Tag Archives: housing bubble

Explaining why there is not a flood of McMansion construction

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Houses are in short supply, housing prices are up, there is money to be made. Why are more McMansions not under construction?

Photo by Michael Tuszynski on Pexels.com

With houses selling for so much, you’d think there would be a big incentive for developers to throw up new units, which they can do quite quickly. I still remember driving around New Jersey during the McMansion boom and being amazed at how quickly houses went up. Why aren’t the developers rushing in now?

In correspondence, my old M.I.T. classmate and economist Charles Steindel pointed me to the likely answer: It’s the supply chain, stupid.

This makes sense given current conditions: an increased cost in materials plus difficulty acquiring materials might translate into fewer profits in building McMansions.

I do wonder if there are additional factors at work. A few quick ideas:

  1. McMansions have an established reputation. There are still plenty of people who will buy one but there is also a clear connotation about the home when this specific term is used. Hence, “luxury homes” instead.
  2. How much land is available and how many communities would welcome them? It is one thing to have teardown McMansions in desirable communities and neighborhoods and another to build McMansions on the sprawling edges of suburbia.
  3. There is more money to be made in even larger houses. Why build McMansions when there are enough customers for even larger and/or more opulent homes? Perhaps the money in McMansions comes at a sizable building scale while the per lot/house profits on even more expensive homes is preferred.

McMansions are not going away as they are an established part of the American housing stock. But, it will be worth watching how many new ones are constructed, where, and by whom.

An oil bubble and McMansions

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One commentator links the shrinking profits in the oil industry to declining McMansion values:

They lived high on the hog in Bubble McMansions near Houston and elsewhere, the economy tied to the oil industry. And now, a very different story all over Texas.

 

texas

That is not a huge drop in housing prices compared to the changes in other areas in the chart. But, the potential link between oil money and McMansions is an interesting one. Houston has long been known as a major city tied to the oil industry; I remember reading works by sociologist Joe Feagin about the effects of the oil industry on Houston written in the 1990s. The stereotype is that all of this cash was spent on Texas-sized items, like huge homes in sprawling suburbs. However, I’ve never seen data on whether Texas has more McMansions per capita than other metropolitan areas. For example, are there more McMansions in the Houston area compared to the New York area (which has its own money-printing industry in Wall Street)? Or, in the Atlanta or Las Vegas area? Going further with the chart provided, what about McMansions in Midland and Odessa?

Housing flipping now above 2005 levels

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RealtyTrac finds that house flipping levels have increased in recent years:

The report by RealtyTrac found that home flipping in 12 active metropolitan areas last year was above a peak set in 2005, just two years before the U.S. mortgage market started to collapse, leading to a banking crisis and the Great Recession.

Profits generated by home flipping also hit a 10-year high, with home flippers netting an average $55,000 per sale before renovation and transaction costs. Profits topped $100,000 in expensive markets such as New York and Los Angeles…

There were also indications smaller investors were starting to pile in on the action. The number of home flippers rose to levels not seen since 2007, while the number of home flips per individual investor fell at the same time.

“When home flipping numbers go up, it is usually an indication that the housing market is in trouble,” said Matthew Gardner, chief economist at Windermere Real Estate, who was quoted in the report.

I blame HGTV. Seriously though, hasn’t there been a shift in the last decade or so to seeing house flipping as a more normal business that many people could get into? I hear radio ads regularly in the Chicago area for house flipping seminars where supposedly anyone can show up and learn the secrets. On one hand, you have professionals and firms that do this on a mass scale but you also have an increase in the number of flippers as people take on these projects to make some extra money or start a new business.

If this is pushing us toward another burst housing bubble, is there any way to reign in the flippers? Could local governments institute more regulations that would slow this down?

Chief economist for Zillow says “homeownership is not for everyone”

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The chief economist for Zillow suggests we need alternatives to homeownership for low-income American residents:

All this leaves us with a conundrum: Overall, homeownership is a tremendous boost to millions. But in some specific cases, it simply does not deliver as advertised. Depending on circumstances, homeownership is not for everyone. And our steadfast belief that homeownership is always the better option has led us to worry less about the one-third of Americans that rent,leading to a crisis in affordable rental housing.

Please don’t get me wrong. None of this is to say that lower-income Americans should not aspire to homeownership, nor be given opportunities to access its tremendous benefits. But we also need to be steely-eyed about the realities and foster a wider diversity of options on housing, crafting innovative solutions that address the reality we face, not the one we imagine.

If we truly believed this, we could do different things. We could focus on the creation and maintenance of more affordable rental housing. We could find innovative new ways to build wealth, aside from homeownership. Given the prevalence of single-family rentals in the aftermath of the recession, we could explore the feasibility of renting-to-own on a wider scale. We could narrow and sharpen our focus on addressing the fundamental sources of inequality that drive differences in homeownership in the first place.

Yet, even with the strong negative effects of the recent economic crisis/housing bubble, I wonder if it is easier to promote homeownership than it is to advance other policies. Here are several reasons why this might be the case:

1. Americans really do seem to prize homeownership. Homeownership is closely tied to the American Dream, making this issue both politically and culturally important. As far as I know, every president since the 1920s has promoted homeownership. Suggesting that everyone can’t access the American Dream can be problematic.

2. Renting may be a good short-term solution but because of the status conferred to homeowners, renters receive the opposite sentiments: transient, less committed to their community, more prone to social problems, etc. Plus, how many wealthier residents want to live near cheaper rental housing?

3. Speaking of cheaper housing, affordable housing is a very contentious issue. Where will these units be built? Wealthier neighborhoods and communities want little to do with affordable housing. Which developers will go this route rather than chasing bigger profits with larger and more expensive housing units?

4. Getting at the fundamental issues behind the the differences in homeownership is a huge task. Which shall we tackle first – Race? Social class? Residential segregation? Large disparities in wealth? Unequal access to resources?

Perhaps the price to be paid in housing bubbles is more palatable to those in charge than the other options…

Storing wealth in New York apartments, contemporary art

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According to one asset manager, the wealthy are now storing their wealth in apartments and art:

“Historically gold was a great instrument for storing of wealth,” the chairman of BlackRock Inc. said at a conference in Singapore on Tuesday. “Gold has lost its luster and there’s other mechanisms in which you can store wealth that are inflation-adjusted.”…

“The two greatest stores of wealth internationally today is contemporary art….. and I don’t mean that as a joke, I mean that as a serious asset class,” said Fink. “And two, the other store of wealth today is apartments in Manhattan, apartments in Vancouver, in London.”…

The median sale price for existing condos in Manhattan jumped to a six-year high of $1.3 million in the first quarter, driven up by buyers seeking alternatives to out-of-reach new developments, according to Corcoran Group, a brokerage. In the U.K., asking prices for property climbed to a record in April as values in London rose 2.5 percent, Rightmove Plc said on Monday.

Three quick thoughts on this:

1. Good thing New York City has a boom in luxury building. Those underground expansions in wealthy London neighborhoods don’t hurt either.

2. What is the point where these apartments turn into a luxury housing bubble? There are only so many uber-desirable locations and only so many people who can afford these luxury places. If this part of the housing market collapses, what happens?

3. I recently read 33 Artists in 3 Acts by sociologist Sarah Thornton and this trend among the wealthy certainly has had an effect on the art world. There are some interesting discussions amongst artists involving money, commodities, and related topics.

Housing bubble pushed more whites to leave mixed-race neighborhoods

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A recent study suggests that American housing bubble influenced racial segregation:

In a paper released earlier this year, researchers Amine Ouazad and Romain Rancière show how the credit boom affected the racial makeup of U.S. neighborhoods. Expanded credit led some black households to leave mostly black neighborhoods for more racially mixed neighborhoods, a move consistent with buying larger or newer homes in areas with better schools or more amenities. Yet at the same time, their report finds that the credit boom led still more white households to leave racially mixed neighborhoods for mostly white neighborhoods—meaning greater isolation for black households…

Given easier access to credit, black households moved into more mixed neighborhoods—but not at the rates that whites households were leaving them. And black households found little purchase in mostly white neighborhoods, Ouazad explains…

“Empirically, what we observe is that black households tend to become homeowners in their own neighborhoods or in mixed neighborhoods,” Ouazad says, “whereas white households used their mortgage credit to move into mostly white neighborhoods.”

The researchers say they were surprised by these findings. Yet, this fits the longer-term patterns in American life: when they are able to, whites tend to move away from blacks. While we may not be in the era of racial covenants, restricted deeds, and redlining (early 1900s) or blockbusting and white flight (post-World War II), whites still express their preference to live in mostly white neighborhoods rather than live with blacks.

It would be worthwhile to then track these neighborhoods that have experienced significant racial change just before and after the housing bubble. What happens in the long-term? Once whites leave, do the neighborhoods (often suburbs) become majority black or do they also offer space for other non-whites? And do those attractive amenities blacks sought continue to exist, thrive, or decline over time?

More Americans again view owning a home as a good investment

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The burst housing bubble reduced the value of many homes yet more Americans are again seeing a home as one of their best investments:

According to a recent Gallup poll, real estate beats out stocks, bonds, savings accounts and even the Great Recession’s investment darling, gold, as the favored form of long-term investment. A full 30 percent of Americans see real estate as the best investment—up from just 19 percent in 2011.

A new survey by the Pulte Group echoes such sentiments: 35 percent of Americans reported that they would like to buy a home soon in part because they see it as a smart financial investment, said Valerie Dolenga, spokesperson of Michigan-based home builder, Pulte Homes.

This kind of growing confidence should make us all wonder, though: Haven’t we learned anything from the housing crash? One of the big takeaways from the crash was to avoid this exact line of thinking…

Now that the market is recovering, and home prices are growing again—in fact home prices are at an all-time high in nearly 1,000 cities across the country, according to Zillow—the siren song of seeing your home as an investment is becoming tempting once again.

Then four tips are offered to help ensure your home can be a decent investment: location matters, buy a home that needs some work so you can increase its value, “don’t buy the best house on the block,” and expect to stay in the home a while to allow the value to increase. In other words, a house is not automatically a good investment yet good planning can go a long ways.

At the same time, sentiment about seeing homes as good investments is not necessarily related to making bad choices about buying houses. In other words, we need to see how these beliefs become translated into actions. For example, more Americans may want to buy homes but if other pieces are not in place, such as good inventory or readily available mortgage credit, then this may not lead to another housing bubble. The bigger issue may come when everyone involved from buyers to lenders to the media gets caught up in a housing rush and it takes on an inertia of action that goes far beyond consumer sentiment.

Finally, views on homeowership as a good investment are tied to other factors:

Upper-income Americans are much more likely to say real estate and stocks are the best investment, possibly because of their experience with these types of investments. Upper-income Americans are most likely to say they own their home, at 87%, followed by middle (66%) and lower-income Americans (36%). Gallup found that homeowners (33%) are slightly more likely than renters (24%) to say real estate is the best choice for long-term investments.

Social class and wealth matter when determining what are viewed as good investments.

Canada’s rising middle class the result of a housing bubble?

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In eclipsing the American middle-class as the world’s richest, is the increasing wealth of the Canadian middle-class largely due to a housing bubble?

One word that doesn’t appear in the article, however, is housing. The U.S. is emerging from a catastrophic collapse of the housing market that obliterated household wealth for millions of middle-class families. Canada, however, is in the midst of a delirious housing boom and a personal debt craze that reminds some economists of the U.S. market exactly a decade ago (before you-know-what happened)…

One year ago, Matt O’Brien calculated that Canada’s price-to-rent ratio was the highest among advanced economies, making it the “biggest housing bubble” in the world. Canada’s historic housing boom (and our historic bust) comes at the precise moment in history that they pass us to grab the title of World’s Richest Middle Class. Just a coincidence?

Maybe. As the LIS data in the Upshot article shows, Canada’s median earner has been gaining on America for decades, powered by a strong service economy, supported by a disproportionately large energy industry. Remarkably, U.S. GDP-per-capita has been more than 15 percent richer than Canada’s for the last 25 years (see graph below), even as the median American worker has fallen behind the median Canadian earner. That’s a pretty clear indictment of U.S. income inequality…

Still, as many economists like Atif Mian and Amir Sufi have have argued, strong housing markets support middle-class income growth just as housing busts wreck middle-class income growth. The effect can be direct (more houses means more construction jobs*) and indirect (when families feel richer from rising housing prices, they spend more across lots of industries, raising incomes). As Reihan Salam writes, “the central driver of the decline in employment levels between 2007 and 2009  was the drop in demand caused by shocks to household balance sheets.”

Housing is an important factor in a middle-class lifestyle from being able to own a house (more important in certain places like the United States as a sign that “we’ve made it” as well as providing for one’s family) to affording a good neighborhood (which is often associated with lots of other good outcomes like better schools, less crime, more local resources) to paying relatively less for housing than those with lower incomes.

All that said, there is no guarantee that housing will be a significantly positive financial investment in the long run. And what happens in Canada if such a housing bubble does burst?

Parody: Nazi leader loses the equity in his McMansion as the housing bubble bursts

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One of the YouTube parodies of the 2004 German movie Downfall features Hitler lamenting the effect of the declining housing market on his new McMansion. Here is a small part of Hitler’s complaints:

Real estate only goes up! My broker told me it only goes up! I cannot believe I’m going to have to sell my house before I can flip it for a profit. That bimbo said I could always refinance before the rates went up! I’m going to have to sell assets to raise cash. I’ll love my vintage Camaro SS! I got that car with my home equity loan along with my flatscreen TV and a bunch of other toys!

Question from military official: But you didn’t put any money down, how can you complain?

Response: Everyone was doing it! I needed a nice car and a new television!

Question from the same official: What about all the people who lived within their means?

Response: Screw them. I invested in that house to live the life of luxury I am entitled to! There was equity in the house! I thought that renters and conservative homeowners were suckers for not jumping on the credit gravy-train. I was going to flip it and my investment would double!

And on it goes. Some interesting commentary on the housing bubble. Of course, the housing bubble didn’t just affect McMansion owners but they are often blamed for inflating the market with big houses and big mortgages that they couldn’t afford. Putting these words in the mouth of the most recognized evil person in recent human memory only serves to drive home the argument…

Headed toward another housing bubble in the United States?

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A CNBC editor looks at some data that suggests the United States may already be experiencing a housing bubble:

On Monday, we got the fourth month of home affordability data coming in below trend, which is a strong confirmation that the housing market is once again in a bubble. (The NAR index is published with a two-month delay, so the latest numbers are for July).

The affordability index measures the household income needed to qualify for a traditional mortgage on a median-priced single family home. So it’s looking at a mortgage with a 20 percent down payment and a monthly payment below 25 percent of income at the currently effective rate on conventional mortgages…

The index has been dropping rapidly since peaking in January at 210.7. We’re now down to 157.8, according to the preliminary numbers released for July on Monday. Home prices have been rising and interest rates climbing, while wages haven’t kept up. That’s how we got to the lowest level of affordability seen since July of 2009.

According to the NAR, this shouldn’t be dire news. A score of 157.8 officially indicates that a household earning the median income has 57.8 percent more income than needed to get a mortgage on a median priced home.

A few interesting things to note here:

1. There is some debate about whether this index has predictive power. In other words, it isn’t necessarily easy to identify when there might be a housing bubble.

2. This adds more evidence that a housing recovery in the US is a long-term project. Housing prices may have risen so much by the mid-2000s that it will take years to sort it all out. A slow-growth economy doesn’t help.

3. Instapundit has a good take: “I WISH IT WOULD GET TO MY NEIGHBORHOOD.” While the idea of a bubble could be troubling, there are plenty of homeowners who would welcome some increased value for their home. Of course, that increased value might disappear again…