The Housing Bubble

A report from CBS 8 in California. “San Diego apartment rental prices continue to go up, up, up with the average price of a two bedroom apartment now around $2,200. But, there may be some good news on the horizon. The good news is vacancy rates are starting to creep up in San Diego County, mainly in the North County, Chula Vista and East County, said San Diego County Apartment Association spokesperson Molly Kirkland. ‘All the new stock coming to market tends to be higher end,’ said Devin O’Brien who works at Zumper, one of the largest rental web sites nationwide. ‘We’ve seen pretty much most of California go crazy.’”

The Colorado Real Estate Journal. “Entering 2017, the rapid acceleration of Denver’s multifamily market seems to be cooling. Yet, it’s not doom and gloom but, rather, a settling back onto familiar ground. In mid-January, the Apartment Association of Metro Denver announced that rents across metro Denver decreased by the largest dollar amount in the 36-year history of the report, and it was the second quarter in a row that the average cost of renting an apartment in Denver decreased.”

“Downtown Denver, which witnessed more than half of the new multifamily development in the past few years, may see negative or flat rent growth. ‘There’s just no way around it, because you’re going to deliver all these units,’ said Shane Ozment with ARA Newmark.”

“Massive supply has some experts concerned,’ said Mark Williams with the Apartment Association of Metro Denver. ‘There were nearly 25,000 new apartments build in the last three years and another 25,000 are currently under construction. Prior to this recent development boom, it took from 2002 to 2012 to build that many units.’”

The Chicagoist in Illinois. “If you think Chicago rent is Too Damn High, we have potentially good news—rents could fall soon, because the number of rental units on the market is going to skyrocket this year. Due to a controversial construction boom, the city will get 33 new buildings and roughly 6,600 new apartments in 2017, according to Luxury Living Chicago Realty. If Luxury Living’s estimates are borne out, Chicago will get more new apartments this year than in 2015 and 2016 combined, Curbed reports.”

The Mountain Xpress in North Carolina. “During last year’s fourth quarter, the rental vacancy rate in Buncombe, Haywood and Henderson counties stood at 7 percent, says economist Barbara Byrne Denham of Reis, a real estate research firm. That’s slightly higher than the 6.8 percent vacancy rate Reis reported during the third quarter of 2016. Developer William Ratchford cautions that actual vacancy rates are probably higher than what property managers report.”

“‘People lie about them,’ he explains. ‘Banks start asking questions if the occupancy rate falls below 90 percent.’ Ratchford, whose companies have built several rental developments in the Asheville area, says, ‘We’re starting to worry that the market is becoming oversaturated. Now is the time that rents actually are going to start to come down.’”

From Delmarva Now in Delaware. “A decade ago, city officials cracked down on nuisances to address issues with the rental market –– mainly in the Camden neighborhood near Salisbury University. In Camden, homes once occupied by owners were converted to rentals. A student housing building boom relieved the pressure off Camden. But that has created another problem, Councilman Jim Ireton said. Many of those rental homes now sit empty because their rent prices remain too high for families to afford. ‘I can take you on a tour and show you 500 of them,’ he said.”

The Gothamist in New York. “This is a great time to be alive—if you’ve been spending a ton of money on rent for an apartment in a not-luxury building and have been dreaming of spending a similarly large amount of money for an apartment in a luxury building. According to online real estate firm RentHop, the higher end of New York’s rental market, particularly the Manhattan market, has softened to the extent that one-bedroom rents in luxury buildings are often approaching parity with those of commoner buildings. In some areas, like glamorously desolate DUMBO, RentHop found median non-luxury unit rents now actually exceed rents for comparable luxury units.”

“The enormous boom in luxury units (defined as units in a building with a doorman or gym—rather generous categories, I know) over the past few years has saturated the market in many neighborhoods, and real estate watchers have been reporting since this past summer that the tide has started to turn toward renters. Landlords are cutting rents and offering one and two months free rent and other similar teasers to lure folks in, whereas a few years ago they would have asked you to put down your first born as a security deposit.”

From Michigan Live. “The state’s pension fund lost millions of dollars taking a chance on a private development deal in Ann Arbor. The Michigan Department of Treasury confirmed this week the State of Michigan Retirement Systems lost about half its original $20 million investment in the failed Broadway Village project with the recent sale of the property to a new development team that is planning an entirely new project now. About a decade ago, the SMRS made a $20 million equity investment to become a limited partner in a $172 million redevelopment project on Broadway Street.”

“Ron Leix, a spokesman for the treasury department, said the Great Recession froze bank financing options and stalled the previous development project. Going back more than a decade, the Strathmore Development Co. had plans to build 185 upscale apartments, 138,275 square feet of retail space, 152,689 square feet of office space and a 760-space parking structure. No activity has occurred on the site since 2009 after the existing buildings were demolished by the developer.”

“‘As the real estate market has improved, the general partner recently sold the property, resulting in a loss of approximately half the initial SMRS investment,’ Leix confirmed this week. That’s about a $10 million loss.”

A weekend topic on this New York Times article by Conor Dougherty. “Suppose there were a way to pump up the economy, reduce inequality and put an end to destructive housing bubbles like the one that contributed to the Great Recession. The idea would be simple, but not easy, requiring a wholesale reframing of the United States economy and housing market. The solution: Americans, together and all at once, would have to stop thinking about their homes as an investment.”

“The virtues of homeownership are so ingrained in the American psyche that we often forget that housing is also a source of economic stress. Rising milk prices are regarded as a household tragedy for some, and spiking gas prices stoke national outrage. But whenever home prices go up, it’s ‘a recovery,’ even though that recovery also means millions of people can no longer afford to buy.”

“So instead of looking at homes as investments, what if we regarded them like a TV or a car or any other consumer good? People might expect home prices to go down instead of up. Homebuilders would probably spend more time talking about technology and design than financing options. Politicians might start talking about their plans to lower home prices further, as they often do with fuel prices.”

“There was a time, a few decades ago, when the cost of living did not vary all that much from city to city.”

“Finally, if housing were plentiful and cheap, we would probably stop having big housing bubbles. One good way of describing a speculative bubble is a moment when society deludes itself into believing that something plentiful is scarce, or will soon be. Housing is particularly prone to bubbles because, in contrast with other products, we seem to want it more when it is expensive and less when it is cheap. And no matter how many times we look out an airplane window to see vast acres of emptiness, we somehow still believe that land is a great investment because nobody is making more of it.”

“Homes would still hold a lot of value; they still might appreciate, if more slowly; and desirable neighborhoods would still seem relatively expensive. But there would probably be fewer manias in which people expect home prices to double in just a few years.”

“Just as we don’t expect to make a profit selling our cars, if we stopped thinking of our homes as big moneymakers, we would probably start focusing on building them faster and less expensively.”