Most Were Greedy And Ran For The Roses
KION reports from California. “High demand landed Santa Cruz on the number 17 spot on realtor.com’s top 20 hottest U.S. housing markets. ‘The demand is being driven by Silicon Valley from people who come over here looking for second homes,’ said Candie Noel, 2016 president of the Santa Cruz County Association of REALTORS. ‘It is more affordable and people think it’s a bargain and it is.’”
“Agents say compared to last year there are 125 fewer homes on the market this year because people are holding onto their properties. ‘People are just now getting equity in their homes,’ said Noel. ‘People have been under water in their homes, some still are. So they really don’t have the equity in their home for the move up sale.’”
GoLocalProv in Massachusetts. “If you think the Great Recession’s housing problems are over, you are wrong. Worcester’s foreclosure crisis has been bad and is now getting worse. Despite many aspects of the regional economy picking up, those homeowners who are underwater are still facing significant problems despite all the federal and state programs. ‘So November represents the 20th consecutive month increase - we never got as low as the peak of the 1990’s crisis, but we are approaching the height of 2011 now,’ said Grace Ross, former candidate for Governor and leading housing advocate. ‘The crisis has spread out through every community in Massachusetts. Worcester County is again hardest hit.’”
“Advocates this week organized to help the Alvarez Family who has been fighting for their home since 2009 when they were illegally foreclosed on. The Alvarez family has been attempting to purchase their home back since initially faced with the foreclosure. ‘The longstanding eviction brought by Freddie Mac comes as a surprise to the Alvarez family as they have been in negotiation to purchase their home back for months now. The eviction also comes as a surprise because they have paid use and occupancy (rent) every month as agreed upon,’ according to Lori Cairns, Worcester Anti Foreclosure Team.”
The Citizen Times in North Carolina. “Based on forest regrowth and timber supply, life should be good for lumber companies in the Appalachian Mountains. But that hasn’t held true in recent years, though there is hope for the future. ‘In general, we’ve seen a 30 percent decline in pricing from the start of 2015 in a number of grades (of wood),’ said Fred Hardin, a forester and leading salesman at Gilkey Lumber.”
“A weakening of overseas markets, such as those in China and Vietnam, is a primary cause, he said. The domestic demand for hardwood flooring also has dropped dramatically since last year and the beginning of this one, Hardin said. Thin profit margins and high capital costs have added to hardships that hit the industry when the Great Recession drove down housing construction. That meant demand declined for wood to build houses and products people put into their homes, Hardin said. ‘Pricing also went down,’ Hardin said. ‘People didn’t have the money’ to pay what had been standard costs for products.”
“Attaining the all-time highs the industry enjoyed in 1999-2000, when it generated 13 billion board feet, isn’t likely, said Tom Inman, president of Appalachian Hardwood Manufacturers. But ‘trees are still growing and we’re banking for the future,’ Inman said. ‘We’re using less than 1 percent of our standing inventory of merchantable trees in the forest every year,’ he said. ‘There are so many trees, we can’t keep up.’”
The Wall Street Journal on New York. “It once seemed as if prices on superluxury apartments had nowhere to go but up in a stretch of Midtown Manhattan known as Billionaire’s Row. But with at least six towers on the market or under development on and around West 57th Street, there are signs that prices are coming under pressure as the supply of expensive condominiums increases. At One57, a four-bedroom condo bought by a European investor for $20.3 million in April is about to sell for a loss of more than $1 million.”
“‘For sure we weren’t able to sell it for what he bought it for,’ said James C. Cox Jr., a broker with Compass who along with colleague Frank Giordano had listed the sprawling condo.”
“Most sellers are asking for millions of dollars more than they paid, but a condo on the 62nd floor that cost $31.7 million is now listed at just under $30 million after being offered for as much as $38.9 million last year. ‘Just because you buy a piece of New York real estate doesn’t mean you have a God-given promise to make a profit,’ said Donna Olshan a broker who tracks the luxury market. ‘There is plenty of competition and more new projects are coming on the market.’”
The Crosby Journal in North Dakota. “While vacancy rates in Tioga soar, rents stubbornly sit well above rates normal for a rural community with a sparse population. With nearly half of rental units empty, a lot of people are wondering why rents haven’t fallen to meet the affordable range. Dean Dovolis, an architect who worked on the Annabelle Homes and Cenex station projects, said a collapse could be just around the corner.”
“While it may mean affordable rents, he said the situation could be ‘brutal.’ Dovolis, who has a master’s degree from Harvard, said when the boom hit, developers rushed to get financing for their projects and capitalize on $3000 per month apartments. ‘They were willing to accept risky terms, such as five-year paybacks and high interest rates. Most were greedy and ran for the roses….They built a lot of pro forma on $100 per barrel oil,’ he said.”
“This leaves them locked into loan terms that cannot be satisfied without high rents. It may explain why housing owners have been unwilling to lower rents to normal levels and have aggressively lobbied to shut down man camps. If rentals continue to see vacancy rates climb, the result could be widespread foreclosures. Apartments, townhomes, and other rental properties will then be sold at auction. New owners will be in a much better position to lower rents. Corbin Graham of Graham Construction, owner of the Mainstay Suites, said amortization is about one-third here what it is in your typical American housing market and construction costs are very high.”
“He said the high rents have little to do with greed and everything to do with what an owner needs to charge to make any profit at all. ‘With the low amortization they are running bone thin,’ Graham said.”
“Graham said developers will probably pursue other options before reaching foreclosure, and these options are preferred by lenders and developers. Renegotiating loan terms is one option. So, the ‘apartcalypse’ is not certain to unfold soon or at all. Graham said the rental market will eventually normalize but there are a lot of ways that could play out. He also points out there’s still a lot of business going on and the situation doesn’t reflect the bust of the 1980s.”
“…..They built a lot of pro forma on $100 per barrel oil,’ he said….”
That is the problem with pro forma numbers: it assumes the conditions today will stay that way indefinitely!
Time to buy VGENX?
A portfolio of debt and depreciating assets is the definition of failure Jingle_Fraud.
It’s worse than the oil. They also assumed no competition would come in. Come on, 3,000 dollar apartments in North Dakota? I bet they didn’t even have a lazy river.
Come on, 3,000 dollar apartments in North Dakota ??
I believe I mentioned this some time ago but I sold a Motor Home to a guy from LA…He told me that he a several other guys were flipping foreclosures down in southern California but said that it was pretty much played out..He said they were turning their attention to building rental housing in North Dakota and they had investors from Texas to fund it…This was roughly 2 years ago…Two years ago it was hot…With oil at $35. now, not so much…I am sure you will monitor that market Ben…It will be interesting to see what the rent rolls do and if we see any loan defaults…
One lesson that I’ve learned over the years that they don’t teach in school is that the more understandable the narrative, the more money flows to certain investments, increasing their value, but also driving supply to the point of a crash.
Remember quotes like this?
“Housing prices have never fallen nationally” or, as they say in other parts of the world “safe as houses”.
The Bakken narrative was similar. The world is running out of oil, and we have 40 years worth of jobs here, and the yields are so high, the building can be worthless at the end of 10 years, and you would have done just fine.
The narrative that I’m most concerned will drive a glut in real estate is the narratives surrounding senior housing.
I personally like the one-off narratives, that aren’t bets on entire markets, like “the building is poorly performing because the family that owned the property ran out of money, and no brokers will even show tenants the vacant spaces, because they know the owner can’t pay their commission.”
Time to buy VGENX?
If i was going to buy an oil fund I would hedge it with it an alternative energy fund, such as FAN (wind power) or TAN (solar power). FAN has a 3% yield. I’d do it to play both sides. Interestingly, if the price of oil sharply recovers, say above $50, it improves the economics of building more wind and solar plants.
You won’t have to worry about that anytime in the next 50 years.
“said Candie Noel, 2016 president of the Santa Cruz County Association of REALTORS. ‘It is more affordable and people think it’s a bargain and it is.’”
These are the same brain dead dip$hits with empty pockets that showed up in AZ, TX, OR, WA, ID, CO, NV and FL in 2006 and 2010.
Question: What qualifies a realtor to establish or to even understand what a bargain is?
‘Silicon Valley from people who come over here looking for second homes’
‘People have been under water in their homes, some still are. So they really don’t have the equity in their home’
Misery loves company.
“Question: What qualifies a realtor to establish or to even understand what a bargain is?”
Oh, so now such qualifications are all of a sudden necessary? The only qualificantions that have been necessary and will continue to necessarily in order to make any of this work is the ability of realtors successfully steer marks to the closing table - my closing table.
Don’t tell ‘em the truth - selling real estate is not about the truth. Instead tell them what they want to hear - what they NEED to hear.
Do this and a realtor (and the banker) just may prosper. Don’t do this and the realtor will lose the sale to some other realtor (however … Bahahahahahaha … the banker will still get to enjoy a win).
Others work, bankers reap. God’s plan.
Realtors say homes in the $5-750,000 range are the hot buys. “It’s probably what people can afford,” said Noel.
Sure Candie… anyone can afford 1/2 to 3/4 of $1-million for a moldy Santa Cruz beach house. Delusional.
That’s what realtors do best. Cluelessly yap off at the mouth.
If you can trade 7,500 shares of Apple stock to obtain it, yes! Yes! Yes!
I would rather a nice 2nd home about 100′ above the Pacific Ocean than 7,500 shares of Apple. Wouldn’t you?
Who needs the aggravation and massive expense of a depreciating asset at a grossly inflated price Jingle_Fraud.
Allen, TX Housing Craters; Prices Plunge 19% YoY And Falling
http://www.movoto.com/allen-tx/market-trends/
‘people are wondering why rents haven’t fallen to meet the affordable range’
‘when the boom hit, developers rushed to get financing for their projects and capitalize on $3000 per month apartments’
‘If rentals continue to see vacancy rates climb, the result could be widespread foreclosures. Apartments, townhomes, and other rental properties will then be sold at auction. New owners will be in a much better position to lower rents.’
The title of the article:
Rents can only go so low without foreclosure
Btw, you read it here second after the Crosby Times:
the ‘apartcalypse’
This is going to happen all over the US and probably elsewhere too. Everything is priced to perfection and more. One recession and apartment loans will collapse like, well the guy said, brutal.
‘Apartcollapse Now’?
The construction is still going on here in the Finger Lakes. Hotels, condos and high rent apartments going up like we were a boom town. Only problem is, there are no new jobs.
Here is the latest start. This ancient brick icehouse has been on the market for years for $500K. It is being demolished now for more luxury apartments. A tiny piece of property perched on a steep slope.
http://www.zillow.com/homes/for_sale/Watkins-Glen-NY/121371770_zpid/34680_rid/42.384747,-76.875129,42.383814,-76.87709_rect/18_zm/
Click the Birdseye view.
A few yards up the shore, the old water treatment plant was converted a couple of years ago. Last I looked from lakeside, still high vacancy. Across the street to the west a complex of hopeful garden apartments sprouting up clings to the side of the hill. Not far to the south along the shore sits a grand particle board hotel finished a couple of years ago.
Jobs? The salt mine and soon to be gas storage facility directly underground, and the Walmart.
It is brutal on the south end of the lake in the winter when a north wind sweeps down. A couple of miles up the lake, you could buy 100 acres with lake view for $100K. This is a place for summer cottages and vineyards.
Watkins Glen!
Dude where my car?
Great place to get high
‘Bone-Chilling “Plateau” in Apartment Boom Resurfaces, Smartest Money Bails Out’
‘And prices for office, retail, and apartment buildings are in the most phenomenal bubble ever: up 10% this year through November, according to the Green Street Commercial Property Price Index, after having already jumped 10% in 2014. They’re up 100% from May 2009. They’re up 23% from September 2007, the peak of the insane bubble that blew up. Even on an inflation-adjusted basis, prices are now 12% higher than they’d been during that propitious peak of the bubble.’
From the comments:
‘5% cap rate….hard to make any money.’
‘Here in UK investors have for quality propositions been paying mote than 20 times rent for some years. 2-3% yield is not unheard of.’
‘My very limited understanding of USA commercial property market is that propositions can sometimes come with a mortgage in place. In the UK that would be most unusual: buyers that need to borrow would be expected to arrange the finance for themselves. The USA inclusive approach faciliates the buying process but does away with an objective assessment of value.’
Real estate is generally built off the yield on cost. And specifically, what your yield on cost is relative to the risk free rate. Perception of risk in rents and occupancy will drive yields lower.
Today, yields on apartments are amazingly low, following the narratives of “everyone needs to live somewhere”, and “no one can buy a home because they can’t get a loan”.
I think that if you bought a well-built, well-located apartment, and didn’t put too much debt on (60% of cost of less), and that debt was fully-amortizing, fixed rate with a 25-30 year term, you’ll be OK. You might have some lean years, but you’ll be OK.
However, many of the apartment plays have 3-5 year time horizons with debt that needs replacing in that timeframe, and that’s where the yield math gets brutal.
If you assume a market cap rate is 5%, and that’s the value on which you borrowed 75%, and that cap rate rises to 6% (which is still pretty low historically), you need to have a 20% increase in income to just tread water. And when your starting point is all-time high rents…that’s a tall order.
And if income is, say, flat while cap rates are rising? Even if banks are still willing to lend 75% in the context of a rising rate/flat rent environment (and they may not), you need to come up with HUGE equity to refinance.
Example:
$1MM income property, valued at $20MM. You borrow $15MM and put in $5MM of equity.
When it comes to refinance, with a cap rate of 6%, the value of the building is only $16.667MM, which means you can only borrow $12.5MM at 75% of value, Do you have another $2.5MM to put into the deal to refinance and hold on? How do your investors feel about putting in more money when you tell them that 2/3 of their equity is gone due to higher cap rates?
The crazy thing is, cap rates are not just 100bp out of whack compared to history…they are probably 150-200bp out of whack.
It is worth noting that while interest rates and cap rates are correlated, the correlation is weaker than you might think…0.5 is the correlation that I remember reading about over long periods of time…however, if the property type is one where the spread over the 10-year is narrow (like apartments), you might see a much higher correlation in the near term as the Fed moves off of 0%.
They better hope the Fed acts slowly….or the pain will be (and I’ll use that word again)…brutal.
The pain will be brutal because the price is too high.
Any thoughts on good ways to short this market, RW? Thoughts on timeframe for entry?
I have long assumed that our lowest cap-rates in history can not last forever…
Collapsing Demand For Commercial Office Space
http://www.zerohedge.com/news/2015-12-20/peak-office-space
“Dovolis, who has a master’s degree from Harvard,”
These clueless types can’t perform the simplest of tasks. They can’t get out of their own way.
“New owners will be in a much better position to lower rents.”
This reality won’t materialize until the price is lowered by half plus some.
Buckle up.
‘a four-bedroom condo bought by a European investor for $20.3 million in April is about to sell for a loss of more than $1 million’
I’m sure the UHS didn’t charge you anything there Schultz, seeing as how you lost your a$$ in just a few New York months. But kudos for getting out; the next guy will jump out the window.
‘That meant demand declined for wood to build houses and products people put into their homes, Hardin said. ‘Pricing also went down,’ Hardin said. ‘People didn’t have the money’ to pay what had been standard costs for products.’
Wait a minute Fred. We have an economist here at the HBB who says you can charge whatever you want for your wood. It’s your wood after all. Just tell the buyers, that’s the way it is.
‘‘trees are still growing and we’re banking for the future,’ Inman said. ‘We’re using less than 1 percent of our standing inventory of merchantable trees in the forest every year,’ he said. ‘There are so many trees, we can’t keep up.’
And the builders are using Styrofoam Fred. Gosh, you may be in a pickle after all.
Katy, TX Housing Craters; Prices Plummet 16% YoY As Price Declines Gain Speed Nationally
http://www.movoto.com/katy-tx/market-trends/
Silver Spring, MD Housing Craters; Prices Plunge 11% YoY
http://www.movoto.com/silver-spring-md/market-trends/
“’The eviction also comes as a surprise because they have paid use and occupancy (rent) every month as agreed upon,’ according to Lori Cairns, Worcester Anti Foreclosure Team.”
Does paying ‘use and occupancy’ equate to defaulting on the mortgage contract?
Never mind that ten’s and maybe hundreds of thousands of renters have been evicted so the new landlord can slap some paint on and double the rents, financed by Mel Watts.
Homeowners are special and deserving of federal and state government protections.
Renters are scum who deserve to be evicted the moment they stop paying the full monthly.
The estimate is that 40% of the foreclosures were tenant-occupied properties. So if 4 million households faced foreclosure, 1.6 million tenant households were evicted in the foreclosure crisis.
Here’s another grow to the sky group:
‘Breckenridge Brewery officials, while rushing to assure fans that their beers will not change under their new ownership, also said in an interview that they had their backs against the wall and needed to find a new partner just as Anheuser-Busch InBev came inquiring about them.’
‘AB-InBev announced Tuesday that it’s struck a deal to acquire the Littleton craft brewery. Breckenridge Brewery President Todd Usry, who oversaw the construction of the new farmhouse brewery in Littleton for two years before its May opening, said that shortly after its completion, his partners from the four-year-old Breckenridge-Wynkoop joint venture approached him and said they were not interested in overseeing a company as large as Breckenridge was becoming. The brewery is the 50th-largest craft brewery in the U.S., distributed in 35 states, and can double its production capacity immediately with the new facility.’
‘After an initial burst of anger, Usry said he worked with those partners to bring on First Beverage Group to see if there were parties interested in acquiring the brewery. “A big motivator for me [in finding a new owner] was that, one, I was out-voted and two, we have a responsibility for our shareholder group,” Usry said. “I crossed my arms, did my posturing, gave them my best pissed-off face and listened to what they were interested in … I was shocked. They weren’t interested in messing with what we do. It wasn’t immediate, but I aligned with their vision.”
I have news for you, everybody is planning this:
‘can double its production capacity immediately with the new facility’
And another:
‘For a long time, smug worked pretty well for Chipotle Mexican Grill. It’s grown into a chain of more than 1,900 locations, thanks in part to marketing—including short animated films about the evils of industrial agriculture—that reminds customers that its fresh ingredients and naturally raised meat are better than rivals’ and better for the world. The implication: If you eat Chipotle, you’re doing the right thing, and maybe you’re better, too. It helped the company, charging about $7 for a burrito, reach a market valuation of nearly $24 billion. Its executives seemed to have done the impossible and made a national fast-food chain feel healthy.’
‘On Halloween, the ER doctor called him at home: Collins had Shiga-toxin-producing E. coli 026, and he’d likely gotten it from one of those 21 ingredients in his meal at Chipotle. (This was later confirmed by public-health officials.) The doctor warned him that kidney failure was possible; intensive treatment, including dialysis, could be necessary. His kidneys held up, but it took an additional five days for the worst of Collins’s symptoms to ease and nearly six weeks for him to recover. He still doesn’t have as much physical strength as he used to, and he feels emotionally shaky, too. “Before, I was doing the P90X workouts. For a long time after, I couldn’t even walk a few blocks,” he says. “It made me feel old and weak and anxious.” On Nov. 6, Collins sued Chipotle, seeking unspecified damages.’
I’ve never eaten there and was unaware of this:
‘and maybe you’re better, too’
“It made me feel old and weak and anxious.”
Imagine how you’d feel if you paid $500 per share?
Chipotle Mexican Grill, Inc. (CMG) -NYSE
497.88
52wk Range: 482.23 - 758.61
P/E (ttm): 29.70
EPS (ttm): 16.76
Div & Yield: N/A
http://finance.yahoo.com/q?s=cmg&fr=uh3_finance_web&uhb=uhb2
Who even knew there was a Breckenridge Brewery (beside InBev and visitors to Breck)? Now they’re being bought before they’re even a thing. Peak Brewing.
‘We’re using less than 1 percent of our standing inventory of merchantable trees in the forest every year,’ he said. ‘There are so many trees, we can’t keep up.’
Sounds like there’s a growing lumber glut to match the widely heralded oil glut.
Does anybody have a rough figure on forest growth rates? I’m guessing nature’s return on leaving trees in situ exceeds 1 percent.
It’s a slow day at work, so I looked it up:
http://www.fs.fed.us/rm/pubs_other/wo_gtr078_064_066.pdf
Long story short, per the link the growth rate in 2006 was 2.8 percent per year.
Timber is a favorite investment of the uber-wealthy.
Stable, generally low cost of keeping inventory, and the inventory grows each year you don’t use it.
You only cut what you need and when you need it.
Reminds me of an guy I heard speak regarding “global greening”. Some of the climate change narrative used to be discussions about increasingly arid land, desertification, etc. But what they are actually seeing is “global greening”…more plant growth in traditionally arid regions of the globe (the Outback, etc.).
The growing glut of lumber (pun intended), might be getting marginally worse due to the fertilization effects of higher CO2 concentrations.
You give new meaning to ‘trees grow to the sky’ Rental_Fraud.
There’s a whole lot of loss built into the lumber biz unless you’re getting the rights to the wood for free.
“Multi-scale predictions of massive conifer mortality due to chronic temperature rise”
http://www.nature.com/nclimate/journal/vaop/ncurrent/pdf/nclimate2873.pdf
If you invest in timber, do it in the far north because the lower latitude forests are dying and will be dead.
Pine=worthless junk anyways.
Cooler summer temperatures, warmer winter temperatures, falling energy prices=big WIN for all of us.
My favorite woods grow in the warmer climes. Would you like me to cut down that Cocobolo tree for you?
The thing about hardwood is it can last decades, possibly centuries if it is good quality 3/4″ wood. So not the same business model as carpet that will be replaced in 5-10 yrs.
I saw a business model a while back that involved the dismantling of old structures (built with heart pine in the late 1800’s), and reselling the wood. Lots of money in the old growth wood.
I have old growth pine floors in my late 1800s structures, no dismantling required.
This Is Canada’s Depression: Surging Crime, Soaring Suicides, Overwhelmed Food Banks “And The Worst Is Yet To Come”
http://www.zerohedge.com/news/2015-12-23/canadas-depression-surging-crime-soaring-suicides-overwhelmed-food-banks-and-worst-y
Greece.
China.
Brazil.
Canada.
………..US.
This is just getting underway so you better put your biggirl pants on.
And Russia. Oh wait, this is Zero Hedge, they will never admit that.
Cmon now….. biggirl pants.
It’s the Washington Post. I don’t know how to help you.
“And The Worst Is Yet To Come”
Isn’t that a given?
“The Housing Recovery Was Just Cancelled (Again) Due To 5 Months Of Downward Revisions
http://www.zerohedge.com/news/2015-12-23/housing-recovery-was-just-cancelled-again-due-5-months-downward-revisions
“foreclosure crisis has been bad and is now getting worse”
Contrary to popular belief, foreclosure ‘crisis’ + getting worse = positive development. This is because it also = opportunity.
“The Dollar Shortage Has Arrived: Africa Runs Out Of Dollars”
http://www.zerohedge.com/news/2015-12-23/dollar-shortage-has-arrived-africa-runs-out-dollars
We’ve advised repeatedly to liquidate and hold onto every dollar you’ve got because you’re going to need them. Did you wisely do so and get out of debt?