The Housing Bubble

A report from MarketWatch. “Housing starts ran at a 1.16 million seasonally adjusted annual rate, the Commerce Department said Wednesday. That’s 4.8% below June’s pace, and 5.6% lower compared to a year ago. It also missed the MarketWatch consensus forecast of a 1.23 million rate. ‘The economics of building, with fixed costs associated with permitting and environmental requirements rising steeply, favored the high-end of the market for much of this expansion (it is easier to get those fixed costs back on a $500,000 home than a $300,000 home),’ wrote Stephen Stanley, chief economist for Amherst Pierpont Securities, in a note out Wednesday.”

“‘Anecdotal reports point to a widening chasm between the entry-level market, which is red-hot with inadequate supply, and the luxury market, where there are huge gluts of overpriced homes in many areas. Builders will have to figure out how to make money building starter homes to balance that equation, and that seems to be where we are headed,’ Stanley added.”

From National Real Estate Investor. “In a few overbuilt downtowns, apartment rents are starting to fall. But experts claim that demand for apartment units continues to be so strong, the trend won’t last for long. In Houston, rents dropped by 1.6 percent on average over the past year, according to RealPage. In the top ‘urban core’ neighborhoods where developers have opened the most new apartments, rents have fallen by more than 10.0 percent. ‘There is still some pain immediately ahead for Houston, mainly reflecting that another 22,000 or so apartments will be delivered in the coming few months,’ says Greg Willett, chief economist for RealPage.”

“Developers are expected to open 20,000 new apartments in New York City this year, according to RealPage. That’s about 25 percent up from the year before. ‘Some further rent cuts are possible,’ says Willett. ‘Queens will join Manhattan and Brooklyn among the areas struggling to digest sizable new supply.’”

“Developers are now opening new apartments in Nashville at a rate of nearly 8,000 a year. That’s about double the rate of completions in 2016 and 2015, according to RealPage. ‘And the downtown submarket—where construction is heaviest—is suffering sizable rent cuts,’ says Willett.”

From Real Estate Business Online. “The multifamily market in South Florida is gaining strength but not sales velocity due to converging market and demographic forces. It’s clear the current upcycle will continue beyond the usual period as immense demand from investors is causing an incredible scarcity of Class A product, and the lifestyle preferences of millennials are intersecting with the luxury condo boom. Most condos under construction in South Florida are high-end properties that only a small percentage of the population can afford. That impacts the new blood in the marketplace: millennials. Research shows that they don’t want to own homes and can’t afford them. Millennials are comfortable paying higher rents, as much as 55 percent of their income in Fort Lauderdale.”

“Going forward, a mix of investors will buttress the multifamily market. We’ll have the traditional international sources of capital: Latin America, Canada and Europe, plus new money from Russia, the Middle East and Asia. Add to them out-of-market property owners within the United States. To complete a 1031 exchange, a New York investor that just sold at a 1.5 to 2 percent cap rate will outbid locals on a Miami deal with a 5 percent cap rate.”

The Daily Emerald in Oregon. “A lot has changed at the University of Oregon since the early 1990s. ‘Much of the grounds and feel is still the same,’ 1990 grad and Eugene mortgage company owner Eric Lundberg wrote in an email. However, off-campus neighborhoods have had a much more abrupt transition. ‘Housing around the U of O has changed dramatically,’ Lundberg wrote. ‘The amount and scale of recent student housing near the U of O is staggering.’”

“A combination of increased demand for luxury housing and tax breaks offered by the city of Eugene has led to a housing boom in the last 10 years, and changed the way students live off campus. Today, many UO students live in luxurious, pre-furnished apartments where the amenities make college life very comfortable. The kitchens are stainless steel, residents soak in poolside Jacuzzis, and the gyms are always open.”

“As the Eugene and UO community grows, so does the need for housing. ‘We did have a major student housing shortage for many years,’ Lundberg wrote. Now, there is anything but a shortage of housing. A student housing construction boom began around 2008, and changed the shape of campus-area neighborhoods. Since then, numerous large housing complexes have opened. Lundberg pointed to some of the conditions that have led to the housing boom, most of which has been financed by out-of-state developers.”

“To incentivize new construction in the downtown area, the city gave tax exemptions to builders of new and renovated multi-unit properties. The Eugene Multi-Unit Tax Exemption, or MUPTE, helped many new apartment buildings develop around the downtown area. For instance, 13th and Olive, the largest student housing complex at 1,300 beds, is exempt from property tax until 2024, totaling $8.5 million in savings. An investment firm from Singapore bought the 13th and Olive complex this year for $104 million — an example of big, out-of-state investors getting involved with the Eugene housing market.”

“Although the city has recently excluded student housing from the MUPTE, Jim Walsh, vice president of sales at Rosboro, a Springfield lumber company, believes the tax exemption existed too long. The housing shortage of the ’80s and ’90s is long gone, as new apartment complexes have struggled to fill up and often offer deals to students in an attempt to get leases signed. ‘Talking to people around town, they may have overbuilt,’ Walsh said, as many buildings maintain empty rooms.”

“Although construction projects have slowed recently, the development spree isn’t over. In April, a Houston-based company purchased the property on Franklin Boulevard near The Hub. The company is planning to build a new 12-story apartment tower, roughly the same size as The Hub. In the oversaturated campus housing market, a new building of that size might struggle to find renters.”

From Crain’s New York Business. “A judge delayed a decision in State Supreme Court yesterday on whether an under-construction Billionaire’s Row apartment tower should go into foreclosure. Judge Eileen Bransten postponed a preliminary ruling that could determine the fate of the high-profile Steinway Tower project at 111 West 57th Street until Monday. Ambase Corp., a part owner of the property, is seeking a preliminary injunction to hold off a foreclosure by mezzanine lender, Spruce Capital.”

“Ambase’s attorney, Stephen Meister, alleges that the other partners in the project, developers Michael Stern and Kevin Maloney, are conspiring to eliminate Ambase’s $66 million stake by agreeing to the seizure by Spruce. If Meister succeeds in delaying the strict foreclosure in court, it would preserve Ambase’s stake in the project for the time being. Spruce Capital, whose $25 million loan on the property is currently in default, could move to hold a standard foreclosure auction for the property, but that process could take several weeks or months. Meister said a conventional foreclosure would potentially allow Ambase to recoup at least some of its investment.”