September 8, 2018

The Buyers Have The Whip Hand

A report from Global News in Canada. “North American developer Grosvenor Americas is looking to score big with its luxury penthouse in downtown Calgary. Grosvenor’s Rob Duteau doesn’t think the $2.459 million price tag will deter buyers — at least not the right buyer. Still, 2018 has been a tough year for Calgary’s housing market, with both sales and prices down in August. Grosvenor started the project back when oil was at about $100 a barrel, so turning back wasn’t an option.”

From CJME in Canada. “One Regina realtor attributes the reason for home sales hitting a 10-year low point in August to over-pricing in a tough market. Craig Adams with Remax Crown Real Estate said it definitely is a tough market for sellers because there is a lot of inventory and house prices have dropped substantially in the last few years. ‘Some sellers are still thinking that prices are back where they were four to five years ago and that’s just not the case. So if you’re still trying to get what you thought you could get four or five years ago, that’s not going to happen,’ Adams said.”

“‘What they paid for it a few years ago is not what they’re going to be able to get right now,’ Adams said. ‘They have to come to the realization that they might lose money on their home and not recoup what they have paid for it. If they come to that realization that it is what it is then they’ll be fine and they’ll be able to sell it. But if they try to recoup what they have paid for it in the last few years that could be the challenge for them for sure.’”

“There are also still a lot of new builds available on the market, particularly for condos.”

From Prince Albert Now in Canada. “It appears as though the bottom of the Prince Albert housing market slump has yet to be found. Last month a mere 30 homes sold according to the Saskatoon Region Association of Realtors (SRAR). That represents a 17 per cent drop compared to August last year when 36 transactions happened. The latest figures may be good news for buyers but show that the housing slump isn’t showing any signs of slowing.”

“July’s figures showed just 25 properties changed hands, which was 50 per cent worse than the same month in 2017. ‘Although August numbers are down year over year, the decline was not as dramatic as the decline in July sales,’ said SRAR CEO Jason Yochim.”

From Medicine Hat News in Canada. “Topping headlines this week is a move by city administrators to pull the trigger on council’s wish to sell excess land to bolster land department profits and private development. Another of the properties is the lot beside the Moose ball diamonds that was surprisingly the subject of a $900,000 conditional sale last year.”

“The buyer walked away reportedly due to the high costs of bringing utility upgrades to the site, so officials are suggesting a price drop to $564,000 for about four acres. That alone should raise the eyebrows of land department critics who argue private landholders are constantly being undercut.”

From Domain News in Australia. “The cooling property market is biting into one of Sydney’s favourite pastimes, the Saturday street auction. Under pressure sellers are increasingly taking their sales behind closed doors to achieve a sale. More than 30,000 properties were put up for sale last month and the amount of time they are on the market is increasing.”

“New figures show more than 20 per cent of properties were withdrawn from auction in some areas, as clearance rate consistently hover around the 50 per cent. Last month the number of Sydney properties on the market was up almost 22 per cent year on year, according to Domain Group data, with the north west and upper north shore volumes up more than 30 per cent.”

“Economist Stephen Koukoulas, from Market Economics, said the market was a ’stand-off between buyers and sellers.’ ‘The buyers have the whip hand … they’re the ones controlling things,’ he said. ‘The next six to 12 months will certainly be very tough for sellers, they have to adjust their expected sale price lower.’”

“Sellers are getting the message. Price discounting in Sydney is at its highest levels in more than five years and the city’s median house price has recorded its biggest annual drop since the GFC. ‘It’s not good … unless you’re a buyer and prices still have further to run,’ Mr Koukoulas said, predicting prices would fall another 5 per cent in the next 12 months.”

From The Guardian on Australia. “Five years ago banks were ‘falling over each other’ to give out loans says the Sydney-based IT executive Karl Sice, who bought his first investment property 15 years ago. He currently has six properties in his portfolio across Sydney, Melbourne, and northern Queensland. But after roughly six years of uninterrupted, breakneck growth, Australia’s housing prices are falling, and the noises from the lenders have changed. The difference between now and five years ago, Sice says, is like ‘chalk and cheese.’”

“Across Australia, prices have fallen for 11 months in a row. And while it may not be a crash, it seems set to be a long slide. This week, Capital Economics predicted the coming fall would be the ‘longest and deepest’ housing slump in Australia’s modern history.”

The Courier Mail in Australia. “A shock new broker survey has revealed one in four homeowners given home loans last year would fail new bank tests if they applied today. Everything from Netflix habits, to your online spending spree, and even how many times you chose to use the tollway rather than take the long way around are going under credit microscope. ‘Banks are reviewing an applicant’s actual expenses, rather than using the traditional household expenditure measure method’ this year according to the latest HashChing broker survey.”

“A massive 41 per cent of brokers believed a quarter of those who secured mortgages last year would not pass tougher rules around living expenses now. ‘The reality is, it has become a lot harder to secure a new home loan or refinance an existing one. Banks are scrutinising everything, whether it’s how much borrowers are spending on tolls, Netflix, or ASOS,’ said Siobhan Hayden, HashChing’s chief operating officer. ‘This is because lenders are tightening their credit policies and shining an unprecedentedly harsh spotlight on applicants’ living expenses.’”

When Mortgage Risk Expands Alongside Of Prices

A weekend topic starting with CNBC. “When the housing market began its epic and historic free-fall in 2008, mortgage giants Fannie Mae and Freddie Mac faced imminent collapse. The Treasury Department stepped in with a major bailout that July. That turned out to be a vastly profitable move for Uncle Sam. And it has been paying off ever since. ‘The most amazing thing is that the housing market not only survived, but thrived coming out of the crisis,’ said Jaret Seiberg, financial services and housing policy analyst for Cowen Washington Research Group. ‘What the government did actually worked.’”

“But Fannie and Freddie cannot stay in conservatorship forever, and, according to Dave Stevens, have the biggest chance of change with a new FHFA director. Current director Mel Watt’s term ends in January, but he has been mired in personal scandal, with a former employee accusing him of sexual misconduct, so he could leave earlier. ‘One thing that has protected the status quo has been Mel Watt. That is the only thing protecting the current structure of these companies,’ said Stevens, who recently retired as president and CEO of the Mortgage Bankers Association.”

From The Chronicle. “One of the biggest obstacles confronting low- and moderate-income homebuyers is coming up with the 20 percent down payment that many financial advisers recommend they have in the bank prior to entering the housing market. Under Fannie Mae’s Home Ready and Freddie Mac’s Home Possible programs, it might be possible to obtain a mortgage with substantially less cash on hand.”

“While there are some differences in the two programs, Terri Sicilia, vice president of underwriting for Residential Mortgage Services Inc., says they are both ‘beneficial products, especially for borrowers putting less than 20 percent down. These programs offer a lot of flexibility that you don’t have with a traditional 30-year, fixed-rate mortgage,’ Sicilia notes, ’such as reduced PMI [private mortgage insurance] that helps to make the monthly payment lower.’”

“Both the Freddie and Fannie programs compete with the low-down-payment program of The Federal Housing Administration (FHA), which offers loans for as little as 3.5 percent down for buyers with a credit score of 580. A few other features of the Fannie and Freddie programs are: No income limits in underserved areas.”

The Washington Post. “Home prices have been on a tear for most of the past decade. Lately, they have risen at 5 to 6 percent a year — double the rate of personal income growth. The gap between housing and income cannot widen indefinitely. The Minsky bubble psychology has infected government agencies who insure about 80 percent of home-purchase mortgages. Fannie Mae and Freddie Mac, the biggest of these, have loosened standards.”

“With encouragement of their regulator, the Federal Housing Finance Agency, half of first-time home buyers getting mortgages guaranteed by Fannie and Freddie are making down payments of 5 percent or less. Such easy credit is aimed at broadening access for young people, who often lack capital. However, a lesson from 2008 is that if a person cannot afford a home under prudent lending standards, imprudent lending will not help them.”

“The riskiest loans are insured by the Federal Housing Administration, an agency whose mission is to broaden homeownership. (These loans are securitized with a guarantee from a different government sponsor, Ginnie Mae). Somewhat akin to subprime in the 2000s, the FHA sector, by definition the most marginal, has widened. It is now approximately 20 percent of the mortgage market.”

“According to Edward Pinto, co-director of the American Enterprise Institute Center on Housing Markets and Finance, the average market price of FHA-enabled purchases has risen 25 percent in the past five years, yet the dollar amount of the average down payment has fallen. ‘That is not tight credit,’ Pinto says. A study by the New York Fed, in essential agreement, argues that the housing sector ‘remains vulnerable to very severe declines in house prices.’”

The Herald Tribune. “Ed Pinto issued a bleak warning to the U.S. House Committee on Financial Services Thursday about the current state of the housing market. He opened his testimony with this: ‘The last house price boom and subsequent bust was the result of ill-advised and risky government housing policy,’ his statement said. ‘Today we are in the midst of another boom, and, once again, it is the result of ill-advised and risky government housing policy.’”

“One of his specialties focuses on the availability of affordable housing for working-class families. ‘Unfortunately, we are now able to document that we are in the midst of another potentially dangerous buildup of policy-induced housing risk,’ he said. ‘This policy is making entry-level homes less, not more, affordable.’”

“Pinto says the country’s been in a continuous seller’s market since mid-2012 — ‘one even stronger than in the last boom.’ He tracks this back to January 2013 when the Bureau for Consumer Financial Protection promulgated a rule under the authority granted in the Dodd Frank Act. The Qualified Mortgage rule set a maximum debt-to-income ratios of 43 percent but exempted such primary home loan agencies as the FHA and VA.”

“‘Since 2013, about 85 percent of all primary home purchase financing has been guaranteed by these agencies,’ Pinto states, ‘in many cases doubling or more the percentage of their DTI’s greater than 43 percent.’ ‘When mortgage risk expands alongside of home prices, there is little ‘friction’ in mortgage markets to slow the growth of a housing boom,’ he said. ‘This serves to make entry-level housing less, not more, affordable.’”

“‘In conclusion,’ he states, ‘prompt administrative action is advisable now. We are in the midst of a strong home price boom that is unsustainable and fueled by leverage. While we do not know when real house prices will revert to their trend growth path, what is certain is that when such a reversion occurs, low-income and minority home buyers will again be unduly subjected to volatile home prices, loss of equity, and attendant loan defaults. As a nation we can and must do better.’”

From CNN Money. “Fort Myers was the backdrop President Barack Obama used in February 2009 to dramatize the need for his massive stimulus package, when unemployment in the Sun Belt boomtown was 11.7% and climbing. Now, ten years after the depths of the financial crisis, the area has mostly healed. Median single-family home prices in Lee County have more than tripled from the bottom reached in 2011, unemployment is below the national average at 3.2%, and construction is everywhere.”

“But memories of the crash are still fresh. Randy Thibaut runs Land Solutions, a brokerage that helps sell property to developers and that also closely tracks the housing market. He had projected that 2018 would be a cooling off year, in a gradual deceleration that might allow Florida to get off the roller coaster it’s been on for decades. ‘We don’t want another 2004 and 2005. A sustainable market here would be perfect,’ Thibaut says.”

“So far, the issuance of permits to build new houses is again on track this year to exceed the previous year. Construction is accelerating while demand for homes shows signs of slowing down, and Thibaut sees history repeating itself. ‘We are past our cycle,’ Thibaut says. ‘We think we’re in the 15th inning.’”

“Some people who remember the crisis are tapping the brakes, trying to stay away from debt, diversify into multiple sectors, and grow slowly. But Elmer Tabor, a longtime Cape Coral realtor and investor who ran a bank that failed during the mortgage crisis, says he sees newcomers overbuilding like the housing bust never happened.”

“‘The people who went through it are really paying attention and beginning to tighten up and back off,’ Tabor says. ‘We haven’t seen the failures of the companies. But what we are seeing is because of greed, people are doing it again.’”

There’s Tons Of Supply Coming Online

A report from the Press Democrat in California. “As summer turns to fall, housing prices appear to be coming down in Sonoma County just in time for harvest. The median price of homes currently listed in Sonoma County is around $655,200. That is down 6% from the last June’s record high of $700,000. According to the Press Democrat’s monthly housing report prepared by Pacific Union International senior vice president Rick Laws, July home sales fell to their lowest level for the month in nine years with only 401 homes sold.”

“The market appears to be opening up a bit more with more homes available at mid-market prices. From brand-new single-family homes to refurbished multi-family estates, we are seeing more listings with more to offer. Properties with pools or remodeled kitchens, are beginning to reappear at prices under $600,000.”

The Sacramento Bee. “Home prices rose in July for most of the Sacramento region’s neighborhoods, but an increasing number of them posted small price gains or declines amid a general stagnation in the housing market. Of the neighborhoods that had 10 or more resale home sales, 50 areas saw increases in the median sales price compared to the same month in 2017. Fourteen saw declines, and seven saw modest increases of less than 4 percent, according to new data from CoreLogic. Two had no change.”

“The median sales price for all homes in Sacramento County in July was $360,000, a 5 percent increase compared to July 2017. But there was was a 1 percent dip from June’s median of $362,000. Sales are flat also. The largest decline in the median sales price for neighborhoods with more than 10 homes sold was in Truckee’s 96161, where prices dropped 24 percent. The median sales price was $912,500, down from $1.2 million in July 2017.”

The Times of San Diego. “Sales of single-family homes and attached properties in San Diego dropped in August compared to both the previous month and August 2017, according to the San Diego Association of Realtors. Realtors sold 1,902 single-family homes in August, an 8.1 percent decrease from the 2,070 sold in July. Sales of condominiums and townhomes dropped from 1,044 to 971 from July to August, a 7 percent decline.”

“Year-over-year declines in home sales were even higher for both single- family homes and attached properties. The number of single-family listings sold fell from 2,325 to 1,902, an 18.2 percent decrease, and the condo and townhome listings sold fell from 1,174 to 971, a 17.3 percent decline.”

“‘Despite some lackluster numbers in our region’s resale housing, the overall economy is performing well,’ SDAR President Steve Fraioli said. ‘We particularly want potential buyers to know that the supply of homes on the market has grown nearly 20 percent from a year ago.’”

The Union Tribune. “Competition for renters in newly apartment-heavy downtown San Diego is getting fierce with one complex entering new tenants into a contest to win a $10,000 European vacation. Alexan ALX in East Village opened at the start of the year and has some of the most amenities of any new apartment building — such as a saltwater pool on the 18th floor and a hidden speakeasy for residents — but it also is surrounded by a flurry of new apartments.”

“The vacancy rate for Alexan ALX is around 27 percent, high for San Diego but common for a new building. Its average asking rent is around $2,930 a month, said real estate tracker CoStar. That’s not very far off from surrounding buildings.”

“The rental offer is the latest in a trend of more concessions and rent reductions downtown among the surge of new luxury apartments that have opened in the past three years. Offers are especially noticeable in East Village with large complexes — Alexan ALX, Park 12, Pinnacle on the Park and Shift — all within blocks of each other.”

“‘I think they have to offer concessions,’ said CoStar senior market analyst Joshua Ohl. ‘There’s tons of supply coming online. It’s the only way they can compete to get renters.’”

“At the end of the second quarter, 21.3 percent of apartment communities in downtown San Diego were offering concessions, up from 18 percent at the same time in 2016, CoStar said. Nearly 16 percent were offering one month free rent, up from 9 percent at the same time in 2016.

“Alexan ALX leasing manager Gergana Semerdjieva said she thinks the 313-unit Alexan ALX has the best amenities downtown, but that doesn’t change the fact they are in the middle of an apartment boom. Shift, a 368-unit complex known for its orange tower, recently opened up across the street. Just a short walk away is the newly opened Park 12 with 718 units, the most of any apartment complex in San Diego history, and a second Pinnancle on the Park building will bring the complex’s total to 955 apartments.”

“The vacancy rate for apartments in downtown San Diego is around 16 percent, much higher than the 3.8 percent number for the entire county. Rent is also higher, with an average asking rent of $2,452 per month compared to $1,786 for the county. Mark Goldman, finance and real estate lecturer at San Diego State University, said many of the apartment complexes could be overshooting the mark with asking rents because incomes in San Diego have not kept pace with rent increases. Also, the monthly price in many of the luxury units is comparable (or higher) to a monthly mortgage payment so he said some potential renters may just decide to buy.”

“Some promotions have ended at downtown complexes but there are still reductions to be had. The Rey, a 478-unit apartment in Cortez Hill opened at the beginning of 2017 and had a one month free rent deal until recently. While it might have ended the deal, it lowered rent prices two weeks ago. Average asking rent was up to $2,736 a month in 2017 but now is closer to $2,380. Pinnacle on the Park in East Village, 483 units and the tallest residential tower in San Diego, is still offering up to two months free rent on select units nearly three years after opening. The average asking rent is $2,612, down from $2,972 in 2015.”

“Shift recently reduced rental rates and is offering up to two months free rent on some units. Average asking rent is 2,832 is a month, down from $3,133 at its height in 2017. It allows rent terms of six months, offering a shorter term than most year-long leases in the city.”

From News Channel 3. “A realtor’s sign sits at a home in Palm Springs ready to be sold. Homeowner Steve Reeves and his partner are looking for a much smaller space. ‘My partner and I are both in our 70s. We both have medical problems and that’s why were looking to downsize,’ he said.”

“Selling their two bedroom, two bathroom house though has been slow however. Since putting it up on the market in June, Reeves thinks the weather is playing a role. ‘You might be wasting your time, because when it 115 degrees outside, no one’s going to come looking for a house,’ he said.”

“Reeves say four interested buyers have looked at the house, including one from the Bay Area not deterred by the approximately $560,000 price tag. ‘As soon as they say San Francisco, I think money, with the way prices are up in San Francisco,’ he said. Reeves believes once the weather cools down and the tourism season picks up, interest will rise in his home. ‘I know the Canadians have really invested a lot of money down here in the desert, so if they want to look at my house, they’re more than welcome too,’ he said.”

Requests They Wouldn’t Have Dared To Offer

A report from the Seattle Times in Washington. “The number of homes for sale across King County surged up 66 percent in the past year — and 86 percent just in the city of Seattle — the biggest rise in more than a decade. During that same period the inventory of Seattle condos skyrocketed 161 percent. Prices are continuing to fall across an unseasonably cool Seattle real estate market, with homes that would have been snapped up in an instant just several months ago now sitting unsold. New monthly data out Friday shows median home prices across King County fell $30,000 in August from the month prior, the third straight month of declines. Countywide the median cost of a single-family house, now $669,000, is down by $57,000 since May, according to the Northwest Multiple Listing Service.”

“The drop runs counter to normal seasonal patterns: During the same three-month period last year, prices actually went up by $16,000. Looking just at the city of Seattle, the change is even more pronounced: The median house last month sold for $760,000, a drop of $45,000 in just one month and $70,000 in three months.”

“The surge in listings is not the result of new homes coming on the market, but rather because houses are sitting unsold for longer. In turn, that has prompted a jump in the number of sellers cutting their list price, which would have been unheard of earlier in the year.”

“The drop in demand is part of a national trend as home prices – combined with higher mortgage rates – hit a point where fewer and fewer people can afford them. The fact that Seattle-area rents have stopped growing this year has put less pressure on buyers, as well. Local population and job growth has also slowed in recent months. And reports indicate buyers from China, who have a strong presence in the Seattle market, have had trouble getting their money out of the country amid growing restrictions there, leading to fewer home bids here.”

“‘Things have certainly changed,’ said John Manning, owner of a RE/MAX brokerage in Ballard. Some buyers are making requests for concessions that they ‘wouldn’t have dared to offer’ just a few months ago.”

“Neighborhood-level data is more volatile, but in the past three months, median prices have dropped $397,000 in Kirkland-Bridle Trails, $125,000 in East Bellevue and $87,000 in Southeast Seattle. And they’re down more than $70,000 in the past three months in Queen Anne/Magnolia, Ballard/Green Lake, and Shoreline/Richmond Beach. Brokers quoted in a release from the listing service noted that in recent months, there have been fewer bidding wars, while buyers are taking more time in deciding what to purchase. Even some new-home construction builders are dropping list prices.”

From Seattle PI. “There have been several recent announcements about new condominium buildings being constructed in Seattle. For the last few years, the only residential developments being built in Seattle were apartments, minus a few outliers like Insignia and Gridiron, but we are starting to see a flood of new condominium projects hitting the scene again.”

“Why the switch from apartments to condos? Well, we think it is due to apartment buildings not being as profitable as they once were. Major investment groups who were once willing to buy apartment buildings at high price/unit price tags are not as bullish right due to the softening of the rental market. That softening is likely due to an oversupply of apartments entering the market, around 6600 rental units are coming just to the South Lake Union neighborhood by 2019.”

“It is now more profitable to build and sell condos. Developers are very market driven so they will make these decisions based on what is happening right now in the apartment and condo markets, but it seems to us that they don’t put onus on the future market conditions that their developments might cause. For instance, if we had built a mix of condos and apartments over the last few years perhaps we wouldn’t have an apartment building glut right now and be starved for condos, we might just have balance. Instead it appears that their decisions are reactionary, if apartments are profitable then they build a ton of apartments, flood the market, the apartment market softens, then they switch to building condos and so forth and so on.”

From Bisnow. “Relentless multifamily construction across the country has finally hit landlords in the pocketbook. Rent growth has slowed nationwide for the fourth straight year ending in July 2018, and the fast-growing cities of the past few years that propped up those numbers have fallen back down to earth, according to a Zillow study as reported by Bloomberg.”

“The drop was most pronounced in Seattle. Seattle’s explosive growth thanks to Amazon and the industries that grew around it launched it closer to the upper echelon of rent prices that cities like New York, San Francisco and Washington, D.C., occupy, but those cities saw rents stop growing in the past two years, a Zillow economist told Bloomberg.”

“Smaller cities like Nashville, Tennessee, and Portland, Oregon, went from healthy year-over-year growth around 3% last July to slightly dropping prices a year later as the same story plays out as it did for those metros listed above. Much of the construction that chased those growing rents has delivered, giving tenants an unprecedented number of choices and pressuring landlords into greater and greater concessions just to keep rent from falling into the basement.”

“Due to high construction costs, virtually all new construction has been in the Class-A sector of the multifamily market, which has a shallower pool of potential tenants to draw from than older, cheaper supply. Philadelphia, for example, has established itself as a value option relative to New York and D.C., but its new construction in the past two years has targeted rents at $3.50/SF, according to JLL Research Director Lauren Gilchrist — not exactly a bargain.”

“‘You can go to tons of places in nice areas that are considerably cheaper than that, so I’m not sure who will be paying those rents besides professionals landing in Philadelphia for the first time or empty nesters coming into the city,’ Gilchrist said at a Philadelphia Bisnow event late last year.”