‘Repartments’ Emerge From Condo Conversion ‘Mess’
The Wall Street Journal has this report on ‘repartments.’ “One of the first signs that the Gateway Club was going condo was when the owner of the Boynton Beach, Fla., apartment complex closed the gym within the past year.”
“Their fears turned out to be well founded. Residents complain that they were later offered steep ‘insider’ prices to buy their units, $400,000 for a $1,500-a-month rental in one case. Some declined and moved out. When would-be buyers were wooed at a luau at the pool, existing tenants were excluded. ‘It was like we were the redheaded stepchildren,’ says Jack Carney.”
“Now, Gateway’s owner, faced with slow sales, is reversing course and reverting to apartments. Although one-third of the 319 units had been upgraded in anticipation of sales, no deals were closed. The owner had to refill the complex with renters, so incentives, like lower rent, were offered.”
“Mr. Carney was told he could purchase his $1,500-a-month, three-bedroom unit for $403,000. He has 16 months left on his lease and plans to assess his children’s school situation before deciding whether to move even though the complex will remain as rentals. He thinks some of the new renters aren’t desirable neighbors.”
“‘They’ve always tried to rent to the family type, but with all these promos and things,’ he says, some new tenants play loud music and drink beer at night in the parking lot.”
“Michael Cohen, a research strategist, dubs the reversions ‘repartments.’ ‘It’s definitely becoming a problem,’ he says. ‘Some of these projects probably don’t look as attractive as they did six months ago when developers were buying the conversions.’”
“An emerging trend is evident as developers stuck with slow-selling condo units struggle to recoup part of their investment and as tenants gripe about being caught in the middle when their building swings from apartments to condos and back again.”
“‘It was the wrong market, wrong time,’ Jenny Reidy, said Gateway Club’s rental manager who recently left the company.”
“In south Florida, eight converted complexes containing 2,156 units have reverted to rentals in Broward and Palm Beach Counties, according to Jack McCabe. That compares with about 62,904 units that have been converted or have begun to be converted into condos in the area since 2004, he adds.”
“The San Merano at Mirasol, a 476-unit apartment complex in Palm Beach Gardens, Fla., is a case in point. The luxury development adjacent to a country club was built and developed by Kolter Communities. Not too long ago, Kolter had started running newspaper ads pitching the units as condos and sending letters to existing residents alerting them of the switch, but it called off plans a few months ago after getting nervous about the rising number of competing condos. None of the units were sold as condos.”
“‘I knew we were in trouble when the guy who delivered my television a few weeks ago said he had bought two conversions [in the area] and was trying to flip them,’ says Kolter COO Peter Donnantuoni, pinning most of the blame on speculators for driving up prices to unreasonable levels.”
“The financial pressure on would-be condo converters can be intense, analysts say. Typically they’ve been willing to pay 35% to 40% more than their value as rental apartments. If the project cannot be converted, it becomes a substandard investment being run as a rental property. And if the investment was highly leveraged, the converter risks losing the property.”
“Earl Kratzer bought his unit at the Estates at Stuart last year for about $263,000. Like other buyers intent on immediately selling for a quick profit, he put it up for sale for $295,000 right after he closed in October. No luck. Then he tried to rent it for $1,400 a few months later. That didn’t work either.”
“Mr. Kratzer later discovered the owner of the Estates was renting units as well as selling them, but some at a much lower price. He says he was ultimately forced to drop his rental price to around $1,100 to match the Estates listings. He finally found tenants last month. ‘It was just a mess,’ he says.”
Remembering what short sales were like in California in the 1990s:
The Return of the Short SaleTitle
Hey Ben!
This is why there will be no increase in rents.
I disagree. The rental market is very much supply/demand. Rents can easily go up if there is inflation, or if an area gains significant jobs without significant new development.
Yeah, and as the article shows there is going to be a lot of supply coming back on the market. And what kind of “significant jobs” do you invision we might be gaining?
This was some of the same supply that was there in the past–and the landlords of failed condo conversions will have a lower basis than the developers (potentially banks) who own failed condo projects, and flippers who own un-flipped condos and new homes.
Prices of new housing is SO much higher than that of existing rental stock (including condo conversions), that this lowest common denominator of recent failed investor will be the ones most successful in raising rents after a little time passes.
We will see rents rise in time.
Rents are paid with earn dollars. They don’t make IO loans to pay the milk maid. While rents may trend higher, they will never close the gap on current housing prices.
“We will see rents rise in time.”
Kind of like saying “it will rain again”.
Rents always rise in the long-run; but you can be damn sure they won’t be rising significantly enough soon enough to cover the current rent-buy cost discrepancy.
RW.
Yeah, same supply as before and same amount of people = same rents.
If anything rents should have risen along with house prices especially as units were removed to condo status but they didn’t because house prices were driven by monopoly money while rents were constrained by the lack of and increase in wages.
Respectfully I can’t understand what you are trying to say with your second paragraph. But I think you are right that eventually these projects will be owned by someone at a lower basis and that is why rents will not rise this time around.
Tell me this. Where do you see the money coming from to pay the increased rents you predict?
People - even those that should be flush with cash after these last few years - are living paycheck to paycheck already. There may be an attempt to raise rents they won’t be able to collect.
Turnoutthelights-
I agree. The gap will largely be filled with decreasing home prices, but I believe rents will rise somewhat to help fill the gap as well.
“We will see rents rise in time.”
And the sun will sputter out in time as well. The question really is, when?
Rents can only rise if people can pay the higher cost. There is little creative financing when it comes to rents, except possibly
1) multiple families sharing a unit. very unpalatable to most Americans who would rather move to another area than share space with non-relatives
2) credit card advances. At near 25%, that will only last so long.
Will rents rise? Sure, in some areas. At some point. But those areas may be few and far between at this point, and they may not rise for years for all we know.
Home prices were only allowed to drift from income due to credit. To my knowledge, except for the above 2 modalities, there is no credit allowed for rentals. Thus rentals can go no higher than wages will allow.
Currently, in San Diego you can rent a nice 2BR apartment for $1500 in a nice area of town, such as Mission Hills. That same condo will cost you around $500k or so. The PITI payment on that with 20% down and a fixed rate loan would be in the neighborhood of $3500/month or so (guestimate). It will be a LONNNNGGG time before rents raise anywhere near where the new “investors” need them to be. San Diegans simply don’t make that much money.
And So FL income is a joke. I hear about all these rich retirees. Bull. I go down there a few times a year (South Beach/Ft. Lauderdale/Boca Raton) and most of the people are on fixed incomes.
Sorry folks, not gonna happen. Rents will creep up with inflation, maybe a tidge more… but I doubt we’ll see run away rent inflation.
This is simply a variant of the “buy now or be priced out forever!!!” argument. It’s “buy now or your rent will skyrocket!!!!” instead.
please.
clouseau
Waaahoo-
A few thoughts–there are not the same amount of people, there are more people and more households than before, but what you have is more housing supply as well.
However, this is where paragraph #2 comes in. Much of the new housing has had very high costs, and the ability for the new people and households to own has been from cheap money.
Now dry up the cheap money. You will have a lot of desperate owners with varying degrees of ability to hold on, but one thing is true, the new housing stock is at a much higher basis than a lot of the existing rental stock, making for much more motivated landlords. The weak hands will flood the market with supply, but not for rent, for sale–they will need to get out, and ultimately be forclosed out.
The stronger hands would have liked to sell, but instead they will rent out their units in simply pay the negative every month. However, they will be highly motivated to push rents once they have a tenant. They may get the rents, they may not, but once they get a tenant, they are more likely to get some rental increase.
Those outside of this dynamic are the existing apartment owners. After the initial shock of the new homes being rented, apartment owners will benefit from these high basis landlords pushing rents.
At the end of the day, I think we are in agreement on one simple fact–POTENTIAL rents are not tied to real estate prices, but tied to wages. Where we disagree however, is that I believe that the average renter is much better off than the average homeowner when it comes to their monthly expenses. We have had several years of roughly flat rents in many markets, and 4.7% unemployment with wage growth over the same several years. It sounds like you think renters are already 100% maxed out. If that is the case, you are dead on right–rents will be pushed, but won’t budge much, if at all.
Reminds me of a posting I did back in February ‘06:
Wednesday, February 08, 2006
Rents to follow For Sale Housing Trends?
You all might be interested to hear what some of the new ideas coming out of the housing bubble are. We are all treated to an eyebrow raising when we read that If Home Prices Fall, Rents May Fuel Inflation.
The gist of it
What this theory portends is that rents will drive inflation through the stratosphere because housing prices which have doubled in the last few years need to catch up to resolve the imbalance between rent/buy.
They say that single-family rents drive a whopping 23% of the CPI, rents have been stagnant… until now. The massive tsunami of foreclosures will force overextended home buyers out of their homes and into rentals. And, as we all know, they would naturally gravitate towards SFH’s.
Fear, can you smell it?
This is a decidedly different tactic at fear mongering than we have seen in the past with “better get in now, before it gets even more expensive.” Trying to coax out the last few bubble sitters, it was but only inevetable that it finally came to this; all financial manias try to eke out the last of the last even when alarm bells and whistles are going off. This tactic essentially is the “there’s nowhere else to hide, you will only make it worse for yourself to stay put” induction.
However this tactic is long on fear, it is decidedly short on logic; at least the old one had “demographic statistics” and some historical context to try to back it up. No, this one makes no sense if you think about it more than the writer wants you to.
With housing prices peaked and set to fall, these falling prices will trigger a housing debacle according to the writer. They even have the requisite quote from an “Economist”.
“If you’ve had very quick home-price appreciation, you don’t have to raise rents too much,” said Steven Wood, chief economist at Insight Economics. “But if home-price appreciation slows, landlords will have to raise rents to start to cover that negative cash flow.”
So, it all makes sense right? Peak Oil? Peak Housing?
The real Deal
The truth, unfortunately for these schadenfreude hopefuls, is much less stranger than fiction. Like many on the “rent” side who are not so quietly enjoying the demise of overextended homebuyers, there are a great number of homeowners who would love nothing more than to stick it to these snobby renters if their housing ATM goes in the toilet.
Sorry, no deal. The housing bubble was an appirition that will disappear as mysteriously as it arrived; it was psychology to begin with and that is how it will end.
If rents rise, it is due to rental stock vs. housing demand, not what the investor paid for it and needs to cover each month. Rents cannot be financed and must be paid monthly from cash and income, and therefore cannot be delayed for the future like many of the more recent purchasers have done with interest only or neg-am products. Honestly, investors have not been willingly depressing rents so that they can have the negative cash flow that they always dreamed of; the appreciation just made up for the losses. In recent years, rents have not only been stagant, real rents have been declining due to overemphasis in purchases and a far greater supply of available rentals.
So, what does this mean for our crush of errant homebuyers who will be foreclosed on and still need a place to live? Well, the bank might rent it back to them, another investor might pick it up pennies on the dollar and rent it back to them at positive cash flow, or they will downsize; none of which changes the housing stock. Without reducing the housing stock (say, if banks suddenly prefer holding onto properties just to let them sit vacant), rents cannot increase since any foreclosed properties are soon enough released back into stock. Yes, we all know it takes a while, but banks generally haven’t wanted to be property management companies and have tried to offload properties as soon as possible. Generally, recovering some of your losses is better than making nothing and most banks do not respond to short-term psychology.
Because the economic picture does not look to be all that bright for the mid-term one would expect some increasing unemployment and downward pressure on prices. For the most part, increased cash prices correspond with income changes. Not the same can be said with credit purchases.
RW. Where do you get the idea that there are more people? And more people then the number of units that have been built in the last few years??? C’mon.
“The weak hands will flood the market with supply, but not for rent, for sale–they will need to get out, and ultimately be forclosed out.”
You are not making sense. What do you think happens to those forclosures? They don’t dissappear. They will have to be rented because 40% of them were built to satisfy demand not real people but from SPECULATORS.
“I believe that the average renter is much better off than the average homeowner when it comes to their monthly expenses.”
There’s the mistake I think you are making. 0% savings rate says it all.
To be clear on my belief about rising rents.
I have not seen significant rental growth over the past few years despite wage increases, and believe that rents CAN move.
Let’s say that inflation is running at, say 3%. I believe rents in most markets will rise at 3-5% per year over the next say, 5 years. Over the next 1 year, I think overall rents will be rising, but in markets with the biggest gluts of housing, rents will be flat to down.
There is no way in hell rents will move to the point of making up the discrepancy between buying and renting.
RW-
Population growth, new household creation, immigration are not 0%. And when you talk about specific markets, migration can add signifcantly to population growth.
The weak speculators will not all simply rent out their homes for whatever they can get, many will simply implode and banks will take back the homes. Will the banks rent them? No. They will sell them at far cheaper prices. In places like Phoenix and Vegas, it will take time for this new space to be absorbed (thus a delay in rental growth in these areas), but there is significant population growth in Phoenix and Vegas–I haven’t heard anyone dispute this. Phoenix has been growing at an average rate of 100,000 people per year for the past decade (http://www.gpec.org/infocenter/Topics/Demographics/HistoricalPopulation.html). Recently the run rate has bee at 125k per year.
The houses will be absorbed. There is population growth.
0% savings rate is an AVERAGE, not the average for renters. Think of everyone you know who bought recently or is still renting–who is more stretched?
I am not focused on the next 6 months, I am focused on the next 5 years. Overall, rents will outpace inflation over the next 5 years.
Why is this so hard to believe?
Rental Watch,
It’s possible, but not that easy to believe. We have had substantial building in most places in the US when lending was cheap. It’s all about supply and demand here. If a bank reposesses a home and resells it, there is a zero net gain in renters. I.E. Homeowner goes to being a renter, and some lucky renter picks up the home for cheap, becoming a homeowner.
It’s mathematics; you can’t arbitrarily deduct one housing unit without adding it somewhere else. Even accounting for the lag (unless you’re proposing that banks will hold onto housing long-term without returning it to the market)
On the other hand, if we have a major problem with housing units being demolished, a hot labor market, or both, yes, rents could definitely rise faster than inflation.
At least in my neck of the woods, rents have been outpacing inflation for about 10 years. This is one of the reasons that people were buying “rentals” because they believed eventually neg cash flow will turn positive. Will it continue? It depends, but I don’t see that as a given. Much like for-sale real estate, rentals are a local issue.
RW.
I’m not married to the “no rent raises” position. But I just don’t see any facts that support such a stance. So when you say they will, I have to question you just to make sure I’m not missing something.
You see 40% more people to occupy the homes made to satisfy speculators demand. I don’t.
You see a next door tenant will money to spare. I see an attorney client with a Lexus, a Mercedes, and a 3 mill beach house asking me to spread my 5 k bill out over a few months.
You see a spat of forclosures somehow decreasing the amount of units for rent or putting pressure on rents in someother way. I see the glut of houses that are empty even now staying empty and driving rents lower.
John Doe,
Here’s the setup that I see:
1. Materials costs are not expected to fall over the next several years, keeping new construction costs higher for new housing stock.
2. We have built a lot of housing in many of the growth markets (growth driven by baby boomers fleeing to warmer environments), but more will be needed.
3. I believe that there will be a labor shortage in this country due to boomers retiring.
I do think that there will be significant wage growth, and the only way new housing stock (after this glut is absorbed) will be built is if the rents are higher.
“Think of everyone you know who bought recently or is still renting–who is more stretched?”
Your talking in circles. Are these tapped out forclosed homeowners the same people that are now going to pay higher rents?
As for your assumptions;
1.Remember the experts said housing wasn’t supposed to drop. Material costs are already starting to drop and will drop more as homebuilders start canceling projects.
2. We won’t need housing for the next 20 years.
3. Labor shortage? Any labor shortage we have will be met with either cheap illegals or offshore solutions.
4. Significant wage growth? From where?!? Just tell me that and I’ll post no more.
1. Materials costs are not expected to fall over the next several years, keeping new construction costs higher for new housing stock.
2. We have built a lot of housing in many of the growth markets (growth driven by baby boomers fleeing to warmer environments), but more will be needed.
3. I believe that there will be a labor shortage in this country due to boomers retiring.
RW, I don’t understand any of your points. Here’s my rebuttal:
1) Material costs will be dropping as the economy slows down. They should be a lot less than they are today because of economies of scale with the builders. The actual cost of building a house has decreased in the past 20 years (Shiller).
2) More housing needed? There is plenty of housing already, there will be entire neighborhoods that are dark and will likely rot out before they are ever occupied. As people who cannot afford houses are pushed back into apartments and trailers, those in apartments who can afford houses will buy them at fire sale prices. There are plenty of houses but some of them may be older and less desirable to a generation who discounts the value of anything that isn’t brand new.
3) The labor shortage is a long way off. If this housing bubble blows, we are going to see a lot of boomers working later and later in their lives to make up the shortfall. At any rate, I don’t see every boomer hanging up their tool belt and setting out across the country in a RV. That’s a wet dream for the RV associations but doesn’t represent reality.
Moman. I didn’t say it because I thought it might be a little over the top for the present debate but I see houses a few years old falling apart already. I have no doubt that we will see bulldozers like the KC guy suggested as a solution in the next few years.
I can see we’re going to be in disagreement here, so I’ll leave you with a couple of things that have been on my mind.
1. A couple of years ago, steel prices were out of control. Then demand dropped because China brought some supply online. In response, US steel plants dropped their output to keep prices up. Materials prices generally ratchet upwards in the construction industry. I have had many real estate professionals with decades of experience make the same comment that construction costs are sticky in the downward direction–everyone talks about how they will come down, but they typically come down far less than people predict. We’ll see what happens this time. Land prices are another story.
2. Service industry jobs can be more difficult to outsource. An aging population will need more services. Supply and demand of labor will take care of the rest. I think there is going to be more upward pressure on wages than downward over the next 25 years.
3. All of these discussions of people in financial distress are on the marginal buyer and users of homes. Most of the direct housing financial pain will be concentrated with the speculators and people who took out aggressive loans because they needed to get in. We’re talking about a pretty small subset of the population who are going to really be feeling the pain. I don’t see droves of retirees putting off retirement because they bought a house on an option ARM and now need to make the payments. The secondary effects of the housing correction is what concerns me far more (lower consumption, etc.), which will in some ways be offset by wealth transfer of the WWII generation to their less thrifty kids and the baby boomers retiring and spending the money.
4. And lastly (and most importantly), real estate is a local business. I am NOT proposing that everyone should buy rental property anywhere they can. Far from it–now is a time to be careful, especially with the housing supply on the market. The one big picture trend of interest rates rising and making housing even less affordable will change the psychology of owning a home and the current dynamic in every market, and it will effect each differently. It is my opinion that in a) markets in which there is rapid growth due to demographic factors and b) markets in which there wasn’t a tremendous amount of speculative building relative to population base, there will be strong rental growth. Even in Phoenix, 50,000 houses on the market (and going up), represents about 1 year inventory based on the population growth trend that has been going on for 10 years. Will this balloon to a 2 year inventory? Very possibly. 10 years of inventory? Highly unlikely, IMHO.
Best of luck.
1. Sticky they may be, but down they will come when demand does.
2. Service jobs?!? The lowest paying job sector we have?!? That’s what’s going to put upward pressure on wages??? You mean the service jobs like the all foreign nanny’s and private nurses that I see? Or service jobs like the 4 Mexicans I can hire at the same rate I pay one carpenter now?
3. If you are basing any decisions on the assumption that most people are prepared for retirement God help you. The governments own auditors have said there is going to be a nasty funding problem that will only be solved by a combination of demands placed on the next generation (there goes their extra rent money) and reduced benefits for the current retirees. (Ooops. There goes their extra rent money.:(
4. Dude. The bubble is everywhere. have you been reading this blog? When Boise has 500K condos being built there is no where and no one who will not be effected by the unwinding of this credit binge.
The world is not coming to an end, easy money is coming to an end, and high residential prices because of it. After the period of pain, life will go on–some people will be ruined, others just stung, and others still will simply have had the net result of this whole bubble of reducing their mortgage from 9% fixed to 5.5% fixed. Others still would have been able to cash out of their home at the expense of the ruined to buy their retirement home all cash.
Many people won’t be prepared for retirement–many more will. For every person that does retire, one person will be needed to fills their job, plus more workers needed to help take care of the aging regardless of whether the people are retired or not (medical, legal, financial, or simply brawn).
And yes, I’ve been reading the blog. I just tend to believe that when things unravel, the pain will be dispropotionately felt.
I agree with a lot of your points, Rental Watch. We have had some interesting personal experiences in this area. We own a paid-for home in a very nice suburb of Detroit. A more depressed area, I’m sure you couldn’t find. When our last tenant moved out, he trashed left us with a trashed house, but really needing only cosmetic work. ( To give you an idea, this is an all-brick, huge stretch ranch — 1850 sq feet, 2 1/2 bath, 3 BR home in an “exclusive” neighborhood ). The house is worth about $285,000 here, and $ 750,000 - $ 1,000,000 Californiaweird prices. We had to rent to the former jerk at $ 1200 per month, down from an initial ask price of $1650 per month, 2 years ago, because the market was so bad for rentals. After $9K in fix-up, we now have a nice, 3-year lease at $ 1525 per month. The same broker, who handles “nice” homes exclusively, brokered both deals. He said the market was a lot tighter for rentals than it was 2 years ago, and he had 3 potential renters hot to get into the home. We chose the ones with the best credit and who wanted the longest-term lease. We are using the $$ from the rent to pay for our 2nd home’s mortgage, which is in a working-class town about 20 miles from the fancy home. We will then be looking to buy a home in Phoenix/Sedona for CASH, or at least a 30-40 percent down, at a deeply discounted price, since they are so overbuilt out there, and so many people are in over their heads. Unlike many baby boomers, our financial situation should improve, instead of deteriorating because my husband will getting his doctorate in pharmacy. Not all baby boomers are ill-prepared for retirement. Not all baby boomers are spendthrifts. I had an inheritance from my mother 2 years ago when she died from a brain hemorrhage suddenly, and we saved 90 percent of it. I think a lot of posters are making assumptions about the upcoming retiring baby boomers, savings, etc. that may be too generalized. That being said, we aren’t diving into more rental real estate now. In fact, we sold 2 housing units in the last 2 years.
‘Round and ’round we go RW but you still haven’t explained where the wages to pay these higher rents are coming from. A handful of menial service jobs taking care of the retired isn’t going to do it. Heck, even the funeral homes are getting hit by overseas competition, so there goes that money you were counting on.
No, the world isn’t ending. But it is out of balance. Do you really believe that every job vacated by a retiree will be filled here when somebody, somewhere in the world will do the same thing for 1/3 the price?
Please tell me what area of America is likely to gain significant jobs at any time in the near future? Fast food burger flipper and Walmart clerk are not included. The only decent paying job growth in the last few years has been in Real Estate in most areas and that will certainly change.
Personally I expect rents to drop in most suburban areas as the properties that flippers and casual investers have been holding get dumped back on the market.
A new conundrum.
If the job market is so bad, why is unemployment at 4.6%?
My answer - demographics. Baby boomer retires, leaves his job. New graduate fills job in same company. This is 0 job growth and keeps unemployment exactly the same.
Answer: Because those figures are a thinly disguised lie. Before the gov’t changed how they computed those numbers, they would be at around 10%-12% unemployment.
I have to concur with Jim on this one. This is an urban myth that has been debunked and is only spouted by the MSM and believed by the Joe Sixpacks. Unemployment is just fine and there will be plenty of out-of-work loan officers and real estate agents even if we were to have a “soft landing”.
Either way, we’re not going to see rising rents until you see a population increase without a sufficient housing stock increase. We have perhaps been trained too well that prices often go up. Yes, to say that prices will be higher in the future is a no duh argument. Will they outpace inflation? Probably not in many bubblezones where rents are already substantially higher than in many other places where employment has been hot. In that case, when employment cools (which it most assuredly will), ability to pay high rents (at least in OC) goes out the window. That’s not to say that Detroit MI, or Des Moines, IA won’t see higher rents if companies relocate from Orange County. But, your average rent in OC won’t be going from 2500 to 3000 without a corresponding (if not higher) reaction from wage inflation. It’s about ability to pay.
One among many reasons, at that. Remember the growing mountain of inventory which will also put downward pressure on for sale prices. Since purchasing a home and renting a home are consumption substitutes, lower purchase prices will eventually trickle down into lower rents (just as high purchase prices pushed rents up, though not by nearly as much, during the boom phase of the bubble).
Exactly GS. Spot on. I don’t know why people keep thinking in a falling RE market that rents rise. There is no historical basis for this assumption.
I have not seen any significant rental increases in my area over the past 3-4 years. Rents have not been keeping up with inflation here (SF Bay Area).
Warning–anecdote coming:
Someone I know was renting a unit in the back of a property which was recently sold. The new buyers turned around and attempted to raise the rent 25%. The tenants can afford the increase, but think that the rents are totally unjustified. Based on comps, they largely are. However, it is a giant pain to move, and on both sides of the equation, you have 1) an owner with a new mortgage who is highly motivated to raise rents; and 2) a tenant who can afford the increase without a change in lifestyle. My prediction is that through much too-ing and fro-ing, they will come to an agreed rent that is 5-10% higher than they were paying before. And the tenant will agree to it so that they don’t need to go through the hassle of moving.
This is only one example–what makes it make sense is #2 - tenant able to pay more in rent without any change in lifestyle. This dynamic will play itself out over and over again in markets without significant new housing stock.
In Bay Area markets, I suspect rents will be on the rise. Even in high growth markets (overbuilt), owners of real estate will be trying to push the envelope with respect to rents to help cover their cost of carry. The first time a tenant moves in, they will have discounts, and deals, and free rent. BUT, once that tenant is in, you can expect them to push rents significantly after the first 12 months is up–as long as wages haven’t decreased, there is room for rents to go up in the medium term.
Rental Watch,
With all due respect: 3-4 years ago, SFBA rents were way over-inflated from tech boom. Your chosen timeframe is not a good one. If you want to claim rents aren’t keeping up with inflation here, you need to look at rents before their steep run-up in the late 90’s. Rememeber, too, there are a less jobs now in the SFBA than at the peak of the tech boom (and pending layoffs abound, too (intel rumors, anyone?)).
RW, I’m sorry but national stats just don’t support your theory that there exists a pool of tenants with extra money to spend on anti-moving payments. Human nature is to reach and tenants are no exception as they optimistically stretch to rent the biggest place they can.
The dynamic I see playing out over and over is landlord tries to raise rent and ends up with an empty apartment for awhile or worse yet a 6 month battle to evict the current tenant.
That’s how I got my current apartment. Landlord raised rent, tenant moved out. Landlord lost 5 months of rent before accepting my offer 20% below his asking.
In 2003, I was paying $1,700 for a 2 bedroom apartment in the same complex that in 1998 was charging $1,600 for a smaller 2 bedroom. At the peak of the bubble, the $1,700 unit was being rented for $2,450. I paid all these different rents in the same complex. The bubble rents were already out of the picture by 3 years ago. From roughly 2002 to 2005 rents were roughly flat.
One data point, but the tech bubble had long since burst 3-4 years ago and rents had already corrected.
Yeah RW, you aren’t taking into account vacancy.
If rent goes up 10% and 10% of renters leave for a month (90% stay)… guess what?
No change.
Arguably, since speculation is responsible for a large percentage of current RE prices, they could fall considerably before they put pressure on rental rates. In bubbly areas, the cost of renting is ~half the cost of owning. Now the oversupply of total (sale/rental) housing stock is likely to drive housing costs down, but i predict it would be awhile before it would affect rental rates since it is concentrated in expensive RE (theoreticly)intended for the Owner/Occupier market.
One thing I’ve noticed — with the advent of the “Suicide Loan” many former renters decided to buy because the negative interest loan made buying a house cheaper than renting. They couldn’t afford $1500 a month for rent — but with the Suicide Loan, they ended up paying considerably less per month. Eventually they will find they can’t keep up with the payments and will lose the house, but in the meantime they have managed to put a roof over their head for less than rent would cost.
Tim,
Great article. I have a friend that works in Loss Mitigation and he has never really been able to adequately explain it to me. This approach puts it in terms everyone can understand. Please remember the last time CA went through a downturn we really didn’t have neg. am. IO loans etc. Many among us fear this will accelerate and exacerbate this problem. So much for the notion of the “soft landing”.
I remember a couple I worked with in…Oh 1990 or so. They had “bought” this house (a mobile on a permanent foundation), but they didn’t own the land. They had a 20 year lease or something. For one reason or another they were not able to afford the house anymore. The developer had done their own financing. It took them 18 months to get around to foreclosing and kicking them out. The developer all ready had too many empty houses. This was Rainbow Bend in the Reno Area.
Thought I’d share my personal experience.
I happen to live in a rental-condominium, rent-o-minium, whatever in the Columbus, Ohio-area. It converted from a “luxury apartment” complex to condos in Oct. 2005. The purchaser of the complex had insisted on changing all the renters leases prior to taking title to the property. Those lease changes allowed it to terminate leases and not re-new month-to-month leases on short notice. Current renters were offered “special” purchase prices for the condos.
Unfortunately, after kicking out all the renters, it now finds itself unable to sell its “condos” for anything close to the market price. The ask price for my condo (built 1997) is about $165,000, although purpose-built condos are available at $145,000 (built 2002). As you can imagine, units aren’t selling well. The complex is currently about 20% occupied — eerily quiet, in fact.
My rent is $980, and I have an option to buy at any time prior to Apr. 2007. With 0% down, my monthly mortgage payment would be $1098 (at 7%). As you can see, it would take significant price appreciation to walk away with *any* equity, even after a few years.
The conversion company has painted the exteriors, replaced wood porch supports, installed microwaves, and inserted electrical outlets in the unattached garages. These are mostly cosmetic changes. I’ve noticed that the pace of conversion activity has slowed: the marble countertops have yet to be installed, no new carpet, nothing else. I think they’ve finally realized that, with interest rates rising, this project is going no where fast.
‘Some of these projects probably don’t look as attractive as they did six months ago when developers were buying the conversions’
Some would have you believe that these condo developers are far-sighted investors, with an eye on the long-term.
Exactly! And they are far from being far-sighted investors. I consider them as flippers on a grander scale.
BayQT~
This is happening in NoVa as well. I was on the elevator and overheard a woman describing how her apt building had decided to go condo and now that none of the units bid for have gone to settlement, they have scrubbed the whole idea. This after many long standing tenets moved out.
I thought perhaps the rental market was going to pick up a little in Northern VA as we’ve heard all the threatening stories from NAR. But today we have someone coming to look at our current rental, and there’s a better one down the street for 1,000 less per month. (We have a newbie speculator landlord). Then I checked the local listings, and they are exploding and one of the local rental agencies (ARMI) has been marking the asking rents down aggressively. http://www.armiva.com/index.cfm?action=rentals There’s one there for $1,350 that was $1,750 two months ago.
That link doesn’t work, but this one does http://www.armiva.com/index.cfm?action=rentals&catid=1 (not that it matters, much).
this happens way too many times in south florida. now there are many apts, condos, apts… when 70% to 90% of the renters are gone. the condo owners are stuck with the bill.
now people expect to higher rents. the problem is that PEOPLE ARE PRICE OUT. when people are priced out, no matter how you look at it. unless salaries increase or housing goes down, the bubble will leak. housing is not stocks. you can have 10 homes and expect to make money on them forever. when people who earn 70.000 a household that live in a 450.000 ever wake up at night wondering how do everyone else can manage to live and afford to buy houses. in south florida, there is a job crisis. too many low paying jobs and not enough employees. the housing market is over.
No, Mr. Kratzer. What is a mess is your ability to make a prudent investment.
You deserve whatever you get, you greedy pig.
Has anyone heard how “condotels” are doing? I started hearing about those a few years ago as developers where building properties that had a combination of hotel rooms and condos. Some older hotels like the Plaza in New York where also being converted. I haven’t heard much lately about how they are doing or if this is still a popular concept. Maybe they are caught up in the condo dive?
They are finishing one in a rough part of Vegas right now. I drive by it daily. The sign says prices start at $750k. Beside the building is a 24-hour AM/PM. Across a very busy six-lane road is an electrical substation. I wouldn’t walk around the area after dark. I will keep you posted.
watcher. Your one paragraph paints a nice picture of this whole housing mess.
Are you talking about “Platinum”?
I live in this area. A few years back when the first high rise condo went up in the neighborhood (Park Towers at Hughes Center) I wondered who would want to buy a $1 million dollar condo in an area with so many run down apartment complexes.
Now they are all over the place. Most of the run down complexes have been purchased by developers and torn down to build other high rise condos, more casinos, etc.
The complex I live in (Desert Club Apartments) was just purchased by Harrah’s. I am not sure what they are building (my guess is a parking lot).
I think it is Plantinum. It’s on the corner of Flamingo and paraidse.
San Diego has this now too, the Hard Rock Hotel is also doing condos. Why would anyone want to live in a hotel for half a million dollars. Especially when your “neighbors” are transient and change every few days.
They even stated that owners will get no perks at the Hard Rock Club.
So you basically live in a dorm, a bunch of people flying into town, getting loaded, and being loud. No thanks.
Another causualty of the housing bubble, condotels, they are the Aereon chairs from the New Economy.
In Vegas, Las Ramblas was cancelled and the Hard Rock project is also in a little trouble. There are others but I don’t have the names or articles to site at this time.
http://www.greatlasvegascondos.com/las_ramblas.htm
http://tinyurl.com/qxrte
BayQT~
Condotels are not a new idea, and neither it is bad, if done properly. I stayed in a condotel in Latin America, it was a very nice idea I thought at the time - very well maintained and had all the amenities.
The problem with the condotels that are being peddled around is that they can in no way compete with established hotels, and there is already a good supply of hotels in most tourism locations. Everything is done simply to part fools from their money.
My first reply didn’t post but here is what I mentioned:
In Vegas, Las Ramblas cancelled and the Hard Rock project is on hold.
http://tinyurl.com/qxrte
http://www.greatlasvegascondos.com/las_ramblas.htm
BayQT~
Hey, the 23rd floor of the Plaza (about 9500 sq. ft) is being offered for a measly $31 million—marked down from an initial price of $35 million.
I think you have the wrong condo hotel. That apartment is in the Ritz Carlton at the other end of the block.
There are two MAJOR ones going up in Seattle right now. Makes no economic sense for a buyer-but a smart hedge for Four Seasons, Pan Pacific etc. as long as the buyers don’t default…
PNC (which is a bank) is building one here in Pittsburgh. It has upset some in Congress… BTW - for the first year in several, my rent went up. 5.5%, IIRC.
Another example of the many hidden costs of a bubble. Tenants uprooted, some forced into buying a high priced apartment and then seeing rental rates fall in the building as other units remain unsold and the developer abandons the conversion process.
Clearly “mess” is the appropriate term.
“Forced?” I missed the part about gun-toting heavys forcing leasees to sign purchase agreements. I agree that having to choose whether to buy an overpriced condo or move out is not a good thing, but it is still a choice.
Dawnal clearly meant “forced” in an economic sense, not a physical one. Having to sacrifice one’s net worth through purchasing an overpriced condo conversion in order to avoid eviction is the economic equivalent of having a gun put to one’s head.
I think that most here would argue that moving out at the expiration of one’s lease (or even better, getting paid to move out early) would be an option with far fewer negative consequences than overpaying for a condo.
The article talks about “repartments” in conversions that are never completed.
But in New York, after the 1980s coop conversion boom, there were lots of “repartments” owned by individuals who had purchased units. Some of these were investors who had always expected to become landlords.
But others were singles and couples who bought studios and one-bedrooms expected to live their during youth, then sell at a big profit to buy a house. When the market tanked, and they found themselves squeezed in after marriage and two kids, they moved out anyway and rented what they could not sell. For years, until they were in a position to sell at a loss. Many of my friends and colleagues were really, really hosed.
They are converting my building into condos. They have rehabbed almost 1/3 of them. None of the renters are planning to move, all of us hoping that they buy us out. There are maybe 2-3 people who have bought in a building of 60 apartments, and they bought because the prices were actually pretty decent for the area (if you know nothing of the bubble). I don’t know that they have actually made any big push to sell them to outsiders (and I don’t know who would buy, with most renters remaining and NOT buying). The developer continues to make improvements so maybe all is not lost yet. But I see the building as a prime candidate for “repartmenting.”
Sounds like you will be getting the opposite of a rent increase. If we factor in that your apartments are now 50% nicer han before we can figure like he Fed and say your rent actually decreased 50%.
Njgal,
On Wall Street this is called a “distribution to the street”. It’s a messy and ugly process that almost always leaves the little guy holding the bag. Most apartments (of any scale) are owned by REIT’s or a group of of seasoned investors. When they think things have peaked out they do their distribution to smaller investors that think they are getting a deal/steal. When a mutual fund manager wants out of a stock they can’t sell it all at once or it would drive prices down. So bit by bit they use their own internal brokers (or hire shops that specialize) to do the distribution. In a nutshell, it’s over.
Yeah, it will be completely interesting to watch. I was planning on buying a house myself anyway so I never planned to buy the condo but I want to rent another year at least so I’ll get to watch it unfold.
“Sounds like you will be getting the opposite of a rent increase. If we factor in that your apartments are now 50% nicer han before we can figure like he Fed and say your rent actually decreased 50%.”
Very true. They aren’t fixing my apartment, but with what they’re doing to the halls, the gym, the new washer/dryers - we’re certainly getting a nicer building to live in! Also, they didn’t actually increase the rent much either - maybe $35? However, NJ is very strict about tenant’s rights with respect to conversions, so they really couldn’t. All in all, my rent, while high in comparison to other areas in the US, isn’t bad for the NYC area considering the size of my place and commute.
I have made a lot of money off of these conversions in the last year bys selling them new doors, blinds, cabinets, etc. In fact I have been seeling to apartment complexes for the last twenty years and I am shocked that anybody would want to buy one of these units. I was actually at one today talking to the contractor, and this is an old torn up compex. While we were standing there the breaker box on one of the building caught on fire. We ran over to look at it and eventually had to call the fire department. Basically the sad part is that apartments complexes do not put a lot of preventive maintenance in these units over the years they were apartments. I mean one can only guess the faulty roofing on many of these that have been patched by property management companies in the past.
From some contractors that I talk to they have told me that once this conversion craze is over they are shutting their company down to avoid all the lawsuits that will be coming next.
The problem, as the article pointed out, is that many of these converters paid inflated prices — in some cases, vastly inflated prices — on the expectation they would sell lots and lots of units. Just like flippers who buy too many single family homes to sell at higher prices later, they will now be now stuck renting those units out for less than they need to cover their loan payments. Only this time, we’re talking about commercial mortgages/loans with principal amounts of $20 million, $30 million, $40 million, etc. This is one reason the FDIC is up in arms (too late, as usual) about the amount of commercial real estate loans on bank books right now. If you combine individuals defaulting on lots of smaller loans — with converters/construction companies deafulting on fewer, but much larger, loans, you’ve got a big mess in the making.
The home builder stocks were falling after the market opened this morning. But never fear! The angel arrived at 9:45 and lifted them all. Aren’t angels wonderful?
Check out the charts and compare the price action of homebuilders and non-homebuilders. Not quite the same, are they?
http://tinyurl.com/ovpm8
Wow. They all took a spanking…especially Brookfield Homes and Centex.
BayQT~
The builder stocks all went up on the rumor that txchick was long a basket of their shares…
The story above highlights what is to me the main reason that bubble feed on themselves to the point of their own death. Call it volitility exhaustion. People may bitch about things getting old and stale (jobs, relationships, waistlines) but just the same most are really only comfortable with small, manageable changes. When too much ‘change’ is forced into a system, people act like monkeys on crack for a short time and then sag back into a fetal position hoping to recover. The flipper-conversion-greater fool runup in housing prices that forces long-time tenents to move is highly corrosive to the long-term health of an area. Too much energy spent on stupid, no gain activity. Maybe this is why as we watch the music stop, people are sitting down so damn quick. Exhaustion, plain and simple.
“‘I knew we were in trouble when the guy who delivered my television a few weeks ago said he had bought two conversions [in the area] and was trying to flip them,’ says Kolter COO Peter Donnantuoni, pinning most of the blame on speculators for driving up prices to unreasonable levels.”
Seems like Donnantuoni and his ilk are all speculators as well - that’s why they converted the complex, no?
“That compares with about 62,904 units that have been converted or have begun to be converted into condos in the area since 2004, he adds.”
Didn’t it take something like 10 years to absorb 10,000 condo units in South Florida? Wow! South Florida condos for everyone!!!!!
I think the 10,000 number refers to Miami, not necessarily Broward and/or Palm Beach counties. However, there is something like 25,000 condos under construction and 25,000 more planned for Miami. The NAR talks up the Boomers, but there is no way in hell affluent Boomers will move to Miami (unless they comefrom Cuba). They don’t speak the language. They’ll be giving condos away in Miami.
A little OT (sorry Ben) - I noticed flourescent pink signs springing up all around the area I live (LA) that say “House prices going down? Get your equity out now before it’s too late! Call 800-XXX-XXX today”
Get your equity out now before it’s too late? Wouldn’t it be wise not to borrow against an asset that is likely to go down in value? Unfortunately there are probably a large number of people that think this is a good idea. Borrow, spend, borrow, spend, borrow…
I guess their thinking is that in a while people won’t be able to borrow at all. But it’s just too funny - say you get a new car with HELOC, which is essentially a 30-year variable-rate loan, plus they’ll be not just tapped-out, but underwater yellow-submarine-style.
IMHO I am not sure that is not the right thing to do for a few individuals. If you own the house for 250k with a 1st of 100k and a current market value of 1,000,000 AND HAVE NO INTENTION OF MOVING. Taking a HELOC for 500k (not drawing down so there are no monthly payments) and having the ability to invest in the markets volatility in the future with ready cash could be an excellent idea for the few individuals that are sensible and savvy. (probably less than 1%)
This exact scenario has played out in my area (Tampa Bay, FL). Many cruddy apartment have been sold to FOOLS who plan to rent them out or wrongly believed they would make a killing and retire at 30. I know a few people who have purchased former apartments who are already in negative equity territory and worried. One friend has to sell to relocate but has not even had a showing in 2 months.
The worst part about this whole bust is that it was the educated class who were mowing down each other to overpay for a crappy apartment!!
True, some of those apartments are such crap it is unbelievable anyone would think about investing in them. To make things worse there are so many nice apartments available who would even want to rent in those unless you have no other choice.
If “repartments” is the term for proposed condo conversions that haven’t gone through, what do we call former rental apartments that are now full of condos sublet to renters? Condentals? Rentominiums?
jim A,
Rentominiums! LOL! Lordy, let’s not forget to make them “up-scale”, high end rentominiums! Damn son!
My head is spinning - a already lost track of what converted to what, and what is rented to who.
Luxury rentominiums for all!
Rentominiums! Give that man the 2006 award for the best invented term of the boom/bust era. Hot damn!
BayQT~
Hey, renotminiums aren’t that bad… as long as you’re the renter. I’ve been living in one for several years now.
In Chicago you can usually find them for right around market, that is, what the same floorplan would rent for in an apartment building, and you get decent furnishings and upkeep.
There can be disadvantages in renting from an idiot flipper. And there’s the risk that if he or she goes bankrupt, you’ll be standing in line behind the banks who lent him money when you’re getting kicke out and trying to get your damage deposit back. Still better than overpaying >50% to buy a condo though.
that’s why you stop paying your rent when you hear the house is going into foreclosure. you’ll get your deposit back in free rent.
Earl Kratzer bought his unit at the Estates at Stuart last year for about $263,000. Like other buyers intent on immediately selling for a quick profit, he put it up for sale for $295,000 right after he closed in October. No luck. Then he tried to rent it for $1,400 a few months later. That didn’t work either.
Earl Kratzer - you are a dumbass.
Max,
Your “dumbass” comment was an epiphany moment for me Max! If covering stories of FB’s sells as much or more “copy” than RE advertising revenues LOOK OUT!
(I noticed flourescent pink signs springing up all around the area I live (LA) that say “House prices going down? Get your equity out now before it’s too late! Call 800-XXX-XXX today”)
Priceless.
They say: HELOC and blow the money. Then negotiate a write down of the loan based on declining asset value by threatening to walk.
The know: the bankrupcy laws have changed.
The bubble blowout in prices led apartment owners to believe that it would be more profitable to put lipstick on their piggish apartment units and resell them to low-income buyers as condos, thereby cashing in on mania-level prices in the purchase market. This was made possible thanks to lax lending standards and various schemes (such as downpayment assistance) to lure low-income buyers into becoming homeowners. The repartmentizing of condo conversions is fairly strong evidence that prices are falling back to earth in the purchase market. It is also sad testament to the waste that a speculative runup in prices induces; after all, what value was added to the economy through this process of kicking out tenants who would not consent to purchase their units at inflated price levels?
RE: Condo conversions…
In Andover MA, a 10-unit/$400k per condo, converted school-building project got caught in a 100 year flood. The basement containing all the individual unit boilers, electrical systems, laundry equipment, plus a pair of living units got totally trashed.
The owner’s association had no flood insurance.
At the moment the building is uninhabitable.
Estimated costs of repair is like a couple million for foundation re-hab and systems replacement which the individual unit owners will have to come up with…
Imagine fronting mortgage payments for a $400k residence, in which you can’t live, plus now you’ve got to pony up another $100/200k.
for repairs.
If you were just a “renter”, it’s the landlord who has to eat it all.
You just leave and find another place.
Lot’s of grim faces on the evening news.
Nasty things, condo’s…
do you have a link for that story? sounds awful.
+1
want to see that story…..
do you have a link for that story? sounds awful.
A Boston ABC affiliate news station carried the story last night.
Nothing was in the web/print media.
I think the association got caught because FED food maps are not always accurate relative to water volume changes which can occur in an urban area over 100 years time span.
Obviously, it was determined the project was not in a flood zone as the lenders would have required insurance for such.
But from what I saw of the film footage these condo owners are truely FB’s!!!!!
“The owner’s association had no flood insurance.”
OUCH! Talk about a bad decision by the HO assoc. Can you imagine the screaming at each other at the Board meetings. There is not enough money for me to ever buy a condo. Just way, way too many headaches. Nasty indeed.
ot but i had to copy this from my email this morning, who says they’re still not out there.
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I get a few of those from different lenders a day. Can’t wait to see what some genius comes up with to save the upside down folks better known as the FB’s
“Rentominiums”! Jim A, that was a stroke of genius.
you guys missed the new shoeshine boy!
(”I knew we were in trouble when the guy who delivered my television a few weeks ago said he had bought two conversions [in the area] and was trying to flip them,” says Kolter chief operating officer Peter Donnantuoni, pinning most of the blame on speculators for driving up prices to unreasonable levels.)
Getstucco
I think txchick stopped herself out yesterday when they broke through the lower trend line.
A condo conversion happening in my neck of the woods - they forced everyone out last year to do the upgrades, now they can’t pay the contractors. Oopps! This is a big, nice, well located development too, just novice investors.
>And So FL income is a joke. I hear about all these rich retirees. Bull. I go down there a few times a year (South Beach/Ft. Lauderdale/Boca Raton) and most of the people are on fixed incomes.
This is so true. Yeah, there are a some very wealthy people with beach mansions in South Florida — about 0.01% of the population. The rest are earning small incomes or are retired and living on meager social security.
The average salary for South Floridians (Palm Beach, Broward, Miami Dade counties) is $36,764 which is less than the national average salary. And this does NOT include those who are retired. If we were to include them, the average salary drops significantly.
The fact is that people are willing to take a substantial drop in pay in order to live someplace where there is no snow. As a result, salaries in Florida have always been much lower than the national average. Since the IT bust and subsequent outsourcing, the salary levels in South Florida have been dropping steadily.
I know of several families in which the head of household lost his job to outsourcing and sold his house at the inflated prices. Those families bought much bigger and nicer houses in George, North Carolina, and New Jersey and were able to retire on the difference in housing prices. All of them sold to speculators who are now holding the bag.
It doesn’t make sense to buy real estate in South Florida, especially since everything south of Lake Okeechobee is going to be underwater within 30 years. I suspect that real estate prices will plummet to about $0/sq ft. in 15 years when it becomes well-known that this is inevitable and we are beyond the point of no return.
400K for a unit at the Gateway Club? They have to be kidding. I lived there for a year while my house around the cornerwas under construction. I paid $1100 for a 2 bedroom apartment. It was a fairly nice place. It was a new complex when I moved in and I heard it went way downhill after I moved out.
4 bedroom houses in that area geberal go for the low 400s. or were going for the low 400s when I sold last summer.