP, and all these other acronyms giving free money to save risk-taking entities who didn’t want to take their losses; they just wanted to make profits.”

“They privatize the profits and socialize the losses. In doing that, they create another bubble within the bubble that hadn’t even finished deflating.”

“The second bubble was very hard to see coming. But it limited supply because a lot of the builders were still insolvent from the last bust and those who were able to build were reluctant, so when you limit supply, you automatically inflate demand relative to supply.”

“When that happened, prices started shooting up again. But when prices started shooting up, they shot up in a very uneven perspective. Affordable housing is harder to come by, and most of the money is in the high end; that’s where most of the development came on. Now, if you look around here in New York, there are cranes everywhere—from New York City going down to Miami.”

“Epoch Times: In our neighborhood alone, we have five developments within a couple of blocks. Mr. Middleton: Massive amounts of inventory. In Miami, it’s the same thing. In South Beach, downtown Miami, up and down Biscayne, everywhere. If you go to D.C., Philadelphia, Georgia, Texas, on the West Coast, it’s the same.”

“Demand is also going up because of tight supply in certain areas, but income has only gone up incrementally. When income goes up this much, supply goes up that much, who’s going to buy these or pay for these houses?”

“Epoch Times: Especially in the high-end market. Mr. Middleton: Exactly. The high end has already softened. The Hamptons, much of the Upper East Side, Aspen. The middle and low end are going to soften as well. The reason is that supply’s starting to pick up more and more. It’s picking up because of zero interest rates and negative interest rates; we have institutional investors who are trying to get yield because they are pension funds, and they rely on income-producing investments.”

“Now, this perspective seems to differ from many of the real estate publications and analysts you’d see, where they say there’s significant demand and tight supply. I look around; I just don’t see it. Unless an extra 5,000 to 6,000 people are going to move into this six-block or this three-block area like where we are right now, or an extra 200 or 300 extra businesses are going to move in over the next 12 months, then I think there’s excess supply.”

“It’s the bubble 2.0, but this bubble seems to be an elastic bubble that’s difficult to pop. Every time we stick a needle in the bubble, the Fed comes in and papers over with another acronym: TARP, MARP, bubble patch, etc. In the United States, you had—if you don’t count the bubble—for the last 50 years, you had roughly 1 to 3 percent residential housing appreciation per year. Now, you have 5, 10, 15, or 20 percent annually in certain areas.”

“That’s ridiculous. Unsustainable. Especially when you have the same income. If you factor in unemployment, you have negative income growth. That means housing is going this way; income is going that way.”

From Bloomberg. “The consensus that Chair Janet Yellen has worked hard to maintain among Federal Reserve policy makers showed signs of severe strain on Wednesday. Three members of the Federal Open Market Committee, notably including Boston Fed President Eric Rosengren, dissented when the majority of voters elected to hold interest rates steady despite strong progress this year in the labor market, expectations for higher inflation and calm in global financial markets.”

“Rosengren, 59, played a key role during the 2008 financial crisis leading the Fed’s efforts to prevent a collapse in money-market mutual funds. He has also frequently cited the number of cranes he sees while heading to and from work in downtown Boston as he warns about a potential bubble in commercial real-estate valuations.”

“The disagreement shows the mood on the FOMC is shifting, said Roberto Perli, a partner at Cornerstone Macro LLC in Washington and former Fed economist. ‘The chair is not an emperor,’ he said. ‘I don’t think she can, even if she wanted to, hold these guys back.’”

The Journal Star. “Wells Fargo CEO John Stumpf wants Americans to believe that 5,300 of his former employees — yes, 5,300 — of their own initiative without any direction from above, worked in unison if unconsciously to defraud customers by creating more than 2 million phony bank and credit card accounts without authorizations or signatures and then charged them fees for something many didn’t even know they had.”

“To say next to nothing of the allegations of Wells Fargo’s abusive mortgage service and foreclosure practices that had what by then had become the nation’s largest bank socking customers with outrageous fees for services sometimes not even delivered, such as an $1,800 charge to a widow for an eviction that never took place.”

“Again, the guy regrets it, truly. Hey, ‘the housing downturn was a challenging time for the nation’ — if less for some than for others, if we may say so — according to a spokesman. The bank ‘has acknowledged … mistakes.’ There’s blame to go around: ‘Lenders, investors, along with policymakers and regulators — all sides — learned foreclosure processes had to be addressed.’ So can’t we all just stop harping on it, chalk it up as lesson learned, and move on?”

“Did we mention that this fraud went on for years after it was initially uncovered in 2013 by the Los Angeles Times (not, interestingly, by regulators)? Did we mention that no members of Wells Fargo’s upper management were fired (unless you count the head of community bank operations being allowed to retire over the summer with a golden parachute in the tens of millions)? Did we mention that most of the 5,300 who did get canned — the company is all about accountability, capital A — were among its lowest paid, making as little as $12 an hour? Did we mention that no one near the top has had their pay docked, including a Stumpf who reportedly made — we hesitate to use the term ‘earned’ — $19 million last year, $103 million in combined compensation between 2011 and 2015?”

“If the conduct of Wells Fargo — and of course we’re talking about the institution and its leadership; we trust many who work there are as appalled by these revelations as anyone — doesn’t make Americans even angrier in this, the Year of Rage, what will? Unfortunately, so much of that fury has been misplaced. In this case, it’s perfectly placed.”

“What are the lyrics of that Dylan song (thanks for the reminder from a Wall Street Journal commenter)? ‘Steal a little and they put you in jail. Steal a lot and they make you king.’ Until that changes, expect more of this kind of fundamental immorality.”