August 16, 2018

A Boom No Longer Supported By Cashed-Up Buyers

A report from CBC News in Canada. “The Canadian real estate industry is used to disregarding gloomy predictions. But now, after a decade of laughing in the face of repeated false warnings that a housing slump was imminent, most Canadians affected by real estate — in other words, just about all of us — have suddenly become a little more wary. No one disputes the meteoric rise in Canadian house prices has come to an end. The latest figures from both Vancouver and Toronto, which come out before the national data, indicate the boom is over.”

“Those who bought recently also have a bigger stake because the mortgage represents a bigger chunk of their house. That means a combination of rising rates and sharply falling home prices could make recent buyers feel nervous, knowing that a sudden job loss or a forced move could make them swallow a big, and perhaps unsustainable, loss.”

From Better Dwelling in Canada. “Real Estate Board of Greater Vancouver numbers show July saw inventory surge. The rise in inventory was met with big declines in sales. The month-over-month decline, works out to a loss of $3,700. This is the largest monthly decline since August 2012. The total number of active listings in Greater Vancouver made a huge climb. REBGV had 3,952 active condo listings in July, up 66.96% from last year. This brought the sales to active listings ratio to 27.3% for condos, compared to 62% last year. When the ratio falls below 20%, the industry considers the market ‘balanced.’ If the ratio falls below 12%, it becomes a ‘buyers market,’ and prices rapidly decline.”

From Troy Media in Canada. “The Calgary Real Estate Board says stricter lending criteria, higher interest rates and a slow economic recovery weighed on housing demand in the city over the first half of 2018 and MLS sales have dropped off more than first anticipated. The drop in demand has been coupled with rising inventory. New listings are up five per cent from a year ago to 24,492 and as of Wednesday, active listings on the market of 8,551 have risen by 24.87 per cent.”

“‘Easing sales combined with rising inventories has pushed the market into an oversupply situation for all products, affecting pricing for all products, which include detached, semi-detached and row, and apartment,’ said Ann-Marie Lurie, CREB’s chief economist. ‘Prices were not expected to improve this year. However, supply has not adjusted fast enough to weaker than expected demand. This is causing us to make a downward revision from earlier estimates.’”

From Urdu Point on Australia. “Australia’s largest city Sydney’s vacancy rate reached 2.8 percent, the highest level in 13 years, while rental property vacancies across Australia rose 2.2 percent in July, with a total of 72,458 properties sitting empty across the country. General manager of SQM Research Louis Christopher said there shouldn’t be any panic from property investors.”

“‘I don’t think there’s going to be a big fall,’ he said. ‘I think it is very unlikely we will see a steep crash in rents.’”

From Nine Finance in Australia. “The number of empty vacant properties in Sydney is at a 13-year high as a construction boom creates more investor-purchased apartments than there are tenants to fill them. Across the city 19,114 properties lay vacant, unable to find a tenant willing to pay the asking price of rent. Louis Christopher, Managing Director of SQM Research, said the oversupply of new properties in Sydney did have one upside for tenants: cheaper rent.”

“‘The supply of rental accommodation, especially of new units, has jumped following the building boom in the city,’ Christopher said. ‘Sydney has also experienced slowing population growth, which has helped to push asking rents lower, as landlords increasingly struggle to fill properties.’”

“But Sydney isn’t the only market to suffer the symptoms of a building boom which is no longer supported by cashed-up buyers. Perth has the unenviable title of boasting the most vacant properties – proportionately – of any capital city. The West Australia capital has 8,146 empty homes, or 4 percent of the market, unable to find residents.”

“In Darwin there are 1,030 properties left unattended (comprising 3.4 percent of the market), followed by Brisbane with 9,503 properties (2.9 percent) and Melbourne with 9,043 empty lots (1.6 percent).”

The Australian Financial Review. “Selling agents are starting to reveal the truth behind recent listings in Sydney’s west with Belle Property Strathfield’s Jimmy Kang saying up to 50 per cent of his clients were asking him to sell their homes in Sydney’s western suburbs because they can no longer afford their new principal-and-interest mortgages. A couple asked him to sell a two-bedroom weatherboard home in Veron Street in Wentworthville, 27 kilometres west of Sydney, for $950,000 when it was only worth about between $820,000 and $830,000. They bought the home for $790,000, two years ago.”

“‘I asked them where they got that number from and they said that was the number they need to pay back the $200,000 they borrowed from family to buy the home as well as repay their interest-only loan,’ he said. ‘A lot of them initially paid $2000 to $2500 a month on their interest-only loans, and now they have to pay $4000. Many owners are going through loan issues. If they let the banks take over, the bank will sell their homes for a lesser amount than if they try and sell it now.’”

“LJ Hooker’s Peter Tannous says about 25 per cent of his current listings are struggling interest-only sellers. In Guildford, a couple – a teacher and a factory worker – with two children asked him to sell an apartment they paid $385,000 about three years ago. It is on the market for $428,000 after an initial price of $438,000 did not attract buyers.”

“‘In another week, we will have to adjust another $10,000,’ he said. ‘They’ve tried to roll over their interest-only loan but unfortunately they had no luck. There is stress out there, and it takes a lot to coax the truth out of the sellers.’”

Fears That The Market May Be Peaking In California

A report from My News LA in California. “California’s housing market backpedaled in July on an annual basis for the third consecutive month as higher interest rates and rising home prices eroded housing affordability and dampened demand, the California Association of Realtors said Thursday. ‘In the midst of the peak home-buying season, high home prices and rising interest rates combined to crimp housing affordability, which in turn is subduing home sales,’ said C.A.R. President Steve White. ‘Some of the reluctance by buyers appears to be driven by fears that the market may be peaking. Additionally, the lack of a federal tax incentive for homeownership could be at play given that much of the weakness is in the lower-priced, first-time buyer segment of the market.’”

“The statewide median home price decreased to $591,460 in July. The July statewide median price was down 1.9 percent from $602,760 in June and up 7.6 percent from a revised $549,470 in July 2017. ‘While home sales continued to decline in recent months, the softening of the market is more indicative of a market shift rather than a major market correction,’ said C.A.R. Senior Vice President and Chief Economist Leslie Appleton-Young.”

“On a non-seasonally adjusted basis, sales in the Bay Area fell 7.1 percent monthly and increased 2.0 percent annually. Sales in the Inland Empire declined 6.1 percent from June and were up a nominal 0.1 percent from a year ago. Sales in the Los Angeles metro region dropped 11.3 percent from June and were essentially flat from a year ago.”

There’s A New Sign In The Market - ‘Reduced Price’

A report from CNBC. “After several years of rich home price gains, the market appears to have found a limit to what people can afford. Sellers are finally responding by increasingly lowering prices. Approximately 14 percent of all listings in June had seen a price cut, that’s up from a recent low of 11.7 percent at the end of 2016, according to Zillow. In addition, home price growth is slowing in nearly half of the 35 largest U.S. metropolitan markets. The market was thus suffering a critical shortage, just as demand was taking off. Prices had nowhere to go but up. Until now. In San Diego, 20 percent of all listings had a price cut in June, up from 12 percent a year ago. In Seattle, which continues to be the hottest market in the nation, 12 percent of all listings had a cut, the largest share in nearly four years.”

“In Austin, also a very strong housing market thanks to a recent influx of technology jobs, more homes are seeing price cuts as well. ‘We saw intense bidding on homes over the past few years, but that is calming down with more inventory in the area,’ said B Barnett, a real estate agent with Reilly Realtors in Austin. ‘Our inventory of homes is going up with new construction, and it is helping transfer power back to the buyer.’”

From the Dallas Morning News in Texas. “There’s a new sign in the North Texas housing market - ‘Reduced Price.’ Almost 19 percent of the home sale listings in Dallas-Fort Worth had had at least one price cut, according to a new report from Zillow. That’s up from about a 14 percent reduced price rate in D-FW a year ago. With home sales slowing and housing prices growing at a much slower rate than in recent years, sellers are sometimes over reaching with their asking prices, real estate agents say.”

“Houses that just sit on the market often get a price reboot. The rate of home price cuts in D-FW is higher than the nationwide rate of 14 percent in June, according to Zillow.”

The Columbus Dispatch in Ohio. “More home sellers are dropping their asking price, in Columbus and across the country, according to Zillow, suggesting that the housing market may finally be softening. In central Ohio, 15.1 percent of listings had cut prices in June, up from 12.5 percent a year ago. The figures are the latest of a handful of indications that the housing market may be starting to soften after six years of sky-high growth, although sellers still hold most of the cards.”

“‘The housing market has tilted sharply in favor of sellers over the past two years, but there are very early preliminary signs that the winds may be starting to shift ever so slightly,’ said Zillow senior economist Aaron Terrazas. ‘It’s far too soon to call this a buyer’s market. Home values are still expected to appreciate at double their historic rate over the next 12 months, but the frenetic pace of the housing market over the past few years is starting to return toward a more normal trend.’”

“In two cities - Tampa, Florida, and San Diego - at least 20 percent of listings saw price reductions in June.”

From KOMO News in Washington. “Finally there is some good news for people struggling to buy a home in the Seattle area’s red-hot real estate market. Zillow says more homes on the market here are seeing price cuts - nearly twice as many as last year. Some 12 percent of listings in Seattle had a price cut in the most recent reporting period - that’s up from 6.9 percent a year ago. The typical price cut is 3.1 percent.”

“There are also fewer buyers from outside the United States. Countries like China have made it harder to move money overseas. And Zillow is projecting that the slowdown in home prices will continue into next year.”

From KOVA in Arizona. “New statistics from the Tucson Association of Realtors show the housing market is going through a slight summer slump. Total sales volume fell 15.91% percent to $347,114,173, while the average sale price fell 2.01 percent to $253,924. Also, the average listing price fell 1.53 percent to $260,279.”

From Builder Online. “One top 10 home building firm has data that indicates a flash-point on house prices it’s unwilling to risk triggering. An executive there notes: ‘For every $1,000 we add to the selling price of a home in our [seven state] operating regions and divisions, we know we’d eliminate 250,000 households from our qualified buyer pool in those markets and submarkets.’”

“Right now, that’s not a risk builders willingly take. New data from a BTIG/Homesphere survey of 75 to 100 small to midsize builders whose operations sell from 50 to 100 homes per year indicates that builders’ ability to pass-along construction cost increases may have hit a cycle tipping point. While builders haven’t gone so far as to lower base prices, more and more are apt to do the next best thing in order to keep driving the pace of absorptions in each of their subdivisions and communities.”

“For the last five-and-a-half months of 2018, we’re going to be hearing one word a lot: Incentives. Here’s how the BTIG/Homesphere analysis contextualizes it: ‘This month no builder surveyed reported a drop in base prices. 39% raised most or all of them, down from 50% in June. The 42% reporting increases in sales incentives was up from 33% in June, but note we would expect this trend to increase seasonally through the year. Not a single builder surveyed reported seeing lower mo/mo costs in land, labor nor materials.’”

“The most-recent analysis in The Z Report makes similar observations–’many builders increasing their exposure to more affordable price points of late, which is putting a downward skew to reported prices’–and comes to an identical conclusion about tactical pricing to keep pace and volume levels cranking: ‘Any potential further deceleration in order activity will likely result in heightened incentives into year end, which could put pressure on gross margins heading into 2019.’”

“A parting thought challenge for you to ponder here. If a $1,000 increase in a per unit price for a builder prices out a quarter-of-a-million prospective buyers in its operational footprint, what would a $1,000 decrease in a like-for-like unit do to that buyer pool? “

August 15, 2018

You Are Starting To See Too Much Inventory

A report from the Wall Street Journal. “Owners of an apartment complex near Pittsburgh, who wanted to take out a mortgage on the buildings, allegedly made vacant units look occupied by turning on radios, placing shoes and mats outside doors and in one instance having a woman tell inspectors her boyfriend was asleep inside. The owners obtained a $45.8 million loan, which was wrapped into mortgage securities and sold to investors.”

“Practices such as these—which were alleged in a federal search-warrant application—have sparked one of the largest mortgage-fraud investigations since the financial crisis. It focuses on whether income from commercial properties was falsified, a move that would enable owners to get larger mortgages and take out cash or expand their businesses faster.”

“Still in its early stages, the investigation has so far yielded a fraud-conspiracy indictment against four real-estate executives in upstate New York. Loans that some or all of them were involved with totaled about $170 million, the indictment alleges. Investigators have sought mortgage data on dozens of other apartment buildings, according to documents reviewed by The Wall Street Journal and interviews with people familiar with the probe. Investigators have looked at student housing and self-storage facilities in addition to apartment complexes.”

“About $1.5 billion of securities issued by Fannie Mae and Freddie Mac are backed by mortgages from just one developer who has been under scrutiny, according to a Journal analysis of loan data from Thomson Reuters. The 2010 Dodd-Frank financial overhaul required home borrowers to document their income, and home lenders to verify it. The rule doesn’t apply to multifamily housing.”

“‘All the systems will work fine as long as people are being honest,’ said Sam Berns, senior vice president at NorthMarq Capital LLC, one of about two dozen firms licensed to originate and sell multifamily mortgages to Fannie Mae and Freddie Mac. If borrowers or their mortgage brokers choose, they can easily submit and certify false numbers, he said. ‘It’s a fault and a failure within the system.’”

“One owner of properties investigators reviewed is Robert C. Morgan, the founder of a suburban Rochester, N.Y.,-based apartment development company. He built a business of more than 140 properties with over 34,000 rental units across 14 states, according to its website. ‘There’s a lot of money chasing the multifamily assets, more money than deals,’ Mr. Morgan said at a Freddie Mac housing conference last year.”

From Crain’s New York. “Some 8,278 condo units are in the Manhattan development pipeline and around 2,000 of those are expected to hit the market within the next year, according to Halstead Property Development Marketing. The new development market has grown increasingly soft, especially for the priciest product, as projects planned after the height of the market in 2014 now come up for sale—joining many existing new buildings that have not moved all of their units.”

“As a result, supply has grown. Halstead’s first-quarter report showed around 6,000 apartments available in the borough, though some of those were being held off the market by developers until they can unload more units. How quickly these units will sell depends on the location, according to Halstead.”

“‘The supply-constrained neighborhoods that are most in demand are still seeing healthy absorption,’ said Robin Schneiderman, managing director at Halstead’s new-development arm. ‘When you go into the second-tier neighborhoods that have a lot of product and the pricing is not meeting the market, that is where you are starting to see too much inventory.’”

“However, sales volume has been declining and absorption—the amount of time it would take to sell all available supply at the market’s current pace—has been on the rise. If existing product does not sell, adding more will balloon inventory and put downward pressure on prices.”

From Long Island Business News. “For some time now, year-over-year home sales prices have increased while sales have declined. National figures for new and existing home sales confirm this. Some observers even worry that another housing price bubble – a rapid and unsustainable run-up on prices – is on the horizon. With homes being the major purchase for most consumers, this would be harmful for Long Island and elsewhere.”

“A confluence of factors has contributed to declining sales. Clearly, rising mortgage interest rates have given potential home buyers pause. Changes in the deductibility of mortgage interest and property taxes have likely been contributing factors as well. On Long Island, the situation is similar to the national experience. In Nassau County, year-over-year sales prices have increased every month for at least the past year. But year-over-year sales have declined for nine of the past 12 months. The steady growth in prices in the face of declining sales seems unsustainable. But evidence suggests that home sales inventories are finally starting to rise, both nationally and on Long Island.”

The Glut Is A Sign The Market Is Weakening

A report from the Times Free Press in Tennessee. “Already, rising home prices and mortgage rates have cut into some home sales, keeping overall sales of single-family homes relatively stable despite the overall improving economy. In June, for instance, single-family home sales by Chattanooga Realtors were down 5 percent from a year earlier. Credit standards are higher than before the Great Recession so qualifying for a mortgage is more difficult than a generation ago for many young home buyers. In response, the Tennessee Valley Federal Credit Union (TVFCU) said it is offering a no downpayment mortgage for those with strong credit ratings and good income ‘and we’re really killing it with that product,’ TVFCU President Todd Fortner said. ‘This is our most popular mortgage product right now,’ he said.”

“Home prices in Chattanooga during the second quarter already rose twice the rate of inflation.”

From ABC 7 News in California. “What was once the murder capital of the U.S. is now a town selling multi-million dollar homes - East Palo Alto. Forty-four percent of students in the Ravenswood School District are considered homeless. Schools Superintendent Gloria Hernandez-Goff said, ‘Families that are split up with children in a friend’s house and another child in a friend’s house. Their parents are sleeping in cars.’”

“East Palo Alto has always been a working community. Most residents hold down two jobs to survive. Simply put, the socio-economic condition has not caught up with the rising home and rental prices.”

From Northern Nevada Business View. “In July, sales of single family homes in Washoe County decreased 17 percent compared to July 2017. While this drop in unit sales may seem high, it can be attributed to the seasonal cycle we see annually, but also due to the fact that there’s not enough supply of homes to buy. What we have seen is that year-to-date sales are lagging behind prior years. Does this mean we have reached the peak?”

“A correction in housing, like in any market sector. is normal, foreseeable and possible. In February 2018, we started to see a shift for the first time in 16 months that pending sales were not tracking closely with new listings coming on the market. You only need to drive around the Reno-Sparks area to see the number of new home projects coming online. When they are in full swing, I expect the resale market will adjust.”

The Orlando Sentinel in Florida. “Prospective buyers of Metro Orlando homes who sat on the sidelines in June might have scored a bit of a bargain in July as prices dropped 1.3 percent during the month, according to Orlando Regional Realtor Association. The median sale price dropped for all home types to $235,000 – down $3,000 from a month earlier. It’s the second time in three months that prices dropped month-to-month, with a $4,000 drop recorded between April and May.”

“Among numbers that have remained consistent from June to July: Pace of sales: Down 2 percent. Distressed sales: 3.6 percent of all sales. Supply of listed homes: 2.2 months. Pending sales: Down 9.9 percent for the second straight month.”

The Dallas Observer in Texas. “Rent prices in Dallas are known to skew high. The August 2018 National Apartment List Rent Report shows Dallas has a median rent of $894 for a one-bedroom apartment. While that’s nowhere near as high as rents get in the suburbs, the near constant rise of new developments such as the 400-unit tower at 2000 Ross Ave. has done much to add high-priced square footage to the local apartment market.”

“‘I mean prices are just ridiculous,’ says Kara Zielinski, a local realtor and agent for The Locators Real Estate Brokerage. ‘If I was to pinpoint it to a neighborhood, I would say Uptown proper and then also the Arts District for sure, and those are like $2,500 [a month] easy. It’s crazy.’”

“Here are 10 of Dallas’ most expensive apartment complexes with vacancies to spare: One Uptown. It’s our first Uptown entry to make the list but certainly not the last. At one point rent for a 571-square-foot entry-level unit ran for as high as $1,805. With the recent slump in rent price, $1,600 per month will get you in the building.”

From Williamette Week in Oregon. “Renters who can afford an apartment in one of the new luxury towers sprouting up across Portland are now being offered cash incentives to move in. Take the Emery, a seven-story building along the South Waterfront. It has nine apartments available within the next two months, starting with a $1,356-a-month one-bedroom. There’s air conditioning, a shared bike if you don’t have one, a bike room if you do, a pet washing station, and a clubhouse for parties. And there’s a bonus for some units: a $1,000 gift card from Amazon to encourage prospective renters to sign a lease.”

“Not far away, at Sky3 in the West End, the owners as recently as last week were giving some tenants a $1,000 Visa check card and six weeks free rent to move in. (Studios there start at $1,328 a month.) That’s just the start. As of last month, at least 33 high-end buildings in the central city and South Waterfront have more than 700 apartments sitting vacant or available for rent within the next two months, according to numbers WW found via publicly available listings and on a private management company spreadsheet.”

“So landlords in those buildings are advertising concessions: free rent for as long as eight weeks, along with other perks like gift cards, free parking and a yearlong free membership at a nearby health club. Even Burnside 26—the building that captured Portland’s imagination in 2015 as a symbol of invading yuppies driving out artists—is now offering six weeks free rent.”

“The deals represent a 180-degree change for a Portland housing market that’s seen relentlessly rising rents and vacancy rates lower than 3 percent. New construction has sent a flood of new luxury apartments onto the market—by December, it’ll be 12,000 units over two years—and they’re arriving at a faster clip than landlords can fill them.”

“‘It’s a sign that the market is weakening,’ says Portland economist Joe Cortright. ‘The last thing that apartment owners want to discount is the rent on a building. One-time offers—gift cards, free parking, waived deposits or other fees—it’s an indication they’re scrambling to fill apartments. It tends to predict that rents should ease further.’”

“The glut of new buildings is having a larger effect. After years of rent hikes, last month brought news that the average rent in Portland had fallen. From June 2016 through June 2017, average rent for one-bedroom apartments dropped 3 percent, according to ApartmentList. Data from real estate company CBRE show rents fell 3.1 percent during the last quarter of 2017 alone. That’s the largest drop in a single quarter since the early 2000s.”

“‘The market works, but with a lag,’ writes Cortright. “After lagging well behind demand in the early post-recession years, housing supply has finally caught up, with the predictable effect that rents have flattened out and now clearly started to decline.’”

The Lipstick Effect Has Emerged In China

A report from the South China Morning Post. “Mr Shen Weipeng is a 29-year-old trust manager in Beijing, working in one of the highest-paid vocations in China. His after-tax income last year was about 260,000 yuan (S$52,000). He decided to cut his spending this year by replacing his favourite cocktail with water, cancelling a planned trip to Europe and sticking with his current mobile phone even though the screen is badly cracked.”

“Mr Shen said he was trying to save money because he had a monthly mortgage payment of 11,000 yuan on his flat and was concerned about his income prospects, with the government’s crackdown on shadow banking having significantly reduced average incomes in the trust investment industry. ‘I just have no better choice than to cut back on my spending,’ he said. ‘My income was cut by about 30 per cent this year from a year earlier because of the broad downturn in my industry.’”

“Mr Shen’s financial situation is not unusual in China, where discretionary spending is often limited by a large mortgage payment and confidence about future income has been undermined by a less optimistic economic outlook. At the end of last year, total outstanding individual mortgage loans and borrowing from the public housing fund rose to 26.4 trillion yuan, meaning that housing-related loans made up 57 per cent of overall household debt, according to government data.”

“Considering that many Chinese use consumer loans to come up with the down payment on a house or to help pay their monthly mortgage bill, the weight of real estate debt on purchasing power is even heavier. Mr Qin Han, chief fixed-income analyst at Guotai Junan Securities, wrote in a research note last month about the recent emergence of the ‘consumption downgrade’ phenomenon. ‘Mortgages are an obstacle to consumption that cannot be avoided,’ he said. ‘Rents are also significantly squeezing consumer spending.’”

“‘The lipstick effect has emerged in China,’ Mr Li Xunlei, chief economist with Zhongtai Securities, told the South China Morning Post, referring to the phenomenon of consumers being more willing to buy less costly luxury goods instead of more expensive ones.”

“A number of articles on how to change one’s lifestyle to save money have gone viral on Chinese social media this year. ‘No afternoon tea, just use the time to diet,’ one article advised. ‘No more taxis or ride hailing, buses and shared bikes will do. And no new clothes; after all, work uniforms should be fine.’ One question posted on Zhihu, the Chinese version of question-and-answer site Quora, about ‘how to downgrade consumption to survive 2018′ has attracted more than 1,300 answers and 17.5 million views.”

“The responses offered suggestions such as ‘no food delivery, no milk tea and no electronics upgrades’ as well as ‘cooking your own food, eating Lao Gan Ma chilli sauce (only 10 to 30 yuan) and pickled mustard.’”

From Bloomberg. “Signs that China’s attempts to cool its red-hot property market are working are hard to find: housing prices rose the most in 21 months in June, and as soon as authorities squelch one buying frenzy another pops up. Scratch below the surface though, and something interesting emerges — land is going unsold in some of the nation’s most-crowded cities as the government’s deleveraging campaign and a relentless flow of property curbs squeeze developers’ profit margins.”

“A total of 419 land sites went unsold in the first seven months of 2018, up 78% from a year earlier, data compiled by China Real Estate Information Corp. show. A slowdown in land acquisitions preceded the past two housing downturns, and the surge in failed sales suggests the pattern may be repeating. ‘The series of failed land auctions shows that the home market is already in a correction,’ said Zhang Hongwei, a research director at Tospur Real Estate Consulting Co. ‘Developers will face increasingly harder times ahead, becoming forced to take a steeper cut in prices.’”

“Three suburban plots in Guangzhou attracted no bids at six separate auctions this year, even as the asking price was continually cut. In Shanghai, a small site close to the city centre drew no offers earlier this month. Land has also gone unsold in Hangzhou, Suzhou and Hefei, all considered popular markets due to a scarcity of space.”

“‘Sometimes companies don’t have enough funds,’ Liu Wei, executive vice president at developer China Merchants Shekou Industrial Zone Holdings Co., said. ‘Sometimes, under the pricing curbs, you just give up after doing the math.’”

From the Global Times. “China is ramping up efforts to tighten real estate transactions, thwarting speculation that the nation might loosen restrictions on the real estate market to stimulate economic growth amid escalating China-US trade tension.According to media reports, banks in some Chinese cities have raised lending rates to curb overheating in the real estate market. In Beijing, the average increase in rates for first-home loans was 10 percent above the benchmark rate, and 20 percent for second-home loans. An employee at a bank in Beijing told the Global Times on Monday that his bank’s rate for first-home loans was 40 percent above the benchmark rate.”

“There has been speculation that China might loosen restrictions on the real estate market to stimulate economic growth amid escalating China-US trade tension, but an industry insider surnamed Dong predicted that the real estate regulations will be further strengthened, rather than relaxed in the next six months.”

“‘The Chinese economy is now facing both domestic and external challenges, but preventing financial risks is a much more important task than maintaining rapid growth,’ Dong said, adding that deleveraging and structural reforms should remain the government’s priority. Song Ding, a research fellow at the China Development Institute, warned that while it’s important ‘to curb the pace of price increases in the real estate market, it’s also important to prevent a slump, which might lead to a financial breakdown and a plunge in growth.’”

“Auctions of land have also seen a slump in recent months, and some cities have reported failures of land auctions. For example, in Taiyuan, North China’s Shanxi Province, auctions of eight plots of land were reported to have failed on Saturday, and there has been a similar situation in some first-tier cities, including Shanghai and Guangzhou, capital of South China’s Guangdong Province.”

The Asia Times. “Let’s allow Japan to answer this most impactful of economic questions. Through the prism of Tokyo’s long experience, the bears have it. Xi’s government, after all, is reading right from the Japan Inc playbook. After Japan’s bubble economy imploded around 1990, bureaucrats fell into a decade-plus cycle of one-step-forward-two-steps-back on deleveraging efforts. The pattern: Tokyo would get serious about reducing debt levels and then, at the first sign of slower gross domestic product or market fallout, reopen the credit spigot. Close, reopen, repeat.”

“It was only about 2002-2003 that then-Prime Minister Junichiro Koizumi prodded banks to write down bad loans. The costs of that dozen or so years of dithering are still being calculated today. Glacial and unsteady clean-up efforts explain why the Bank of Japan is still holding interest rates below zero. And why, after 18 years of toying with quantitative easing, Tokyo is barely halfway to 2% inflation.”

“President Xi Jinping wants to break a cycle with which Japan is still grappling. Granted, the timing seems terrible, as Donald Trump’s escalating trade war imperils China’s $12 trillion economy. And so, Xi’s two-year crackdown on shadow-banking is taking a backseat to GDP – again. In the weeks since Trump took direct aim at Beijing’s export engine, Xi rolled out fresh fiscal stimulus and tax cuts. The People’s Bank of China, meantime, is prodding banks to up lending and easing capital requirements.”

“Easier credit means it’s now cheaper for mainland banks to borrow from one another than from the central bank. They also mean local-government leaders have greater latitude to borrow anew. It’s troubling, then, that roughly 80% of the jump in bad loans last quarter was among rural commercial institutions. Declines in capital adequacy ratios, though notable throughout China, are most pronounced among smaller banks.”

“And therein lies the Japan-like threat to China’s future as a balanced, vibrant economy. Xi is running into an inconvenient financial truth: the more he prioritizes short-term GDP gain over pain, the more he prolongs an inevitable Chinese reckoning. We’ve seen this movie before. It won’t end any better for Beijing than it did for Tokyo.”

August 14, 2018

The Common Markers Are Essentially Present

A report from USA Today on Tennessee. “In Nashville, the median home price was up 8.6 percent annually at $263,000. That came on the heels of four consecutive years of double-digit price increases, Moody’s figures show. But the soaring prices have taken a toll. Homeowners devote 35.1 percent of their monthly income to housing costs, up from a 27.8 percent average over the past 13 years, according to ATTOM Data Solutions. Metro area sales fell 4.3 percent in 2017 year and are down 0.5 percent so far this year.”

“‘Things have slowed down,’ says Sher Powers, president of Greater Nashville Realtors. ‘It’s not a bad thing for the market. It can’t sustain itself endlessly. There has to be some correcting. It’s still a sellers’ market.’”

From Crain’s Detroit Business in Michigan. “Real estate market watchers are looking for clues on the next downturn as home prices continue to rise on shrinking inventory in Metro Detroit. Housing price bubbles have been on the minds of some real estate market observers, Realcomp said in its monthly market statistics analysis.”

“Demand is still strong — a decline isn’t forecast as imminent. But ‘the common markers that caused the last housing market downturn are essentially present,’ as wage increases aren’t keeping pace with climbing home prices, the Realcomp news release said. Worries about lack of affordability could lead to falling sales.”

From Multi-Housing News. “Real estate players have been gearing up for the next phase in the cycle for a while now. Borrowers and lenders alike are watching closely as the Federal Open Market Committee continues to raise short-term interest rates. Josh Migdal, partner with Mark Migdal & Hayden, specified. ‘In the wake of the financial crisis, banks have become more discerning as to whether borrowers should qualify for loans. This included larger down payments and lower levels of debt-to-income ratios. However, in recent years, people have begun to forget about the crisis. In fact, the Financial Times reported in March 2018 that subprime mortgage bond issuance in the first quarter of 2018 went from $666 million to $1.3 billion.’”

“In some cases, non-bank lenders have taken advantage of the opportunity, Migdal explained, leading to situations where loans get approved through less lenient vetting procedures. ‘I believe that lenders are really trying their best to vet proposed borrowers based on well-thought-out underwriting guidelines, but are also getting somewhat creative for these loans to be pushed through and ultimately reach approval.’”

“Developers are finding ways to offer incentives to buyers. G&L Real Estate Development, the American division of Empresas Guzmán & Larraín, has put together a special lending structure for the company’s first U.S. luxury project, One Bay Residences. ‘The lending structure we offer our buyers allows them to purchase a residence with up to 97 percent financing, with the remainder of their deposit going to cover closing costs and upgrades, additionally removing the need to dip into their savings. This is essentially unheard of in Miami’s condo market, where deposits can range from 30 to 50 percent,’ according to Nicolas Guzman, CEO of G&L Real Estate Development.”

The Herald Tribune in Florida. “The Sunshine State’s delinquency rate rose by 1 percentage point from May 2017 due to the continued effects of Irma’s widespread destruction in September 2017, according to the CoreLogic. Florida had the third-highest delinquency rate of any state at 6.2 percent. Analysts say it’s the ongoing aftermath of Irma, which damaged homes, put some people out of work at least temporarily and left some homeowners unable to make their payments promptly.”

“In Charlotte County, May’s delinquency rate reached 4.1 percent, an increase from the 3.2 percent mark last year. ‘Serious delinquency rates continue to remain lower than a year earlier except in Florida and Texas, the hardest-hit states during last year’s hurricane season,’ said Frank Martell, president and CEO of CoreLogic. ‘We have observed continued challenges for families to make mortgage payments in regions impacted during the 2017 Hurricane season.’”

The Tampa Bay Times in Florida. “The priciest house for sale in the Tampa Bay area could soon become its biggest foreclosure. A Miami company has filed a lis pendens on a Clearwater mansion that was once part of the storied Century Oaks estate and is now on the market for nearly $19 million. Built in 1915 on a huge lot overlooking Clearwater Harbor, the 23,919-square-foot house has had a tangled recent history.”

“In early 2017, powerboat racing champ Hugh Fuller sold it to Princess Yenega Properties LLC for $11.18 million — the highest price ever paid for a bay area home — and Mystery Key LLC took out a $14 million mortgage. The managing members of both companies are Blaise Carroz, whom Bloomberg News once described as a ‘French-born, Dubai-based real estate developer,’ and Marata Tapsoba Carroz. The couple, who had been leasing the house from Fuller, put it back on the market just four months later for $19.75 million. The price was lowered in March to $18.999 million.”

“In 2013, a Louisiana bank foreclosed on a $5 million mortgage on the 28,000-square-foot Tampa home of former corporate raider Paul Bilzerian. That house, on a lakefront lot in the gated Avila community, once was priced at $18 million but sold two years ago for $2.85 million.”

From on California. “Napa County is known for its premium wines—and premium housing. Which makes it an unlikely candidate for one of real estate’s most ignominious titles. We usually don’t see grand, French-inspired estates in Northern California falling into the hands of creditors, but Villa Vigne is the exception. The nearly 40-acre spread is on the market in Saint Helena for $5.5 million—making it the most expensive foreclosure in the country.”

“If you think bank ownership means you can make a lowball offer to score a deal, don’t get your hopes up. Listing agent Julie Larsen notes that both she and the bank carefully researched the right price for the property. ‘They are not into the idea of giving properties away,’ she says.”

Cash Negative From Day 1

A report from the Voice of San Diego in California. “In recent years, downtown San Diego has become an epicenter of a lot of that new construction at the high end of the market. But there’s a big problem: We need people to start living in those new apartments. As of April, MarketPointe Realty Advisors estimated that a glut of luxury rentals in downtown could account for as much as a full percentage point of San Diego’s approximately 4 percent rental vacancy rate. That figure came before the opening of at least two more luxury towers in East Village, and at least three more are opening in the near future, including the largest project to date, Ballpark Village.”

“But a statistical analysis of downtown residency is not necessary to know that plenty of housing units go unoccupied. Just look up at the towers that even years after opening, have half of their lights off in the evening. That’s not because folks are out at local restaurants, it’s because they’re sitting empty.”

From Bloomberg. “Isaac Sitt and Elliot Tamir had been investing in real estate for years when they stumbled onto the idea. They decided to put up ads at the nearby Wyckoff Heights Medical Center, expecting to lease to doctors. Instead, they got medical students. With jobs scarce, tons of people were going to school, they realized. Sitt remembers thinking, ‘Hey, this is a good business,’ even in a downturn. ‘Not only does it make sense, but I think we can raise equity for it.’”

“Today, Sitt and Tamir run Vesper Holdings LLC, one of the largest owners of student housing complexes in the U.S. It’s been a lucrative niche. One of the few dangers for the business is bringing back the draft, Sitt jokes. ‘That would be a problem for the college population,’ he says. The other, he adds, ‘is overbuilding.’”

“That second danger is no joke. Too many of those dollars flowed to projects around schools where there were low barriers to development, such as Texas A&M and the University of Oklahoma. Landlords in those areas have had to offer discounts and freebies to get ‘heads on beds.’ Some properties are going bust, leading to downgrades of bonds that backed the development. Now, veteran investors in student housing say they’re being careful about their next moves, even as money continues to pour into the industry.”

“Analysts caution that there’s a broader demographic shift under way that could hurt demand—or at least cluster it around a few flagship schools. Millennials, one of the biggest generations in the U.S., are aging out of their college years, says Hans Nordby, managing director at CoStar Portfolio Strategy. ‘The tide’s going out,’ he says. ‘There are fewer of these kids every day.’”

From News OK in Oklahoma. “Upperclassmen move into campus housing Wednesday at the University of Oklahoma, but many rooms will be vacant. OU’s efforts to entice more students to live on campus after their freshman year began last fall with the opening of two elegant residential colleges that together can accommodate 600 upperclassmen. Officials predicted there would be a waiting list to get into Dunham and Headington going forward.”

“But this fall’s occupancy for the two residential colleges is at 70 percent, OU spokeswoman Erin Yarbrough said. Another 1,230 beds for upperclassmen are available for the first time this fall with the opening of Cross Neighborhood, a luxury complex that has an occupancy rate of 28 percent for the fall semester. New OU President Jim Gallogly said earlier this summer the residential colleges were ‘cash negative from Day 1.’”

“They feature spacious dining halls, made-to-order food options, private courtyards, game rooms, comfortable lounges and libraries filled with books and artwork on loan from the campus museum. Before he took office July 1, Gallogly announced the university has been losing money every year. Total debt is nearly $1 billion at the Norman campus and debt service costs are almost $70 million a year, he said.”

“‘Our debt has more than doubled in the last 10 years as we’ve been on a building campaign,’ Gallogly said. ‘As a result of that, we have a beautiful campus and a lot to be proud of, but during that period of time, we spent approximately $730 million and that’s why the debt has gone up to that level.’”

The Colorado Business Journal. “The combined markets of Denver and Colorado Springs are major markets tracked by our national firm and, compared to the same period in previous years, 2018 has been strong. In the first six months of 2018, the markets added just under 5,500 new units. During the same span two years ago, that number was only 1,100. The area has been experiencing a new construction boom, and the flow still is increasing. In addition to the new supply delivered this year, 11,000 units already are under construction.”

“These likely will be entering the markets within the next 12 to 18 months. For reference, a total of 9,000 units have been delivered in the last 12 months. The areas absorbed almost 6,500 in the first two quarters and over 9,800 units year over year. After adding more units than were newly rented in the opening half of 2017, it’s a positive development that absorption has outpaced new supply by 1,000 units in 2018.”

“But, for markets still amid a construction boom, it bears noting that there appears to be less room to run than even two years ago. At the top of the segment, average occupancy ended June at about 78.5 percent. Because this is the segment with new construction activity, an average occupancy below the stabilization threshold isn’t a surprise.”

From North Jersey. “The luxurious new complex rising up on South Van Brunt Street in Englewood boasts a myriad of amenities, including a fitness center, cinema and putting green. But not everyone can move into this exclusive enclave: Prospective residents of The Bristal at Englewood must be at least 55. It’s the latest in a slew of cushy developments for senior citizens that have been cropping up throughout New Jersey and the nation as well-heeled baby boomers aim to age amid luxury: with swimming pools, five-star chefs, elegant decor and daily housekeeping.”

“But living the high life doesn’t come cheap. A two-bedroom at the Assisted Living in The Bristal starts at $8,300 a month. (Studios and one bedrooms are less.) That price includes meals, but not medical care or recreational costs. The average price for a unit in a Toll Brothers Active Living community, which features a golf course, tennis court and swimming pool, is $800,000.”

“And Arbor Terrace in Teaneck, an independent living facility, offers a full-service restaurant, a 24-hour concierge service and a movie theater at prices starting from $4,820 a month for a one-bedroom apartment. A three-bedroom goes for $6,700. But Teaneck Deputy Mayor Elie Katz notes that the more upscale senior housing facilities in town tend to have more vacancies, while the affordable senior apartments have a 10-year waiting list. ”

“Nevertheless, developers are confident they have found a lucrative niche. The luxurious properties are being built across the nation, said Steven Krieger, a partner of the Garden City, New York-based Engel Burman, which is developing and managing assisted living communities in Englewood, Woodcliff Lake, Wayne and Somerset. ‘We want to offer every single amenity that we can think of to make their lives more enjoyable,’ he said.”

From Globest on Florida. “Conventional wisdom dictates that investing in Miami area condos today is tricky because there’s a market glut throughout South Florida. But two reports this month indicate that when it comes judging factors such as supply, it all depends. That’s due to two considerations: What price level is being considered. And location, too.”

“CondoVultures took a different approach to looking at condos. They were more selective about prices. Their August report found nearly a 70-month supply for condos. But those were costing at least $1 million. That included an area in the tri-county South Florida region of Miami-Dade, Broward and Palm Beach. CondoVultures, which regularly reports on the subject and long ago predicted a glut, says it only tracks Greater Downtown Miami condos listed for sale. It does not factor in the nearly 47,500 new condos currently in the development stage east of Interstate 95 in the tri-county South Florida region.”

“But the Miami Realtor numbers were not looking at the same basis for their numbers. ‘Miami condo home buyers are finding great opportunities particularly in the $250,000 to $600,000 range,’ Miami Chairman of the Board George C. Jalil said. One obvious conclusion is that a lot of condos are selling at prices under the luxury threshold of $1 million. And Naranja in Homestead north of Leisure City had only an 8-month supply with at least a few condos priced under $100,000.”

August 13, 2018

Buyers Are’t Chasing The Moving, Runaway Train

A report from Canadian Mortgage Trends. “Last month the Canadian Mortgage and Housing Corporation (CMHC) formally asked the Canada Revenue Agency to take a more active role in verifying income claimed on mortgage applications in an effort to clamp down on mortgage fraud. The CMHC says the move is necessary given that ‘the industry’s current detection tools have not kept pace with the increasing sophistication of threat we face,’ according to its plan. Data backs this up, with a 2017 Equifax study finding that a full 13% of Canadians would be comfortable lying in order to get a mortgage approval. The study also noted a 52% rise in suspected fraudulent mortgages since 2013.”

“But not everyone is behind CMHC’s request for direct involvement from the CRA. Rena Malkah, owner of CYR Funding, has been a mortgage broker for 44 years and thinks this is an issue best left to underwriters. ‘Their job is to verify the claims. If they can’t they should be fired and replaced by someone who can,’ she said. She adds that credit rating is more important than income verification anyway. ‘If someone has a high credit rating, it shouldn’t matter what their income is. If they fight and scrap for under-the-table money to pay their bills on time, then it should be of no interest to the insurance company where the money comes from. And besides, involving CRA opens more people up to audit.’”

“Helen S. is a 61-year-old retired public accountant from Oakville, and the mother of a 26-year-old, and she agrees with Malkah. Her son earns just under $40,000 a year as a baker and she wants him to buy a home. She’s prepared to pay a percentage of the mortgage payments but she wants the mortgage in his name. ‘How I choose to set my son up for success is none of CRA’s business. I know he won’t default,’ she says. ‘My broker knows too. The CRA doesn’t have to be involved. We already give them enough money.’”

From the Georgia Straight in Canada. “The latest numbers from the B.C. Real Estate Association raise questions whether the B.C. government will achieve this year’s revenue target for property-transfer taxes. The BCREA revealed that there was a 23.9 percent decrease in Multiple Listing Service sales across B.C. in July, compared to the same month of 2017. The total dollar volume was $4.9 billion, down 24.2 percent from July 2017.”

“Earlier this month, the Real Estate Board of Greater Vancouver reported that detached homes on Vancouver’s West Side and in West Vancouver experienced the biggest annual price drops over the past year. They fell 8.4 percent and 8.3 percent, respectively, over a 12-month period. These areas have the most expensive homes.”

The Calgary Sun in Canada. “Calgary’s resale housing market remained firmly in buyers’ territory in July, according to the July report from the Calgary Real Estate Board. ‘Recent struggles in the job market, accompanied by yet another interest rate increase, are piling on to the decisions potential purchasers have to make in the housing market,’ says the report.”

The Leader Post in Canada. “June was a bad month for building permits across Canada, but Regina saw a bigger percentage drop in value than any large city in the country. Regina issued only $27.5 million worth of building permits in June of this year, compared to nearly $100 million the same month last year. That’s a drop of 72.4 per cent. Compared to May, the value of permits fell 44.5 per cent, more than any other census metropolitan area.”

“Jason Christbason, builder relations coordinator for the Regina and Region Home Builders’ Association, said part of the pressure comes from nationwide trends, like stricter mortgage rules put in place by the federal government. ‘Turn the clock back five years, you could go in and any day in any time and any bank and you had a mortgage,’ he said, explaining that a so-called ’stress test’ has made it much more difficult.”

“Mayor Michael Fougere said the city has a surplus of housing stock right now, something that might be keeping developers from moving forward with new projects. ‘I think we have an oversupply of housing,’ the mayor said. ‘That’s pretty obvious when you look at the vacancy rate.’”

From Domain News on Australia. “Marketers, vendors and agents are rushing to bring their sales campaigns forward rather than wait for September or October, spooked by reports of falling property values and auction clearance rates hovering at little more than 50 per cent. ‘There’s a lot of media attention about the market getting worse and people want to move now while they still have a bit of certainty,’ said Jim Larcan, a director of ​boutique property styling company Vitus Lee Chan. ‘There’s not much confidence out there right now.’”

“Coco Republic’s senior property stylist Jenny Conroy said business had been quiet in the first half of winter, with tighter lending practices putting the brakes on sales, but things had changed dramatically a few weeks ago making this one of the busiest periods the company has seen in years. ‘We are at capacity right now and it doesn’t look like this will end any time soon,’ she said. She said clients were also asking about extension rates for furniture if a property didn’t sell quickly.”

“However, chief executive of one of the largest property marketing providers CampaignTrack, Stefan Williams, said just because there was a bit more stock on the market to be sold doesn’t mean agents will be able to sell it, which is a big turnaround on market fortunes from this time last year. ‘It’s always busy at this time of year, but whereas last year was a case of agents struggling to source listings, now it’s a matter of selling it,’ he said.”

“Properties with redevelopment potential in top-notch positions, and sub $750,000 homes performed better than other real estate categories at weekend auctions. But stand-offs over asking prices are continuing to instill price uncertainty in Melbourne’s $1.5 million-plus housing market.”

“A buyer’s advocate at the auction, Kate Vines from Melbourne Property Advisory, said a sale price of just over $3 million represented a good purchase. ‘If you go back six months, that would have been an easy $3.2 million to $3.3 million property and it would have sold under competition,’ she said. ‘There is just no urgency. There is no panic out there. Buyers are taking their sweet time, because they can.’”

“Frank Valentic, of Advantage Property Consulting, said other townhouses and villa units in the northern suburbs had recently been passed in, or attracted only one bidder, before selling for prices below or just above their reserves. He said buyers were prepared to wait, and were putting in offers only if the price was right. ‘They’re not chasing the moving, runaway train at the moment,’ he said.”

The New Zealand Herald. “Tomorrow we will get a fresh update on the local housing market when REINZ releases it’s data for July. While winter is traditionally slow for the real estate sector, a slump across the Tasman has heightened concerns that we may see price falls here for the first time in several years. In Auckland, where prices have been flatlining for more than a year, the prospects of prices slipping in to negative territory looks increasingly real.”

“Sentiment in Sydney has turned fast. You’ve only got to scan the media coverage to see that stories about crash-risk and a buyers market are getting all the headlines. Even Reserve Bank Governor Adrian Orr has warned of the possibility. ‘We’re within a wisp of that happening in Auckland housing prices at the moment,’ Orr told TVNZ’s Q+A.”

“Stating in last week’s Monetary Policy Statement that rate rise was unlikely until 2020 has already helped to put downward pressure on mortgage rates. Regardless, the fact is that the Auckland housing market in 2018 looks very different to the one we have grown accustomed to. We need to brace ourselves for an economy that is no longer underpinned by the ‘wealth effect.’”

“As an infrastructure report (released today) by Chapman Tripp points out, house price growth has outstripped income growth in this country every year since 2003, producing one of the worst house price to income ratios in the OECD. Many homeowners simply won’t remember a time when the market wasn’t a one way bet.”

Condo Fever—I Don’t Sense It In The Air Anymore

A report from Mansion Global on New York. “Manhattan luxury housing is still feeling the summer sales slump, recording the worst activity since January in the week ending Sunday, according to the Olshan Report. Buyers signed contracts for just 12 homes priced at $4 million or more, one of the borough’s worst weeks this year, according to the weekly report. ‘For the first time since September 2016, not a single co-op went into contract,’ wrote Donna Olshan, president of Olshan Realty and author of the report.”

“The most expensive home to go into contract was a townhouse on Sutton Place, asking $12.995 million—a significant discount from the $19.5 milion the sellers originally wanted when they listed the home in October 2016. The second most expensive home to find a buyer was a brownstone asking $11.9 million in the West Village. The pending sale also marks a major discount from the initial listing price of $17 million.”

From 27 East in New York. “Construction on the Southampton Pointe condominium complex at the intersection of County Road 39 and Tuckahoe Lane is finished, according to the Corcoran Group. Hundreds of millions of dollars have been invested in the past 10 years to build condominium complexes for zero-maintenance, turnkey, luxury living for aging baby boomers who want to downsize, or millennials looking to buy their first home—that is, if they can afford it.”

“The problem: Condos go through spikes in selling, with high highs and low lows. ‘I felt like condos was all we could talk about for years,’ said Carl Benincasa, a Douglas Elliman regional vice president of sales. ‘Condo fever—I don’t sense it in the air anymore. I think condos are a strong option and will continue to thrive in the Hamptons. But as prices have come down, perhaps the larger homes remain more attractive.’”

“Mary Slattery, the exclusive listing agent for Southampton Pointe, said luxury units have been on the market for about a year, during a time when the complex was not yet completed. Now that the construction dust has settled, and considerable price reductions have occurred for 16 select units priced under $1 million, she said several units are under contract—with the first closings anticipated for early October.”

“Because condos don’t appreciate the way single-family residences do, said Judi Desiderio, the CEO of Town & Country Real Estate, ‘people don’t go chasing them.’ On the other hand, there are condos that have struggled to sell because of overpricing—asking potential buyers to sign contracts for more than $3 million and put down more than 20 percent before the walls were even up.”

“That’s what happened in 2012, when what is now a three-story, 19-unit luxury condominium building called Harbor Edge at 21 West Water Street in Sag Harbor was nearing completion—and the owners, East End Development, filed for Chapter 11 bankruptcy. The complex is now open for business under a new investor, Longview Ultra, offering waterfront property.”

“In 2013, Corcoran brokered the first 20 units of the Watchcase condos in Sag Harbor from a trailer on the construction site. Two years later, developer Cape Advisors poured more than $40 million into renovating the late-19th century factory complex into luxurious, multimillion-dollar penthouses, bungalows and townhouses. ‘There have been nine units that we have re-sold, and there are currently five units as re-sales on the market,’ said listing agent Cee Scott Brown. ‘In most instances, either the apartment was purchased as an investment or major life changes mandated the sale.’”

The Miami New Times in Florida. “Earlier this year, real-estate analyst Peter Zalewski warned that South Florida developers had so overbuilt luxury condos for the global 1 percent that it would take an estimated four years to sell them all. At the rate condos were selling downtown, he found, the 505 available units would have taken nearly 6.5 years (78 months) to sell off during the slower, winter buying season. Well, the state of affairs in what Zalewski dubs ‘greater Downtown Miami’ has only gotten worse.”

“Now, according to a new report Zalewski’s issued this week, there are even more luxury units available downtown: For sale are 559 ‘preconstruction’ units at an average price of $2.13 million. Even at the peak of the Miami summer real-estate ‘buying season,’ Zalewski warns, those 559 units could take 70 months — or 5.8 years — to sell off.”

“‘It is worth noting this report only tracks those Greater Downtown Miami condos formally listed for sale. The report does not factor in the nearly 47,500 new condo units currently in the development pipeline east of Interstate 95 in the tricounty South Florida region,’ Zalewski’s study ominously notes.”

“The overall trend is clear: Miami’s real-estate development community and public officials have approved a truly absurd number of new luxury condo projects pitched at global investors, rather than actual, homegrown Miamians.”

The Construction Folks Have Played Out Their Hand

A report from on California. “In the California real estate market the ‘b’ word is on the minds of many: bubble. One place where home sales were legendary for their risky offers, stripped of contingencies to woo sellers with full dance cards, is Silicon Valley. Inventory is fattening and sales are slowing. ‘At our peak, in my area, if you listed a home you could count on get 15 to 20 offers. We’re still in a market where we’re getting multiple offers, but things are changing,’ says Robert Whitelaw, broker/owner of Whitelaw & Sons Real Estate Services in Morgan Hill, California.”

“‘One, not just anything will get multiple offers. If you have a crappy house, the odds are it’s going to take you longer to sell. And that wasn’t always the case. You could sell absolute crap really quickly. The other part of it is you’re getting less offers, maybe four or five,’ he said. ‘I got an email from a builder recently. It was the oddest email, it read: ‘Now affordable housing at the low $1.3 millions.’ The construction folks seemed to have played out their hand when it comes to high-end construction. The really sad thing is that, in the really high-priced homes, the folks that bought them are likely going to have to sell for less than they paid for them.’”

The Kingman Daily Miner in Arizona. “Home sales have slowed across the nation after a busy spring, and higher prices in certain markets are giving buyers cold feet as they fret about another housing bubble. Doug Angle, founder of Angle Homes, said he’s seen a slowdown in sales over the last couple of months. ‘We’re still selling homes, but not as much as the spring,’ Angle said. ‘You’ve got to keep an eye on it. It kind of makes you nervous. You don’t know if it’s peaked or not.’”

“Angle is actively building in eight housing subdivisions around Kingman with homes starting at $152,000 for a three-bedroom, two-bath home in Cerbat Vistas and ranging up to $575,000 for a four-bedroom, 3½-bath home on two acres at Copper Wind. ‘Many of the buyers are from California, about half of them,’ Angle said. ‘We hope things will keep growing in the next two years, but in the last 45 days, we are starting to see a slowdown in sales both locally and nationally.’”

“Homes are sitting on the market a little longer and buyers are negotiating a little harder for deals, he added. Some builders may give them a $5,000 discount, but then recent buyers get upset because they didn’t have the same opportunity, Angle mentioned.”

“Angle said sales are slowing in higher-priced markets such as Denver, Seattle, San Francisco and Los Angeles as buyers think twice about taking on a substantial mortgage. ‘Prices have been going up the last three to four years. At some point, people say that’s too high, they’re not interested in buying,’ Angle said. ‘It’s going to reach that point. You’re going to have a correction. They’re starting to see that in expensive markets.’”

From Builder Online. “Clearly, although new-home builders in many markets continue to drive sales growth and can expect to record year-on-year increases in sales volume, revenue, and profits, the interest rate wild card is at least showing signs of raining on our builders’ parade. Ivy Zelman and her team at Zelman & Associates call out a statistically important inflection point in the latest issue of The Z Report, a recap of second quarter 2018 earnings among 14 public home builders who booked revenue of $20 billion on 51,500 closings–about 37% of high volume builders sales in the nation.”

“They note that the Zelman home builder basket had a great quarter from a business operating margin and profitability standpoint, but appear to have reached a pivotal moment in terms of the sustainability of their sales volumes and margins. The report takes particular note of new order growth of 6% across the 14 companies analyzed, a 500-basis point quarter-to-quarter decrease in sales volume growth from the first quarter of 2018.”

“‘To put this quarter’s 500 basis point deceleration in order growth into perspective, over the last 28 years spanning 113 quarters, order growth has decelerated at least 500 basis points in 32 other quarters, or 28% of the time. In 69% of these instances, order growth decelerated further in the subsequent quarter, by an average of 1,000 basis points. In other words, periods of large deceleration in order growth more times than not are followed by additional periods of weakness.’”

From the Coloradoan. “A decade ago, L&L Acoustical averaged about 60 jobs a month. Today, the drywall company completes 35 to 40 jobs, not because the work is shriveling up — quite the opposite. There’s enough work to do 60 to 70 jobs in Fort Collins’ robust housing climate, co-owner Gery Lockman said. ‘The cost of building these homes are through the roof,’ Lockman said. ‘Materials and labor are going up, but they can’t keep going up because we won’t have any work. No one’s going to be able to afford the houses.’”

“While the labor shortage continues, the appraiser shortage has eased. John Mayea, who has been appraising property in Northern Colorado since 1984, said there was a shortage right up until interest rates started to rise. ‘In those 30 years, the whole real estate business has tapped into capital unimaginable in the ’80s.’”

“When he started in the business, there were fewer appraisers than today and less work. ‘People didn’t use their houses as piggy banks back in the day,’ Mayea said. ‘There was not the whole volume of lending and borrowing, refinances and seconds.’”

“Appraisers were stretched beyond the breaking point during the height of the refinancing boom, when interest rates were at record lows. ‘There will always be a shortage when there’s a refi boom, but you can’t build an industry based on peak demand.’”

“Ron Harding got 20 to 40 appraisal requests per day during the refinancing boom. He could only accept one or two. Instead of a shortage, he calls it ‘an overabundance of work that no one was prepared for. It couldn’t last and it didn’t last,’ he said. ‘Nowadays, that’s gone. There are plenty of appraisers,’ he said.”

“Realtors and lenders know to call for an appraisal immediately once a home is under contract to ensure there is no delay in closing the purchase, Realtor Ben Blonder of Fort Collins said.”

August 12, 2018

The Downside Of A Glut

A report from Curbed Seattle in Washington. “Last week, developers Solterra announced that a planned apartment building in Capitol Hill would be condos, not apartments—following a similar announcement about a Denny Triangle project back in June. Now, three more projects, all scheduled for occupancy this fall, have made the switch. Between the three buildings, 133 condos will be completed, which, as Puget Sound Business Journal points out, could more than double condo inventory in both neighborhoods.”

“Until recently (and still, compared to for-rent apartment construction), condos were pretty rare. But in rapidly growing Seattle, developers are increasingly deciding these projects are worth the risk—over this summer alone, condos scheduled to deliver in Seattle before 2020 have jumped from about five to at least nine.”

The Sun Sentinel on Florida. “Nearly 9,800 new apartment units are expected to open in South Florida by the end of 2018 as developers move to meet increasing demand fueled by an increasing population, according to RENTCafe. Jennifer Morejon, executive director of the city’s Downtown Development Authority, said that aside from the 4,000 new apartment units under construction downtown, there are ‘another 4,000 to 5,000 in some kind of planning or review stage.’”

“Another in the pipeline is a 348-unit high rise called The Rise Flagler Village by developer Art Falcone’s Encore Capital Management. Started in the first quarter of this year, the building is aimed at young professionals. In announcing the project last year, Falcone declared that many of his target tenants ‘prefer to rent in an amenity-rich apartment building, rather than worry about purchasing a home.’”

The Tallahassee Democrat in Florida, “if there are really 12,000 or so fewer college students in Tallahassee than there were a decade or so ago, it raises an interesting question: Who’s going to fill up all that new student housing, much of which is being built by out-of-town developers lured by incentives proffered by the Community Redevelopment Agency? Would it have been built were it not for those incentives?”

“Then again, if the student housing complexes along the fringes of the campuses fill up, who will fill up the student housing complexes much farther away? Will they end up half empty, go into decline, become Section 8 housing, or get boarded up and become a nuisance attracting squatters and vandals, as has occurred at some of Tallahassee’s vacant motels and homes from time to time?”

“Bottom line: Inquiring minds wonder if Tallahassee is developing a student housing glut aided by some of the CRA’s practices. If so, city officials and neighborhood leaders in the areas that are the most likely to be impacted by the downside of such a glut ought to be asking questions before it’s too late.”

The US News and World Report. “As the back-to-school season gets under way, you may be shopping around for new investments for your portfolio. Real estate is a solid diversification tool and student housing is an under-the-radar sector to consider this fall. Student housing can also be threatened by large exposure to new development, says Beth Mallette, real estate series fund manager at Manning & Napier Advisors. ‘This can provide investors with a growth engine however, it also brings with it the potential for periods of oversupply at specific universities, which can put stress on leasing progress as new supply is digested.’”

From The Buffalo News. “There’s new trouble for the owner of Buffalo’s struggling Monarch 716 student-housing complex: A second similar large-scale complex aimed at a collegiate population is now embroiled in foreclosure. DHD Ventures – which is already facing foreclosure and numerous other financial, safety and public relations challenges in Buffalo – is now more than 90 days late on a $31.9 million loan for its Monarch 815 apartment complex.”

“That’s a 576-bed facility in Johnson City, Tenn., designed to house students from nearby East Tennessee State University. It’s similar in size and scale – and trouble – to Monarch 716, the 592-bed complex for SUNY Buffalo State students on Forest Avenue. The developer, led by Thomas Masaschi of Rochester and Jason Teller of Charlotte, N.C., made its last payment on the Tennessee loan in early March and now owes nearly $537,000, according to data from Trepp, a national commercial real estate research firm. Meanwhile, the property also was cited in inspections for numerous ‘life safety issues.’”

“As a result, the 3-year-old loan was transferred in June to a ’special servicer,’ which handles administration, collection and disposal of debts that are in default. That company, Miami Beach-based LNR Partners, started foreclosure proceedings last month.”

“Built in 2016-2017, the 10-building complex features nine residential buildings and a one-story clubhouse, with 176 one-, two- and three-bedroom suites. But it’s been a continual source of problems for the developer since it opened a year ago, in time for the start of the academic year. DHD and its first management firm, King Residential, lured tenants by offering special discounts and perks, like two months of free rent. But they ended up bringing in many non-students as well, only to evict them later for not paying. One local attorney said more than 100 people have been evicted, and local real estate sources say the occupancy is now down to 60 percent, though only 35 percent are paying full rent.”

“If that’s not enough, a third DHD student housing project is also creating concern. Monarch 544 is located at Coastal Carolina University in Conway, S.C., about 350 miles southeast of the Johnson City property. DHD has been late in payment four times in the past year, and the $23.6 million loan backed by the facility has been on the servicer watch list since early July. Built in 2012, that 440-bed complex is now 82 percent occupied – down from 100 percent when the loan was originated.”

The Quad City Times. “A former Rock Island cotton mill converted into apartments 20 years ago is scheduled to be sold at a foreclosure auction on Aug. 21. Mike Farrell, an attorney for Sterling Federal Bank who is handling the foreclosure auction, said the building currently has residents. Those he has spoken with in the past, Farrell said, have said that they like the facility.”

“‘It’s a housing facility, and we want to make sure those options are out there,’ said Chandler Poole, Rock Island’s community and economic development director. He added that the city has no plans to take over the property and would prefer to see it remain as a senior housing facility.”

The Commercial Observer. “In New York’s dynamic and fluid housing market, it’s not unusual for developers to hold unsold units for a variety of reasons. Given the volume of new construction in recent years and the subsequent inventory of condominium units, developers are turning to condominium inventory loans to repay maturing construction loans and hold units for sale at a later date.”

“Inventory loans are most often associated with mid-market condominium developments, which still make up a large portion of these deals, but there has also been a surge in the luxury sector. Morris Betesh, a Meridian Senior Managing Director, recently closed two loans in Manhattan that reflect this trend and speak to the expanding range of property types that inventory loans support.”

“The first of these is a $20 million loan for 17 condo units at a 52-unit property located on Wall Street in New York City’s Financial District. Betesh secured the 24-month loan from a balance sheet lender. He also secured a 36-month inventory loan for a five-story luxury townhouse in Chelsea, which is currently on the market for nearly $30 million. ‘It’s typically harder to secure inventory loans for ‘super-luxury’ assets, but this is hardly a one-off situation,’ says Betesh. ‘Right now, we’re working on several deals for similar high-end properties around New York City.’”

“Meanwhile, sponsors gain more time to achieve their prices for units and in some cases can recapture equity and lower their interest rates by 1.5 percent to 2 percent by switching from a construction loan. Sponsors may also consider this a good time to hold onto unsold inventory. As the economy continues to grow and lucrative tech, media, and life sciences businesses expand in New York, more buyers will emerge.”