How far might rent drop in Manhattan and other cities and who will benefit?

As some people reconsider living in Manhattan and other cities with high housing costs amid COVID-19, how far might rents drop?

According to StreetEasy, the median rent has fallen below $3,000. That is the lowest price since 2011.

The third quarter of 2020 also marked the first time since 2010 that Manhattan, Brooklyn and Queens all recorded year-over-year rent declines.

StreetEasy says renters are no longer willing to pay the so-called “commute premium” of living in Manhattan, because so many people are working from home.

Any rent drop in Manhattan or in New York could provide opportunities for people who even just a short time ago had little chance to live there.

At the same time, dropping below $3,000 for the median suggests that rent is still pretty high. Who can take advantage of this drop? Those with resources to do so, not necessarily people who need affordable or cheap housing. Indeed, if these lower rents quickly induce a number of people to take advantage, then rents could stabilize and head back up.

Perhaps there is little that could actually move rents and housing prices in certain housing markets to a point where many more residents could take advantage. A pandemic is unlikely to lead to the production of more housing and struggles with employment, among other factors, will limit who would move to big cities with temporarily lower prices. At the same time, COVID-19 could help nudge conversations about housing in a productive direction.

New and existing home sales up but…

Recent data shows both increased new and existing home sales:

Sales of new homes in the US soared to their highest level since December 2006 in July as Americans took advantage of historically low interest rates.

Single-family home sales leaped 13.9% to a seasonally adjusted annual rate of 901,000 units, according to data released by the US Census Bureau on Tuesday. Median sales price gained 7.2% to $330,600 from the year-ago period…

The better-than-expected data follows a similarly positive report on existing home sales. Sales of previously owned homes spiked a record 24.7% to a seasonally adjusted rate of 5.86 million last month, according to a Friday release from the National Association of Realtors. Economists anticipated a 5.41 million rate.

Some of this is not a surprise given low interest rates. There is no mention here, but if it is true that significant numbers of city-dwellers are looking elsewhere, that could be driving demand.

At the same time, this is an odd time for increased housing sales. We are in the middle of a pandemic and the uncertainty and unemployment that has brought. Some indicators of the economy are okay but others are less positive.

With that, it is hard to know whether this is more of a blip or a long-term trend. Perhaps this is part of a rebound in homeownership or an odd confluence of factors in an unusual year.

And it would be helpful to have more data. The Census report suggests 61% of the private new homes sold in July 2020 were between $200k and $399k while 29% were over $400k. What kinds of homes are these and where exactly are they located (beyond regions, how about suburbs versus cities?)

Flipping houses stats – up then Great Recession then up then down again – and questions

How many houses have been flipped in the United States in the last fifteen years? Here are some of the stats:

person holding pencil

Photo by Skitterphoto on Pexels.com

In the first three months of 2020, 7.5% of homes sold in the United States were flipped, according to a June report from real estate research firm ATTOM Data Solutions. That’s the highest rate since 2006 and a jump from 6.3% at the end of 2019.

Home flipping rates had dropped drastically in 2007 and began to gradually recover in 2010. The number of flipped homes sold in a quarter peaked around 100,000 in 2005, and while it was on the rise in recent years, a decline began in the second quarter of 2019. In the first quarter of 2020, 53,705 single-family homes and condos were flipped, according to the report.

Profit margins have also dropped since 2019, hitting the lowest return-on-investment since 2011. After plummeting with the national economy between 2006 and 2008, profit margins on flipped homes grew at a steady rate until 2017. But since then, return-on-investment has been on a decline.

Still, it’s too soon to fully grasp how the coronavirus pandemic will impact the house flipping market through 2020 and beyond, ATTOM chief product officer Todd Teta said in a statement.

Flipping homes is by now a well-known process due to TV shows and personalities plus its spread throughout the United States. Yet, alongside other phenomena featured on HGTV and among certain groups (such as tiny houses), it can be hard to know how widespread a phenomena is.

Not surprisingly, these stats suggest flipping homes is connected to broader economic conditions: flipping increases when property values are high and repairs to a home can pay off in a sale. When times are tough and property values stagnate or even drop, there is less money to be made in flipping homes.

In the data above, it would be helpful to see how the national trends compare to patterns in particular places. Does flipping work in the hottest markets where prices are already high (limiting who can flip)? What about Rust Belt communities in good and bad times? Suburbs? Urban neighborhoods? I would guess there is a lot of variation across communities.

It is also worth considering what happens to the housing stock in places where flipping does or does not take place. If flipping happens, older housing stock gains new life. If it does not, do these homes simply keep sliding into disrepair?

Finally, this article starts with an example of a family involved in a flipping business but says very little about the role of small flipping businesses or more corporate operations. Even if flipping activity declines during tougher economic times, does it present opportunities for some to buy up properties to flip later? How do the profit margins differ across different kinds of flippers? Are smaller firms or family-owned flippers viewed more favorably by communities than corporate entities?

Recent market interest in large homes

With COVID-19, large homes have been moving on the real estate market:

purple flowers and white concrete building

Photo by Lina Kivaka on Pexels.com

Preferences vary by price range and region, but buyers in every market are eyeing extra space. “I would say [buyers are looking at] a 20% to 30% increase in size, whether in the number of bedrooms or square footage,” said Stephanie Anton, who was until recently the president Luxury Portfolio International. [She was interviewed for this story before she announced on June 23 she was leaving her post]. “It’s a jump-up a category or two across the board.”

Versions of this trend are playing out in markets all over the U.S., making it an opportune moment for sellers looking to unload extra acreage, and a time for interested buyers to move quickly…

Whatever the terminology, extra-large properties that might have languished on the market in recent years are seeing a sudden spike in interest, while owners who had previously considered downsizing are suddenly deciding to stay put…

Now that buyers are looking at the long haul of multiple generations working, studying, exercising, and living under one roof, demands for space have expanded accordingly.

On one hand, this is not surprising. This lines up with numerous other media reports that people are searching out suburban properties in which they can spread out inside and outside.

On the other hand, there are several interesting features of these patterns:

  1. The article notes that buyers of these large properties are not interested in McMansions or homes that might be considered McMansions. The negative nature of the term is clearly known. Yet, are these recently hot properties McMansions? I would guess at least a few might be. And once COVID-19 passes, will the appearance of these purchased properties become an issue?
  2. The multiple articles I have read on this trend provide few numbers. There is confirmation from local real estate experts in multiple markets but no hard numbers of how many people are purchasing large suburban houses. At the least, there are not a whole lot of people who can do this, particularly in more expensive markets. Moving from Manhattan to an outer suburb will get you a bigger property but not as much as moving out to a cheaper region.

Housing prices up during COVID-19

During COVID-19, few people are looking for homes – and even fewer are selling:

The median home price rose 8% year-over-year to $280,600 in March, according to the National Association of Realtors. While buyer demand has softened and sales fell 8.5% that month from the prior month, the supply of homes on the market is contracting even faster, recent preliminary data shows…

What’s more, many sellers have been reluctant to cut prices. Only about 4% of sellers cut their prices in the week ended April 25, down from 5.7% during the same week last year, according to Realtor.com. ( News Corp, parent of The Wall Street Journal, operates Realtor.com.)…

Total listings of homes for sale, meanwhile, have hit a five-year low, while the median listing price was up 1% from last year at $308,000, Redfin said.

The housing market has been undersupplied for years. During the pandemic it may get worse. There were 1.5 million units for sale at the end of March, NAR said, down 10.2% from a year earlier. Homeowners are waiting to list their houses, real-estate agents say, because they have decided not to move or they are worried about letting buyers into their homes during a pandemic.

It will be interesting to see how long this holds up given the rapid spike in unemployment. How many people will be in a position to buy or sell in the coming months? And how long will it take for housing markets to return back to pre-Covid levels of activity?

Beyond prices, which matter to many homeowners who want to do everything they can to keep property values going up, there are additional big issues at play. One is noted above: a lack of housing supply long-term, particularly in certain markets and in certain segments. Another is the possible effects on the mortgage industry. A third is what this does to the idea of housing when there have been two  major shocks to housing in the last fifteen years. A fourth is whether people decide they want to live in certain locations more because of health risks. Like other sectors of society, COVID-19 may expose or hasten problems with existing issues.

In other words, stay tuned.

Wealthier Americans looking for homes away from urban COVID-19 cases

With the spread of COVID-19 within major metropolitan areas, particularly New York City, some residents might be looking for new homes outside the big city:

At the same time, well-off suburbs in areas like Greenwich, Connecticut, and Westchester County in New York, which had been relatively sluggish in recent years, quietly recorded strong performances in the first quarter, with few signs of slowing down…

For prospective buyers reacting specifically to the threat of coronavirus in New York City, suburban infrastructure may also hold a stronger appeal than what’s available in a typical vacation town.

“The general consensus is once this is over, you’re going to see a big surge in sales,” Mr. Pruner said. “But a lot of the traditional vacation spots may not necessarily see that. One of the issues is that they don’t necessarily have good medical facilities—even if you own a big house there, they don’t have the hospital or the resources”to go with it.

Though tastes have been trending toward smaller homes in recent years, buyers coming off the experience of their home suddenly becoming their entire family’s office, gym, school and recreation area are unsurprisingly now coming to their searches with a heightened appreciation for space, a fact that could bode well for suburban markets.

A few thoughts in response:

  1. This likely applies to a small segment of the real estate market: people with the resources and jobs to move during the COVID-19 crisis. Plus, the analysis here seems mostly geared toward higher-end homes. Could be worth keeping an eye on for the near future: how many well-off Americans make real estate decisions within the next few months?
  2. Conventional wisdom suggests potential homebuyers care about high quality school districts (for their kids’ education and the effect on property values). How many buyers going forward will also consider medical facilities? And what is the correlation between high-performing suburban school districts and nearby high-quality medical facilities?
  3. Given the moves in vacation spots – like the Hamptons or in the state of Michigan – to try to limit travel to second homes, might there be any long-lasting consequences? The influx of vacationers can already cause tensions but they can also be a very important source of business and income.
  4. The flip side of this analysis is the development of urban residences that emphasize health in different ways. It is not about providing a gym or a pool (which are not helpful during social distancing guidelines); it is about having buildings and residences with lower likelihoods of contracting illnesses. Imagine all antimicrobial resistant surfaces, units on their own air systems, separate entrances and hallways that limit contact with others, particular cleaning protocols, and other possibilities.

Explaining a low housing supply

Relatively few homes are available for purchase in the United States:

Sales of existing homes rose a steeper-than-expected 3.5% in December compared with January, according to the National Association of Realtors.

Demand is surging because mortgage rates are about a full percentage point lower than they were a year ago, and the largest generation, millennials, are aging into their homebuying years.

That demand has pushed the supply of homes for sale down 8.5% annually to the lowest level since the Realtors began tracking inventory in 1982…

Sales of homes priced below $100,000 were down 7.7% annually in December, while every other price category saw increased sales. That is because there is so few for sale at the entry level. Investors have been very active in this category, turning these homes into lucrative rentals.

The article cites multiple factors at work: low mortgage rates, older millennials looking to purchase properties, and a decreased supply of cheaper homes (in part because of investors looking for rental properties).

I am curious about two things the article does not mention:

1. Who are all the actors involved in these trends? Mortgage rates are down – because federal interest rates are low? How are lenders reacting to this? Millennial homebuying might be up – what do the trends look like for other groups (particularly since homeownership is not necessarily high)? How are policymakers reacting to this shortage, particularly when affordable housing is a major concern in many markets?

2. This seems like an opportunity for builders and developers: the supply is low, people want homes. How are builders responding? According to the Census, new housing construction is trending up in the last few years:

NewResidentialConstructionDec19

These converging actions and trends bear watching in a country devoted, at least in ideology, to homeownership.

 

Trump administration pushes housing deregulation

A look at the Trump administration’s approach to homelessness includes this summary of how they view housing more broadly:

Housing deregulation is probably the core of the report outlined by the Council Advisors. That lines up with the Trump administration’s overall position on housing—from Carson’s enthusiasm for breaking up exclusionary zoning to the housing plan that the Domestic Policy Council is drafting. Trump signed an executive order establishing a White House Council on Eliminating Regulatory Barriers to Affordable Housing in June.

While making it easier to build housing could ease the affordability crisis, it may be hard to achieve those reforms, Hanratty says. Several of the Democratic Party primary candidates have outlined housing plans with various strategies to promote new construction, but all of them would require sweeping new legislation. And in practice, deregulation might not produce housing that is affordable to very low-income families or people with substance-abuse or mental-health afflictions without subsidies.

This is a common conservative argument to make these days: the housing market needs to be a more free one with less interference from local governments as well as the federal government. Attempts at more explicit intervention – such as in public housing – have not proved popular. If the law of supply and demand could simply take over, the market would provide housing options for all.

However, this may not work as intended. The suburbs, a space seen as desirable by many Americans was not the result of free markets but rather the result of all sorts of social and government interventions. Would Houston’s growth without zoning look attractive for communities around the country? Without any regulations, developers and builders may have little incentive to build cheaper housing and instead pursue units that provide more profit.

Finding some middle ground where specific and limited interventions actually lead to more affordable housing will prove difficult. Without some negative consequences for communities and housing market actors who do not participate in providing cheaper housing, what can be done?

Rebuilding beachfront McMansions

A journalist argues the construction and reconstruction of large homes near Atlantic beaches is a losing proposition in the long run:

Through federally funded flood insurance, huge appropriations for beach nourishment projects, and generous, well-intended relief aid, government policy allows developers and wealthy investors to build huge houses and hotels on beachfronts and low-lying barrier islands at high risk from coastal flooding as well as hurricanes. Uncle Sam’s generosity makes it all possible…

Writing just as the extensive damage from Hurricane Florence became apparent, Gaul covers the waterfront, so to speak — from Hurricane Katrina to South Florida, to the halls of Congress. In North Carolina, he stops Down East in Columbia, Creswell and other towns of North Carolina’s “Inner Banks,” where rising water levels and flooding are washing away entire communities…

According to Gaul, things began to tip in the 1980s, when multistory “McMansions” began to supplant the simple Cape Cods. (A similar trend has transpired on the north end of our state’s Outer Banks). Disasters such as the Ash Wednesday flood of 1962 did little to discourage development. On the contrary, real estate dealers saw storms as “clearing the market,” blowing down older, ramshackle structures and making way for the new, bigger units that buyers seemed to want.

Real estate prices went up, and increasingly retirees and residents with modest incomes were squeezed out. But there were always more customers in line for resort property.

I wonder if the primary objection is that big homes are being built and someone is profiting from the government money or should there be no homes on these properties? If the goal is to protect the beach and taxpayer dollars, less development in these areas is better. If the problem is profiting with the government’s money, there could be restrictions on the size of the new home or how the money is used.

It would be an interesting thought experiment to consider what this would look like without any government intervention. The argument here is that the government’s funding for rebuilding simply encourages the cycle of building larger and larger homes. If there were no regulations, what would the market bear? Or, as the author seems to suggest, would different regulations be better for the long-term fate of the beach and tese communities?

Manufactured housing to be more popular with fancier features?

Those seeking cheaper housing options may like both the price of manufactured housing and the features they can purchase:

The hope is that more Americans will see the factory units not only as a more-affordable alternative to a traditional single-family house, but also an appealing one, without the old trailer-park stigma. It helps that they’ve been getting fancier.

Scott Richards, a salesman for Rona Homes in Pataskala, Ohio, said that when shoppers come to his lot, he can dazzle them with customization options like hickory cabinets, rainforest showers and built-in entertainment systems coupled with electric fireplaces.

“We’ve got linoleum floors that look just like hardwood floors,” said Richards, who got back into selling factory-made houses after leaving the industry in 2012. “You don’t think about solid granite being in a manufactured home, but we have that as well.”…

The company sells what most people probably picture when they think of manufactured homes — single- and double-wide houses wholly built on a chassis in a factory — as well as modular homes, which are factory-built in sections that are assembled on a lot. While a single- or double-wide is often much cheaper than a modular home, both offer cost advantages that come with putting construction on an assembly line.

The article goes on to talk about some regulations involving the federal government and lenders that could be altered to make manufactured housing more available to house buyers. Theoretically, these changes could open the floodgates to cheaper housing for many.

Yet, I would suggest there is then another hurdle to overcome that might prove even more difficult. This housing may be cheaper than other options and it could even be attractive inside and out. This does not mean that it will be easily accepted by numerous communities, particularly those with higher qualities of life. In many of those places, manufactured housing implies all sorts of things that those communities work hard to keep out through formal and informal means. It will take time to reverse the common image of such housing.

The same issue faces tiny houses. Even if they look nice and are attractive inside, they are not easily accepted in places with more expensive single-family homes. Tiny houses are affordable – though significantly smaller than the manufactured housing options discussed in this article – but not necessarily that popular, either to consumers or neighbors.