A Formula For Overdevelopment
The Daily Democrat reports from California. “Whether they are first-time buyers or hoping to get back into the red-hot housing market, David Setti with TurnKey Mortgage Solutions in Campbell, takes the opportunity to educate them. While lenders will allow 43 percent of gross income to be dedicated to debt, Setti asks his clients to think about the kind of life that debt will leave them with and whether they are comfortable with the bills they will be paying each month. ‘We think the industry is broken and it’s up to us to fix it,’ Setti said. ‘For example, I met with a couple who make $300,000 a year. First we talked about what they felt they could afford, figuring in their other expenses, and they settled on 1.2 million.’”
“Although they knew how much money they were comfortable spending, the couple was curious as to how much a lender would be willing to loan. They were surprised to hear that it was more than twice the amount they were planning to borrow. ‘He asked if the lender figured in their expensive eating habits, his kid’s private school education, or the money they spent caring for their horse. I told him, no, they don’t figure those expenses in and that we can only fix mortgages one at a time by educating clients.’”
The Chicago Sun Times in Illinois. “Thomas Morabito, Seneca Real Estate Group’s president, spoke with reporter Sandra Guy about Chicago’s housing market — and why he thinks people are paying too much for properties these days. Q: What’s the downside? A: People today are overpaying for properties. If they bought in 2009, 2010 or 2011, they got an unbelievable opportunity to buy something at 60 to 70 cents on the dollar. Today, owners and lenders are less likely to write down their assets. We’re getting to a tipping point where people are paying, say, $3,000 a month in rent — that’s akin to what you’d pay with a $450,000 mortgage — and thinking, ‘Maybe I should go buy.’”
“So I think, in the next 24 months, you’ll see a lot more condo projects. Also, interest rates for residential apartment buildings have been fueling demand for those investments. When interest rates go down, prices go up. I believe we’re in a mild bubble in terms of apartment buildings being acquired as an investment. I don’t think this bubble will be as severe as in 2008-2009.”
The Hartford Courant in Connecticut. “Home sales in Connecticut regained strength in 2015, surging nearly 17 percent compared with the previous year, a new report showed. The median sale price of a single-family house — in which half the sales are above, half below — slipped 2.2 percent in 2015, to $246,000, from $251,500 for 2014, said The Warren Group. Curt B. Clemens Sr., owner of Century 21 Clemens & Sons Realty in Rocky Hill, said he considered it surprising that strong sales did not push up the median price. ‘There is a lot of inventory out there,’ Clemens said.”
The Wichita Eagle in Kansas. “These are pretty good days for Wichita-area landlords, but trouble is brewing. Some in the industry expect landlords to start having more trouble finding enough tenants because of an avalanche of new apartment projects set to open this year and next. Very low interest rates have altered financing formulas, making borrowing money to build apartments cheaper while also punishing the returns on other types of investments.”
The result is more than 2,500 units built, under construction or planned for the Wichita area last year, this year and next year. That’s roughly a 10 percent increase in units overall, and a much larger increase in Class A – the newest, nicest apartments. ‘When developers are optimistic and the lenders are motivated, that’s a formula for overdevelopment,’ said Randy Johnston, an agent for J.P. Weigand who handles a lot of multifamily real estate.”
The Real Deal on Florida. “Related Group has started pre-construction sales of condos at the Auberge Residences & Spa Miami at lower prices than many rival condominium developments. Carlos Rosso, president of Related’s condo division, told the South Florida Business Journal the company is selling Auberge Miami units at an average price of $575 per square foot. Many condo developments in downtown Miami are selling at unit prices exceeding $700 per square foot.”
“‘Gran Paraiso and SLS LUX are suffering because we are going out at a great price on this project [Auberge Miami]. But we are fine with that because at those other jobs we already have met our pre-sales,’ Rosso told the Business Journal. ‘Now if you sell condos, it has to be at an attractive price.’”
From Biznow New York. “With nearly 600 attendees, Bisnow’s seventh annual Multifamily-Residential Rundown yesterday was not to be missed. Speakers discussed a range of trends and deals influencing the market, but the ramifications of a supply glut for ultra-luxe condos and a possible supply shortage for affordable housing dominated the discussion. ‘For projects with a sky-high price PSF, that market is really oversaturated and it worries me,’ says Bruce Eichner of The Continuum Co.”
“To make money in a condo market that’s ‘hit the pause button,’ as Bruce puts it, you need to get creative. New York City was built on rental units, and now that the condo market is starting to turn frothy, it’s likely developers will consider returning to their roots until the dust settles. ‘The first love of residential developers is never condos, it’s rentals,’ MaryAnne Gilmartin, CEO of Forest City Ratner, said.”
“Carlos Rosso, president of Related’s condo division, told the South Florida Business Journal the company is selling Auberge Miami units at an average price of $575 per square foot.”
Damn what a screaming deal! have to get 2 or 3 of those before they raise the prices. If it’s got a French name it must be extra swanky.
“……Many condo developments in downtown Miami are selling at unit prices exceeding $700 per square foot.”
Exactly….with a Related deal, you get instant equity of $125/SF, so get 3 units at 1,000 SF each and poof: $375,000 in immediate net worth. Can’t lose.
Problem is there are no buyers at that price.
Remember?
US Housing Demand Plummets To 20 Year Low
http://1.bp.blogspot.com/-0q8fIAsczFk/VUANHEhSbnI/AAAAAAAAjRs/oANwXOUviGw/s1600/MBAApr292015.PNG
Why buy it at that grossly inflated price when you can build it for $55/sq ft brand new?
‘‘Gran Paraiso and SLS LUX are suffering because we are going out at a great price on this project [Auberge Miami]. But we are fine with that because at those other jobs we already have met our pre-sales,’ Rosso told the Business Journal. ‘Now if you sell condos, it has to be at an attractive price’
I would have linked to the South Florida Business Journal article, but they scrubbed this quote after the Real Deal reused it.
Lately I’ve observed a whole lot of censorship of articles that aren’t favorable to grossly inflated housing prices.
Now you see it, now you don’t.
“When interest rates go down, prices go up.”
And when prices go up my Zillow numbers also go up.
As the financial miracle brought about by lowered interest rates rolls forward my latest Zillow report also rolls forward to accurately and truthfully report to me that over the past 30 days the price of my house (and thus the value of my house’s equity) magically increased by $474, AND my imputed rent increased by $152 a month.
Is this a great country or what?
Think of it, think of the power: Wealth can be created or destroyed with just a few minor adjustments of interest rates.
It used to be (in the old school days) that wealth was something that was generated by industry, by employment, by work. But today wealth is something that is generated by prices - prices that are moved up and down as interest rates are moved up and down.
Progress!
But … but … but think of what would occur if interest rates were to (the horror) go up instead of go down, think about what that would do to prices, think about what that would do to the wealth that is magically generated by prices - generated by rising prices.
Janet appears to be a genius (by some people) if prices go up because wealth is magically generated when prices go up, and prices go up because interest rates have gone down. But how much genius would be attached to Janet if interest rates were to rise and this rise were to destroy prices, destroy wealth?
Janet talks about her planning to raise interest rates but IMHO she can’t really mean it.
Today, wealth is generated when central bankers open their mouths and make vague remarks that can be construed as a promise for more accommodative monetary policy.
How amazing that power must feel.
“How amazing that power must feel.”
“Power is the great aphrodisiac.” - Henry A. Kissinger
I wonder if power has the same effect on women as it does on men?
Alan Greenspan dated Barbara Walters back in the 1970s.
my Zillow numbers
My rental’s (Vegas) estimates are sinking like a stone, just dipped below what the LL paid less than two years ago. I wonder if we’ll make it to the end of the lease before she decides to dump it.
I was in Jacksonville, FL this weekend. Housing being built everywhere on the south side. Traffic was crazy. One thing I found interestingw as it seemed like a smaller number of Canadians with there campers were going south. Obviously just antidotal but I thought it was interesting.
I have not been up there for ten years, but the important thing to remember is that Jacksonville is a low-wage, low-education town, even for Florida. While I personally like the city, it’s hardly a favored destination for jobs or young people, unless you count the Navy base. As for retirement, people with money typically choose somewhere else, like Naples or Stuart, or The Villages, or the Panhandle for military retirees.
The anecdotal evidence is helpful. What provinces were the plates from?
Vienna, VA Housing Market Craters; Prices Plunge 10% YoY
http://www.movoto.com/vienna-va/market-trends/
‘interest rates for residential apartment buildings have been fueling demand for those investments. When interest rates go down, prices go up. I believe we’re in a mild bubble in terms of apartment buildings being acquired as an investment.’
‘That’s roughly a 10 percent increase in units overall, and a much larger increase in Class A – the newest, nicest apartments’
This apartment bubble is going to be disastrous:
‘You’ve probably noticed by now the apartment complexes popping up all over downtown Indianapolis. In the heart of the Wholesale District, off of Mass Ave, and along Virginia Avenue, residents are seeing new luxury apartment complexes appearing out of what seems like thin air. Many developers, investors, and city planners argue that this trend shows the immense growth that Indianapolis has gone through in the past five years. And while it’s true that people are flocking to reside in the city in increased numbers — a sort of urbanization — it’s not at the rate at which most people tend to believe.’
‘By the end of 2014, downtown Indianapolis apartment complexes had an average rate of 8.9 percent vacancy. MPF Research has reported that housing demand in Indianapolis is outpacing supply by a theoretical 450 units. However, occupancy rates rose only a mere 0.3 points in the third quarter of 2015. Why the discrepancy between high demand for housing in the city but low growth in occupancy rates?’
‘Maybe it’s the lack of understanding what most millennials and the working middle class need. Or perhaps it’s the price-gouging that luxury apartment complexes impose on their tenants (extra fees for parking, pool access, gym access, pay-by-load laundry rooms, glamorous lobbies, full balconies, a bigger bathroom, etc.). After all, these apartments are supposedly aimed at the top 1 percent of millennials that are making around $90,000 a year. The reality of Indianapolis demographics is that the average household income is $63,865 at the median age of 34 years old. Under the age of 25, the median income rests at $28,553. That’s not to say there aren’t people who earn the top dollars here in Indy, but they just don’t exist in high enough numbers to fill up all of the amenity-rich apartments that are currently built — and have yet to be built — in 2016.’
‘The luxury apartment boom actually makes certain parts of the city unattainable for most people, specifically the Wholesale District and Monument Circle. Development of these living spaces is supposed to cater to residents who wish to make direct downtown living a reality, but high rent turns people away. So, direct downtown neighborhoods like the Wholesale District and Mass Ave aren’t seeing the vast influx of new residents and high rates of growth that was projected — instead, neighborhoods directly outside of the city are seeing growth because it’s the only affordable way to attain the vibe of downtown living.’
‘In the past five years, there has never been a demand for amenity-rich housing — there has been a need for affordability that allows residents to live comfortably while still investing in the downtown marketplace. Instead of focusing on amenity-rich housing, developers should be looking at the neighborhoods of Indianapolis where most people choose to settle.’
And recall that practically nothing but class A apartments are being built (land prices have doubled or tripled, nothing else “pencils out”), and the B and C are being bought, paint slapped on and magically turning into unaffordable housing. Financed by Mel Watts of course:
‘It could be another record-breaking year for luxury apartment construction in the Twin Cities this year, but with some areas reaching a saturation point, most of that development will happen in the suburbs. That’s according to a market outlook from the Minneapolis office of NAI Everest, one of several firms that’s keeping tabs on the rental market in the Twin Cities.’
‘Buyers, especially big-city institutional investors, continued their buying spree in the Twin Cities last year, setting several records for price per unit. For transactions of $2.5 million or more, total volume last year was about $970 million, not including deals that might closed at the end of the year, but have not yet been reported. That exceeded 2014.’
‘During the fourth quarter alone there were $240 million in sales with an average price per unit of $148,920, a 46-percent increase from the previous year. And the Walkway, a 92-unit luxury apartment building in Uptown that’s best known for its cantilevered hot tub, was a record-setter last year with a per-unit price of $437,000. The entire project, which includes nearly 20,000 square-feet of retail space, was bought by JP Morgan last summer for $53,750,000. Some of the most aggressive buyers were national apartment owners and managers, including Weidner Apartment Homes of Kirkland, Washington, which made about a half-dozen acquisitions.’
‘an average price per unit of $148,920, a 46-percent increase from the previous year’
It’s important to note this is happening in every nook and cranny of the US. Sure Janet, 30 year old apartments go up 40% in one year all the time.
Hello! Alarm bells!!
‘a couple who make $300,000 a year. First we talked about what they felt they could afford, figuring in their other expenses, and they settled on 1.2 million.’
‘Although they knew how much money they were comfortable spending, the couple was curious as to how much a lender would be willing to loan. They were surprised to hear that it was more than twice the amount they were planning to borrow. ‘He asked if the lender figured in their expensive eating habits, his kid’s private school education, or the money they spent caring for their horse. I told him, no, they don’t figure those expenses in’
So $300k in income qualifies for a $2.4 million loan. That’s 8 times income. And what are income taxes in California? How many borrowers are taking this level of debt on because house prices only go up?
“How many borrowers are taking this level of debt on because house prices only go up?”
How could house prices only go up if borrowers didn’t take on this level of debt?
IMO there a positive feedback loop at work here which is made up of three components: Prices, equity, and debt.
Price rises are fueled by debt and these price rises produces equity.
The equity that is produced by price rises is used to give value to debt.
The debt that is given value by equity is what is used to power the price rise, the same price rise that creates equity, the equity that gives value to the debt.
Take away any one of the three components - the price, the equity, or the debt - and you will take away a component that supports the other two components.
We’ve long known that todays sale at a grossly inflated price is tomorrows default.
One doesn’t have to look any further than our very own legendary bull$hitters here on the HBB.
‘projects with a sky-high price PSF, that market is really oversaturated’
How many other coastal, very swanky cities with tons of high paying jobs are also loading up on high PSF air-boxes? All of them?
Durango, CO Housing Prices Collapse 20% On Massive Excess Housing Inventory
http://www.zillow.com/durango-co/home-values/
Mafia Blocks, don’t you have anything better to do?
Remember my friend….. Nothing accelerates the economy, creates jobs and cures poverty like falling prices to dramatically lower and more affordable levels….. Nothing.
Fort Lauderdale, FL Housing Prices Crater 13% YoY As Price Declines Spread
http://www.zillow.com/victoria-park-fort-lauderdale-fl/home-values/
‘The prolonged sell-off in risk assets across the globe will only abate if the U.S. Federal Reserve changes its path and begins to loosen its monetary policy once again, according to strategists at Deutsche Bank. “Without policy intervention, there is more downside risk for equities,” the bank said in a note entailed “The smell of default” on Monday.’
‘A major focus for the analysts has been rising bond yields on riskier corporate debt in the U.S.. This has been seen as a sign of an end of the current credit cycle, which in turn could that could pave way for a number of defaults in the country, the bank noted. Raedler said that U.S. high-yield spreads – the difference between investment grade and non-investment grade bonds - have risen above their 2011 peak and warned of the potential for a self-fulfilling “full default cycle.” He highlighted the stress had started with energy firms - that have been hit by the oil price plunge – but added that it wasn’t confined to this sector.’
“To avoid a further rise in U.S. defaults, we will likely need to see a Fed relent, leading to a sustainable drop in the dollar, higher oil prices and reduced energy balance sheet stress,” the bank said in the report.’
http://finance.yahoo.com/news/only-fed-save-stocks-now-124627175.html#
I can picture Bob Brinker sucking on his thumb in a fetal position.
Zillow says Vegas is hot n up 6% next yr
Baby
Dunno. Despite Zillow’s prediction of +7.6% in the next year, our rental’s estimate is down almost $12K in the last thirty days ($275K estimate.)
Wellesley, MA Housing Prices Crater 8% YoY
http://www.movoto.com/wellesley-ma/market-trends/
“Where Deflation Comes From”
http://www.zerohedge.com/news/2016-02-15/where-deflation-comes
ZH gets it. Do you?