The Housing Bubble

A weekend topic on manias starting with CBS SF Bay in California. “With the ever-escalating Bay Area real estate regularly hitting new levels of insanity, with residential homes selling for seven-times higher than the national average with the average price of about $1.6 million. The house, located in the Pacific Heights neighborhood, just sold for $9.6 million. That’s $1.6 million over the asking price. The property tax alone is nearly double the median household income and far more than what most U.S. families make in a year. Patrick Carlisle, the chief market analyst with Paragon Real Estate, admitted it is impossible to predict when the cycle will turn, he said there’s one thing that all downturns have in common. ‘It’s called irrational exuberance. People get to this belief that it’s never going to end,’ explained Carlisle.”

From Realtor.com on Nevada. “Las Vegas isn’t just surviving—it’s thriving. The city, hit hard by the Great Recession, has rebounded, emerging as one of the hottest real estate markets in the country. Broker Brian Kyle shares the same sentiments about the scorching market right now in the desert. He says homes in nice shape priced under $300,000 are getting multiple offers the day they land on the market. ‘We are back to pre-recession excitement level,’ he says, ‘although the foundation of this real estate market is completely different from where we were back then.’”

The Star Tribune in Minnesota. “Last month, the average price per square foot of a new house in the metro was $166, about 18 percent more than an existing one, according to the Minneapolis Area Association of Realtors. In 2012, the price gap per square foot between new and existing houses peaked at 31.3 percent. That gap has slowly narrowed largely because existing home prices are rising swiftly. Mark Gianopulos, Midwest region director for Metrostudy, said the Twin Cities had the highest level of annual single-family permits of any urban area in the Midwest during the first quarter of the year. ”

“He said the median closing price for a new single-family detached home in the Twin Cities is the highest in the Midwest at $416,960. However, as builders try to cater to buyers on a budget, they are trying to control costs by cutting back on size and amenities. Since the second quarter of 2015, the median price of those new houses has remained relatively flat. ‘The housing market in the Twin Cities continues to show unbridled strength even with the recent modest economic factors,’ Gianopulos said.”

From Market Watch. “On Wednesday, famed real estate investor Sam Zell spoke at an industry gathering for real estate investment trusts. ‘Today, we see a multifamily market that is catching new supply for the first time, frankly, since before the Great Recession. We probably built 480-500,000 units last year, the last time we built that many units in one year that was 1971 when the multifamily market was growing from scratch. We’ve created a lot of supply.’”

“‘In some urban markets, like New York, you see oversupply and dipping rents, and maybe creating concessions, but basically of a relatively small nature because there is no ability to overrun an urban market with oversupply. Not so with suburban markets. I think over the next 12-18 months we’re going to see oversupply particularly in the suburban markets that are going to make multifamily less attractive from a bottom line point of view than it has been up to now.’”

“What about retail? ‘The best description I can give you is a falling knife.’”

From Senior Housing News. “Large private equity firms might have an advantage in seizing the urban opportunity, given that they are flush with capital. Activity should start to pick up in the the second half of 2018 and remain elevated into 2019, predicted Robb Chapin, CEO of Bridge Seniors Housing Fund Manager. One reason is that some markets became overbuilt during the recent senior housing construction boom; the fierce competition now is leading to distressed properties. These will be coming on the market in increasing numbers.”

From Farm Forum. “North Dakota land values declined approximately 1 percent, based on the 2018 County Rents and Prices Report survey funded by the North Dakota Department of Trust Lands. The Kansas City Federal Reserve Agricultural Credit Survey reports land values down approximately 3 percent in the first quarter of 2018, for irrigated and non-irrigated farmland in Nebraska, Kansas, Oklahoma and parts of Missouri.”

“In North Dakota, the 1 percent decline continues a slow downward trend for land values statewide that first was seen in the 2015 report and continued through 2017. Values declined 0.57 percent, 3.95 percent and 0.91 percent, respectively, to $1,996 per acre. The survey data indicate that for the first time since 2003, the northwestern region experienced a decline in farmland values, falling 9.81 percent from $1,230 to $1,110 per acre. This represents the greatest decline of any region in the state. Rents in the Red River Valley counties declined 5 percent, with the southern Red River Valley counties falling from $124.60 to $118.20 per acre. Northern Red River valley counties fell 10 percent, from $89.60 to $80.80 per acre.”

“Rising interest rates put additional downward pressure on farmland as outside investment opportunities begin to look more favorable. While the bulk of farmland is purchased by farmers, a sizable share is purchased by investors.”

“Bryon Parman, North Dakota State University Extension agricultural finance specialist concludes, ‘The exact proportions of land purchased by investors versus traditional farmers is difficult to discern. However, even if as little as 10 to 15 percent is investor-purchased, should they look to sell, or at least no longer view farmland as a favorable investment, it’s likely to have a significant impact on land moving forward. Especially if bond yields rise much faster than capitalization on farmland, investors will most likely look at investments in other markets yielding better returns.’”

The North Shore News in Canada. “What was supposed to be a non-political town hall Thursday evening in West Vancouver took on angry, political overtones as the near-capacity Kay Meek crowd blasted the NDP’s forthcoming school tax. Noting the flagging real estate market and the plethora of homes selling for less than assessed value, Realtor Allan Angell dubbed the situation: ‘a nightmare.’”

“‘The NDP should be shot,’ he said, before being interrupted by applause and shouts of ‘hear, hear!’ ‘We’re losing money galore’ Angell continued. ‘My house has dropped $1.5 million in five months.’”

“Simon Fraser University professor Andrey Pavlov suggested that overall tax increases are hurting affordability. ‘If you’re a buyer, the fact that the home price is cheaper does nothing to help you.’”

“Fellow panellist Seain Conover concurred, addressing the argument that homeowners were only being asked to pay ‘a little bit’ more. ‘That’s a very disingenuous argument because when you pile on a whole bunch of expenses to an asset, the asset becomes less desirable,’ he said.”

From ABC News on Australia. “Australia’s Foreign Investment Review Board (FIRB) reported this week that foreign residential real estate approvals dropped significantly in the 2016-17 period. Whereas 2015-16 saw 40,149 approvals granted, totalling $72.4 billion, the figure for the following year was just 13,198 approvals, totalling $25.2 billion. On these numbers, the foreign property investment boom looks to be over.”

“Chinese demand may have been weakened by a range of factors, including the new FIRB application fees, Chinese overseas direct investment capital controls, and the changing global economy. But if the cycle is moving from boom towards bust, we have learned several things along the way. Between 2013 and 2017, property developers, both local and foreign, regularly contacted me to ask if I had any up-to-date research on foreign investors’ consumer preferences and market forecasts. I did not. But there was no shortage of advice out there, covering everything from feng shui-informed housing design to the key needs of foreign university students.”

“Some global real estate agents suggested to their clients that they could buy an Australian home to accommodate their child while they were studying at an Australian university, and then use the capital gain from the property sale to pay back the tuition fees. Many property developers were formulating medium- to long-term development pipelines that included the foreign capital and consumer preferences of foreign investors. It is unclear, now, whether much of this housing stock will ever be built. If it is, will it suit the changing future needs of our cities, or address our ongoing housing affordability problems?”

“In other words, what sorts of properties will be left as the legacy of the recent foreign real estate investment mania?”

From the Courier Mail in Australia. “Tenants are the big winners of the apartment building boom as median rents across many popular suburbs go backwards. Weekly median rents in Newstead, Bulimba, Milton and Fortitude Valley have all dropped by between 9 per cent and 10.6 per cent over two years. Increasing supply is a big cause of the drop, and in Bulimba the number of units has increased to 1525 from 1454 two years ago. ‘And directly across the road from me they are building another big unit complex,’ said Bulimba renter Zoe Knight.”

“While it may be a renter’s market, the drops had hit investors hard, according to Propertyology’s Simon Pressley. ‘The softening of rents in Brisbane is not new unfortunately,’ Mr Pressley said. ‘It has been progressively unfolding for three odd years, and the main cause of it is way too many apartments.’”

“Rents for houses had also taken a dive across many popular Brisbane suburbs over the past two years. The median rental price in West End was $550 in March, down from $605 at the same time two years ago, despite the number of houses not changing greatly. ‘If you have too many of any dwelling type it can often have a knock-on effect to all dwelling types,’ Mr Pressley said.”