The Housing Bubble

A report from Governing.com. “When it comes to housing, New York, Portland, Ore., Seattle and Washington, D.C., all have something in common. Prices are actually starting to come down. Many of the nation’s hottest real estate markets, construction booms have brought a recent reduction in average monthly rents. Last year, apartment construction reached a 30-year high, with much of the growth concentrated in major cities such as Dallas, Houston and New York. ‘We have seen an uptick in vacancy rates and that’s having an effect on rents,’ says Michael Neal, an economist with the National Association of Home Builders.”

“Seattle’s vacancy rate is now 5.4 percent, which is the highest it’s been since 2010. Rents are going down fastest in the neighborhoods in and around downtown, which have been the most in-demand and, consequently, have seen the most recent construction. But even a drop in rental costs of about 6 percent in those neighborhoods doesn’t feel like much of a break when prices have shot up by more than 50 percent over the past five years. In the major cities, the vast majority of apartments being built are designed to serve luxury or at least high-end markets.”

From Bloomberg on New York. “Sales of Manhattan investment properties are running ahead of last year’s pace, helping to validate the view of many commercial brokers that the snoozy market of 2017 wouldn’t be repeated. Commercial-building prices in New York are off 3.4 percent from their peak early last year, according to Green Street Advisors LLC. Rents are declining or, at best, flat, for offices and apartments. Buyers and sellers alike are getting more comfortable with what the market saying about building values, said Peter Hauspurg, Eastern Consolidated’s CEO.”

From the Pittsburg Post-Gazette in Pennsylvania. “The boom in apartment building in Pittsburgh could spell trouble for landlords of older stock as they try to hold on to renters who find the shiny new units and the amenities that come with them hard to resist. In a report CBRE found Pittsburgh is in the midst of a supply surge, with about 4,600 units being built within the last three years — more than in the previous 15 years combined.”

“As one example, CBRE cited the 2004-built Flats at Southside Works. Occupancy hit 99 percent in 2010 and the average rent peaked at $1.80 a square foot in 2014. Faced with competition from the newer Hot Metal Flats and Southside Works City Apartments, the complex is now 71 percent occupied with rents of $1.73 a square foot, according to the report.”

From Urban Land. “Investors continue to pour money into U.S. student housing projects. Despite shrinking yields and rising development costs, transaction activity in 2017 was ‘very strong,’ after a record volume in 2016, says Jaclyn Fitts, director of student housing for CBRE. About $8 billion was invested in student housing in 2017, compared with $9.8 billion in 2016, but that represents volumes three times higher than 2014, Fitts says. More than 40 percent of the deals in the last year were driven by international groups, she says.”

“Developers were expected to deliver 46,000 new student housing beds for the fall 2017 semester, with another 42,000 scheduled to come on line in fall of this year, according to Axiometrics, which tracks the industry. Many universities have gone through a building boom in recent years. For example, Florida State University added 3,000 beds and Texas A&M University 2,500 beds in the last year alone, Axiometrics reports.”

“As a result, rents in many markets are flattening as new supply comes on line and students—and their parents—push back on rising costs. ‘Some markets are clearly oversupplied,’ said Travis Prince, executive managing director of the National Student Housing Group for Colliers International.”

From the Marquette Wire in Wisconsin. “Milwaukee rent is up about 2 percent from last year, according to a Department of Housing and Urban Development study. However, it’s difficult to determine if this trend will hold true for the Marquette area. Andy Hunt, the director of the Center for Real Estate in the College of Business Administration, said Milwaukee is currently experiencing an ‘apartment boom’ where demand is outpacing supply, leading to more complexes being built.”

“This ‘apartment boom’ may not be good for Marquette campus landlords, who are trying to keep up with newly-built complexes that offer more updated features and amenities to potential tenants. The freshness of new buildings may lead landlords around the area to lower their rates so they can stay on a level playing field with the competition, Larry Conjar, a local landlord, said. Conjar, who has been the landlord for decades, said too many apartments are being built around campus. That leads to a high number of vacancies, especially during the summer, when few students are on campus.”

“‘Right now (Marquette campus) is overbuilt,’ Conjar said. ‘A lot of people, including myself, are suffering from vacancies for next June. They’re actually lowering the rates to fill up the units.’”

From the Los Altos Town Crier in California. “When asked in a Bankrate study last July ‘What is the best way to invest money you wouldn’t need for 10 years or more?’ 28 percent of millennials picked real estate and 23 percent chose cash. Only 17 favored stocks. This is the wrong way to build wealth. I’m not saying that real estate per se is a bad investment. But when it comes to investing your savings for growth, if you think real estate gives you the best returns with the lowest risk, you would be mistaken.”

“A study by the London Business School, cited by Taylor Tepper at Bankrate, revealed that housing returned only 1.3 percent annually (on average) above inflation from 1900 to 2011. Stocks, on the other hand, performed more than four times better. Even in the Bay Area, despite the tremendous run-up in home prices over the past seven years, real estate growth has still failed to outpace the growth in stocks.”

“What about the risk – or volatility – of owning real estate? Illiquidity, one of the factors that adds to the volatility of an asset class such as real estate, masks it at the same time. Unlike stocks, the media cannot report the daily change in the price of your rental property, because without a buyer, there is no way to determine it. So while you hear about the stock market soaring or plunging on a regular basis, the lack of reporting on real estate prices makes it appear to be a quiet and low-risk asset class. It isn’t.”

“Take San Francisco housing prices, for example. From 2000 through 2005, they grew by a whopping 12.7 percent per year (on average). A $500,000 house purchased at the start of the decade would have grown in value to $907,000 in just five years. But from 2005 through 2009, that $907,000 house would have dropped in value to $642,000, a -6.7 percent average annual decline. The data firm of Crandall, Pierce & Co. further identified three other periods (1969-1971, 1978-1981 and 1989-1992) when housing prices nationally plunged by more than 15 percent. That isn’t low volatility.”

“For every well-publicized, highly successful real estate investor, there are scores of investors holding poorly producing rental properties. Not to mention those who bought and sold for a loss. But you never hear about those in the media.”

From KCTV 5 in Missouri. “KCTV5 News investigators are exposing the truth about one of Kansas City’s biggest landlords. A company named ‘Raineth’ has been snapping up low-income property for years and that company is behind nearly $600,000 in property taxes. Raineth doesn’t just owe money to Jackson County. The company owes Cincinnati $600,000 in property taxes and St. Louis $1.1 million. Overall, the company owes over $2 million.”

“If any of the tenants and neighbors want to have a face to face conversation with Raineth’s owner, they’d have to hop on a plane to sunny, southern California. Ed Renwick lives in a $3 million home on the outskirts of a gated community. Renwick has paid his property taxes on his home. KCTV5’s sister station in St. Louis, KMOV, sent an investigative reporter to Renwick’s house to get the bottom of the millions he owes in back taxes in their area.”

“Renwick says he had the best of intentions. He wanted to turn a profit while giving low-income communities access to affordable housing. He admitted the company owes a lot of money and he’s not happy about it. Renwick blamed being ‘behind on profitability.’ ‘We bought a lot of houses and running the houses was more complicated than we thought,’ says Renwick. ‘We had a choice: stop investing in our tenants or fall behind in taxes and we chose to fall behind in taxes.’”

“But Kansas City neighbors point out that it’s hard to see the investment, especially since Raineth is still collecting federal housing dollars which is funded by tax dollars. Records show Raineth has collected more than $2.6 million in public housing funds in Kansas City. However, many of Raineth’s homes are empty, boarded up and not rental ready. When asked about the vacant homes, Renwick says he bought the homes in that condition and hasn’t had money to fix them yet.”

“Assistant City Manager John Wood, the man in charge of housing for Kansas City, says he’s shadowboxing big out of state, and sometimes out of country companies, buying up cheap properties and letting the homes fall into further disrepair. ‘I find them to be negligent,’” says Wood. ‘They aren’t good neighbors. I would prefer they weren’t here. They buy homes low, put a little money into it to make improvements, charge a certain amount to meet a rate of return. I think it’s criminal in my mind.’”