The Housing Bubble

It’s Friday desk clearing time for this blogger. “The price of a tech mogul’s Los Altos Hills compound is now listed for about $38 million less than the original asking price, Socket Site has discovered. In Silicon Valley, where real estate is scarce and high-paying jobs abundant, homes famously sell for over asking, so it’s interesting that the price on this one has dropped so dramatically. The house at 27500 La Vida Real first went on the market with a big splash for $88 million in November 2015. The five-bedroom, 12-bathroom home never sold and the price was then dropped to $68 million last May and then to $55 million in June. Still without a buyer, is now listed for $49.99 million, that’s roughly 43 percent less from the original asking price.”

“Loudoun County Supervisor Matt Letourneau said residents often oppose any move to add housing in their communities for one simple reason. ‘They’re tired of sitting in traffic,’ he said. ‘Frederick County, Maryland, and Loudoun County, Virginia — both are seeing a lot of growth in housing. Route 15 goes between those two — it’s a parking lot from Leesburg to Point of Rocks,’ Letourneau said. ‘Every afternoon. I mean, literally, a parking lot.’”

“John Foust, a Fairfax County Supervisor said there’s no shortage of market-priced housing. ‘The challenge is obviously what the market won’t deliver — and that is affordable and workforce housing,’ he said.”

“They each saw year-over-year declines, but Arlington’s was smaller and, as a result, the county posted the largest average per-square-foot price for real estate across Northern Virginia in August. At an average of $456 per square foot, Arlington was down 3.4 percent from $472 a year before, but Falls Church (which had seen a per-square-foot cost of $530 in August 2017) was down 18.3 percent to $433. Alexandria, which placed third in Northern Virginia at $374, was down $22 per square foot, or 5.6 percent, for the month.”

“A rise in interest rates and slowing home sales have caused a decline in Dallas-Fort Worth residential mortgage activity. North Texas home loan activity fell 6 percent in the second quarter compared with the same period last year, according to Attom Data Solutions. The number of D-FW home purchase loans was down 15 percent. Any decline in home loan originations is significant for North Texas, which has one of the country’s largest concentrations of mortgage industry businesses and workers. Several companies have already begun cutting back on the ranks of workers because of the reduced loan activity.”

“The decline in home mortgage activity in North Texas comes as housing activity is slowing in many neighborhoods. ‘I would expect this somewhat disappointing spring selling season will be a bit of a wake-up call for home sellers, and they will eventually consider lowering asking prices, which in turn will bring some buyers back to the table,’ said Daren Blomquist, senior vice president at Attom Data Solutions.”

“The Foxrock childhood home of Nobel laureate and writer Samuel Beckett, which has been on the market since 2013, has dropped its asking price by €1 million following a change of selling agent. Cooldrinagh was originally brought to market in the depths of the downturn, seeking an ambitious €4.25 million. This price was later amended to €3.5 million, though it still failed to attract buyer interest. Now the property is being returned to market with a 21 per cent price drop and a €2.75 million asking price.”

“The fall in rents has created a lot of buzz in the real estate market with tenants taking advantage of the situation, going for better options. ‘The rents have gone down between 15 and 20 per cent in many areas. This has given people an opportunity to negotiate with their landlords or look for other options as new buildings keep coming up,’ Salman Jalil, head of property division at Al Balushi Investments, told Muscat Daily.”

“Q: Can you say that the administration of high rents by landlords and realtors was responsible for the large number of vacant houses in Ikoyi, Lekki and Maitaima among others? Chief Kola Akomolede, Principal Partner, Kola Akomolede and Co: Again this is another problem we had, over the years during the boom years; we were living in artificial economy. The rents people were paying were just unreasonable. The high rents were not determined by market forces. For example, people are paying as much as $100,000 on a 3-bedroom flat in Ikoyi. I don’t know anywhere, even in America where people pay $100,000 as rent for a 3-bedroom flat; talk less of Ikoyi in Lagos? The rent was artificial. So with the boom coming to an end, some of the owners found it difficult to see the reality when rents started falling and people were asking them to take $50,000 and $40,000.”

“Initially they were saying no because the reality did not dawn on them on time. Some of them are still vacant till today because of the owner are not yet aware that the situation that created that artificial rent is no longer there. There still have those artificial rents especially in Lagos and Abuja. But the truth is that nobody that works honestly will be able to be paying $100,000 as rent. That is why some of these houses are still vacant.”

“The number of construction permits issued by the government rose more than 10 percent from a year earlier in the first seven months of this year. Liu Pei-chen, a research fellow at the Taiwan Institute of Economic Research, said it remains to be seen whether the local property market has bounced back. The economist said the local property market has been faced with a supply glut, so even though the value of the newly launched housing projects is expected to hit NT$1 trillion (US$32.47 billion) this year, less than 40 percent of the projects are expected to be sold. Liu said the local property market remained awash in empty homes.”

“An investor who purchased an off-the-plan ‘dream home’ in Brisbane from cold-calling property spruikers lost more than one-third of its value when he resold, despite several years of booming residential property markets. Mal Jones, a father of three, says he was persuaded by a ‘free’ trip to Queensland with his wife, Michelle, and persuasive pitches about tax breaks, leveraging and confident predictions about future growth.”

“But eight years after investing $415,000 (including commissions, management and refinancing costs), the property was sold for $295,000 – a loss of $120,000, or almost 29 per cent. ‘I trusted advisers’ professional opinion,’ Jones, whose children are aged between and 17 and 27, says about the deal. ‘It is very much a confidence game about future returns and I bought into it,’ he says. ‘I feel stupid about the outcome. I should have done more due diligence.’”

“In 2010 Jones accepted an invitation from a cold caller to have an adviser from Reventon, a Melbourne-based property company, visit his Eltham home for a ‘free’ consultation valued at $300. Property prices were running red hot in 2010 after a succession of interest rate cuts intended to protect the Australian economy from the global financial crisis. His purchase was financed with two loans with interest rates of more than 7 per cent. The intention was to find a tenant and let rent pay off the mortgages as rising capital boosted the resale value.”

“But property prices tanked and the highest weekly rent was $350, which meant an annual shortfall of about $12,000. Jones estimates total commission payments to be more than $40,000. ‘Foolishly we believed everything we were told about rising markets, capital gains and rental income,’ says Jones, who wishes he had consulted with his accountant and third parties to analyse the deal. ‘I went into the deal with eyes wide open,’ he says. ‘It looked too good to be true – and it was.’”

“Jones says he is grateful he got out when he did because similar properties in the same postcode are selling for even less.”

“His experience is consistent with market analysis by BIS Oxford Economics that found the number of negative or flat off-the-plan transactions in Brisbane was 26 per cent and 53 per cent respectively. ‘The substantial apartment pipeline, particularly in inner Melbourne and inner Brisbane, will deepen this issue with commencements on track to increase and remain high in the next two years,’ it concludes.”

A report from the Denver Post in Colorado. “Developers in metro Denver are churning out so many luxury apartments it is depressing rents in the priciest neighborhoods, forcing landlords to provide more concessions and shrinking the premium tenants pay to live downtown. But is it a bubble ready to burst? The real estate community remains divided about what comes next as a record number of units continue to hit the market in Denver.”

“‘I personally believe that Denver is overbuilt,’ Kelley Klobetanz, chief underwriter at Greystone & Co. in Denver., told attendees at a multifamily conference hosted by Bisnow in Cherry Creek on Thursday.”

“Charlie Williams, a senior vice president at KeyBank in Denver, countered that for four years observers have worried about overbuilding in apartments. He even passed on deals that looked too speculative, only to see them succeed. Maybe it takes 18 months instead of 14 to fill a building, or more concessions need to be offered, but every time a new project hits the market, it eventually gets filled, he said. ‘We are a market that is diversified finally. Denver isn’t a boom and bust town anymore,’ he said.”

“But that doesn’t mean the market isn’t straining to absorb what is being built. David Pierce, a market analyst with CoStar Group, detailed the downward pressure all the new supply is having. About one in seven units downtown come with concessions like a month or more of free rent versus 1 in 10 elsewhere. Five years ago, a developer who built or purchased Class A units outside Denver’s core would have enjoyed rent increases of 20 percent versus only 10 percent for those who followed the herd and stayed in the urban core, Pierce’s numbers show.”

“So what are developers doing? Last year, they increased the supply of downtown units by about two-thirds over the annual average going back to 2014. They are doubling down rather than pulling back. In the most expensive submarkets, like Cherry Creek and the Golden Triangle, rents are falling. Another warning sign comes in the narrowing spread in rents between Class A units downtown and the older or lower quality Class B and C units. Typically, tenants have paid a 50 percent rent premium to live downtown in the nicest units, but now the gap is only 25 percent, and even lower once concessions are included.”

“‘The premium to live downtown has narrowed,’ said Pierce, who offered a silver lining.”

From Tulsa World in Oklahoma. “The University of Oklahoma will likely have less of a budget loss than anticipated during the current fiscal year, its president said Thursday. At a University of Oklahoma Board of Regents meeting, James Gallogly said the state’s flagship university was originally going to have about a $15 million operating loss for the current fiscal year, but the university has found about $12.3 million in cost-savings since he took the helm on July 1. He said that the now-projected loss of about $3 million will likely change as he continues to evaluate the budget and identify further cost-saving measures.”

“‘We’ve also discovered some items that we were not aware of relating to some budget categories that weren’t properly accounted for,’ Gallogly said. ‘One of the things I’ll just simply say is that our budgeting process is very weak, and, as a result of that, there seems to be surprise after surprise.’”

“Gallogly first made headlines in June when the then-incoming OU president expressed alarm about the university’s debt obligations, which are more than $1 billion including interest. He then said layoffs were possible as part of the cost-saving measures. At the regents meeting at OU-Tulsa Thursday, Gallogly also described the negative fiscal impact of certain OU student-housing projects on the university.”

“He said the university’s two residential colleges — Headington and Dunham — have about a 63 percent occupancy rate between the two, which equates to about a $2.3 million loss. If 100 percent occupied, the colleges would run about a $1 million loss, Gallogly said.”

“‘At this moment we have about $81.7 million of debt related to those two colleges,’ said Gallogly. ‘I would also point out that one of the things that we learned in the process of during the construction period that the university had contributed an extra $10 million to construction from general funds so this project has been a very, very difficult project for the university. It does have a significant financial loss.’”

“One of the financial ’surprises,’ according to Gallogly, is the expenses incurred by the Cross housing-project. ‘We had been told that we had no fiscal responsibility related to that project and we weren’t involved in the debt,’ said Gallogly. ‘It turns out … the cash amount that goes out the door from the University of Oklahoma related to the Cross project is about $7.1 million a year.’”

The Union Tribune in California. “Materials for construction of San Diego’s newest buildings are rising fast and some in the industry say it might slow the building boom that has altered downtown’s skyline since the end of the recession. Slowed rent growth and increased labor costs are also seen as problems for the building industry.”

“There are enough major building projects ongoing, especially downtown, that it might be a while before anyone notices a slowdown in construction. Companies like Canadian-based Bosa Development have no option but to continue construction on major projects, such as its planned tower off Broadway that will be the tallest residential building in San Diego County’s history.”

“‘It’s ridiculous,’ said Nat Bosa, president of the company, said of steel price increases. ‘It’s costing us a few million bucks more.’”

“Rent prices are still going up, but they have slowed considerably compared to past years and the influx of new apartments has meant more open units. New apartment complexes have the highest vacancy rates, according to CoStar. East Village’s newest tower Shift — known for its orange 240-foot tower — has a vacancy rate of 73.6 percent. It has 368 apartments and opened this spring. AV8, a 130-unit aviation-themed complex in Little Italy that opened this spring, has a vacancy rate of 76.9 percent.”

“Darcy Miramontes, executive vice president for commercial real estate firm JLL, said it is possible developers might decide to sit on land where they have already gotten approvals to start building. ‘I know there is a perception out there that there are a lot of greedy developers,’ she said, ‘but I will tell you that no developer is really hitting it out of the park on returns at this point.’”

“Bosa said it will ultimately be up to market conditions in the coming years if the cranes that have dotted the skyline for several years will continue. ‘If the market (renters and buyers) is willing to pay for it, then it’s OK,’ he said. ‘If the market is not willing to pay for it, then everything comes to a halt.’”

The Williston Herald in North Dakota. “Vacancy rates went up quite a bit during the downturn, stoking fears that the multifamily sector had overbuilt for the long-term need in the Williston region. However, with crude oil prices in the $60 range, Williston apartments have filled up fast. Despite the fact that apartments are running out of room, however, Mike Elliott, managing principal of Energy Real Estate Solutions doesn’t expect to see too many more multifamily units built, at least, not in the near future.”

“The replacement cost on multifamily is $180,000 to $220,000 per unit, Elliott said, ‘and they are still trading below $100,000. So it will be a long time before we see developers for multifamily units coming back to market.’”

A report from the Miami Herald in Florida. “One of Miami’s highest-profile real estate brokerages is engaged in an ugly split, with accusations of substance abuse, mismanagement and runaway expenditures. For 25 years, International Sales Group — ISG — has been known as the sales wizards behind condo projects at Brickell City Centre, Echo Brickell and Muse Residences in Sunny Isles. But earlier this week, the Real Deal reported on a legal fight between principals Philip Spiegelman and Craig Studnicky that began last spring.”

“The legal tussle has become Topic No. 1 in Miami real estate circles. At least one observer believes the breakup is a symptom of the cooling luxury market and may be a harbinger of tougher times to come. In May, a corporate entity run by Spiegelman filed a lawsuit to dissolve ISG, claiming that his longtime partner, a Studnicky-run entity called Craig Nicole Inc, ‘burned through large amounts of cash collected by ISG on sales without producing any profit.’ He accused CNI of running up excessive expenses: ‘ISG’s current overhead expenses approximate $2.4 million per year. It should be one-fifth of that.’”

“In June, Studnicky’s firm counter-sued, claiming ‘Spiegelman’s waste and dissipation of company assets has caused the company to lose customers, employees, independent agent sales people and corporate opportunities. Spiegelman’s substance abuse problems and his unpredictable anti-social behavior and inebriation caused him to be unable to function in any productive capacity.’”

“Some experts say ISG’s breakup reflects the stress of a real estate cycle entering a downturn. While middle-class neighborhood property values are going up, luxury market values in high-end areas such as Key Biscayne and Sunny Isles Beach are down. ‘This is a result of the boom days being over and the distress days coming,’ said Peter Zalewski, principal with the Miami real estate consultancy Condo Vultures. ‘Warren Buffett always said: ‘A low tide exposes who’s naked.’”

“This type of brokerage breakup sometimes happens during stress periods, he noted. ‘But the vitriol between the two speaks to how bad our situation may be.’”

From The Real Deal. “After a more than eight-year run that changed the Magic City’s skyline, Greater Downtown Miami’s condo cycle is likely nearing the end. The Downtown Development Authority’s mid-year report, prepared by Integra Realty Resources, suggests that the cycle is coming to a close as Miami’s urban core has yet to see a new condo project break ground so far this year.”

“The average resale prices for condos fell to $392 per square foot from $405 per square foot at the end of 2017 – a sign that per-square-foot prices are returning to 2014 levels. Condo prices will likely continue to fall in the near future on a per-foot basis to about $360 per square foot. ‘It’s hard to argue there could be any better time to buy as pricing edges down late cycle,’ the report states.”

“The number of units under construction in Greater Downtown Miami totaled 3,849 by mid-year 2018, down from nearly 5,000 units at the end of 2017. By the second quarter of this year, there were nearly 28,000 condo units in the pipeline, up 5 percent year-over-year, according to the DDA. The pipeline includes units that are completed, under construction, under contract, reserved and proposed in downtown Miami, Brickell, Arts & Entertainment District, Edgewater, Midtown Miami and Wynwood.”

“Anthony ‘Tony’ Graziano, who authored the report, stresses that this cycle is healthier than the previous one because developers have more equity in their projects. In most condo projects this cycle, developers required buyers put down 50 percent deposits and banks generally required 50 percent presales before providing a construction loan. ‘You don’t have any of the big banking risk exposure,’ Graziano said.”