Sales of luxury homes continue to slump

Several new reports suggest the luxury housing market is not doing so well:

Sales in the Hamptons, Aspen and Los Angeles fell by double-digit percentages in the fourth quarter, as the supply of unsold homes grew and prices came under pressure, according to market reports Douglas Elliman and Miller Samuel Real Estate Appraisers & Consultants.

Separate research from Redfin found that luxury properties nationwide under-performed the broader housing market for the eighth consecutive quarter. The supply of homes priced at $1 million or more rose 1 percent in the fourth quarter, while the number of $5 million-plus homes was up 15 percent.

The article starts with the suggestion that the election limited sales. But, that doesn’t do much to explain the issues over eight quarters. Perhaps there is a bit of a luxury home bubble? I mean, how many multi-million dollar properties can be bought and sold? I also feel like I have seen numerous news stories in recent years about the latest home that is breaking the record for asking price. But, such homes are only within reach of the wealthiest people.

It would be interesting to hear what experts think this slump means. Builders shifting away from super expensive homes to cheaper homes? The wealthy looking to invest in other kinds of real estate? Any problems with vacant properties in these communities?

Trying to predict the 2017 housing market

This summary of predictions for housing in 2017 includes 17 different estimates from various groups. Here is the one I’m most interested in:

Most observers expect home sales and prices to moderate in the coming year. They say suburbs will make a comeback while the days of low mortgage rates are over.

Suburbs will make a comeback you say? Perhaps there will indeed a Donald Trump effect for suburbs. Here is one more specific suggestion that might contribute to this:

The percentage of people who drive to work will rise for the first time in a decade as homeowners move farther into the suburbs seeking affordable housing.

Cheaper gas probably doesn’t hurt either.

Looking through these 17 predictions, few explicitly apply to suburbs. Most are about two things: millennials (with some help from baby boomers) are driving the housing market and there will be a slow rise in housing values.

One bonus summary statement:

One prediction you can always count on: No matter what’s happening with the economy, NAR is always going to say it’s a great time to buy. Its fourth quarter Housing Opportunities and Market Experience survey found that 70 percent of people say now is a good time to buy a home. NAR also predicts the rate on a 30-year fixed mortgage will rise to 4.6 percent by the end of 2017.

Perhaps there is one prediction missing: will the homeownership rate rise after dropping in previous quarters?

And who is going to check to see if these predictions for 2017 were successful?

Investing in foreclosed homes goes public

Here is a new business model: buy a lot of foreclosed homes after a housing bubble bursts, plan to rent out many of the properties, and watch the money flow in.

Though Blackstone is unlikely to sell much or even any of its stake in an IPO, the stock market debut will test investors’ interest in the idea that the rental-home business can be institutionalized as apartments, shopping centers and office towers were before.

Blackstone and others investors believed that the housing collapse presented a rare opportunity to acquire homes for less than it cost to build them. Millions of foreclosures created a market large enough to justify investing in large systems to manage and maintain sprawling portfolios of rental homes…

To generate the revenue growth that shareholders will demand, they must pace rent hikes to avoid spooking tenants into becoming home buyers themselves. And now that foreclosure rates have returned to normal levels and prices have rebounded, they could find it difficult to add new houses at attractive prices.

They also must convince investors that huge home-rental companies are viable long-term businesses, not just massive portfolios of properties that need to be sold off.

I imagine there will be some particular parties (not just investors) interested in how this works out:

  1. Nearby residents. What happens if this leads to significantly more renters of homes in certain places? Americans tend to view renters more negatively than homeowners – though this might change in the future if the country shifts to fewer homeowners. How well will Blackstone do with having quality renters and following up with issues?
  2. Communities. Having renters is probably preferable to having vacant homes. But, they might have similar concerns as nearby residents as well as other interests in how Blackstone uses the properties.
  3. Advocates for affordable housing. There was some concern a few years ago that having large firms like this purchase cheap homes could limit lower priced housing. The lower end of the housing market could use more stock but investors may need to pursue higher rents in order to generate profits.
  4. Renters and homebuyers. What kind of rents will Blackstone charge? Will they eventually sell these properties and at what price? What kind of landlords will they be.

Additionally, I wonder what would happen if this does not prove to be a viable business plan. Are there others who would be interested in purchasing these properties? What if foreclosure proceedings begin with an institutional investor?

Prediction that the 2017 housing market in the Chicago region will be country’s worst

Realtor.com just released a prediction that the Chicago housing market will not do very well next year compared to the country’s other largest markets:

Both prices and sales will increase, but at a stunted rate compared with other areas, according to a forecast by Realtor.com, a website for the National Association of Realtors. The prices of homes throughout the Chicago metropolitan area are expected to climb just 1.95 percent, and sales of new and existing homes are expected to increase 2.27 percent…

Chicago’s problem is a combination of slow growth in both population and jobs, said Jonathan Smoke, an economist at Realtor.com. The area’s population is expected to increase only 1 percent next year.

Given the size of Chicago, the city should be among the nation’s top three markets for job creation, Smoke said. Instead, Chicago is ranked eighth, with job growth much stronger in areas such as Dallas and Phoenix…

Nationally, Chicago has been among the slowest areas to recover from the housing market crash. According to the S&P CoreLogic Case-Shiller Index released this week, Chicago’s home prices on average remain about 20 percent below July 2007 levels. Meanwhile, the average price for the largest 20 metropolitan areas is now above pre-crash levels.

Not good news for a region that is still the third largest in the country but suffers from a number of problems: its central city is losing residents, the state government is a mess with no long-term budget deals in sight, it doesn’t seem to have enough innovative companies or industries, and there are negative perceptions about violence. Add a slow housing recovery and both the people living there as well as those who might consider moving there may not see much to celebrate.

Actually, this is an interesting question to consider: what positives would Chicago region residents note compared to other regions? What would attract those who have the ability to choose where they want to live? Chicago may be an important global city but it doesn’t want to slowly slip into being a center solely for the Midwest.

One important trait of the Chicago region isn’t going away anytime soon: even in the world of the Internet and jet travel, it has a prime location in the middle of the United States and is a key piece of many transportation and freight networks.

What exactly does “Death Knell Tolling for McMansions” mean?

Numerous outlets are sounding a similar theme: Death Knell Tolling for McMansions. Most of this seems to be based on one recent study that said the cost premium McMansions used to command has declined. Does this mean McMansions are in decline? Not necessarily. There are many ways this could turn out including:

  1. McMansions are still built and bought and sold. Even if they don’t command as much money as before, they still might be profitable.
  2. Over the coming years, fewer McMansions are built and the ones that are constructed are primarily in thriving communities (lots of money as well as population growth).
  3. Regardless of whether #1 or #2 happen, there are plenty of existing McMansions. They could go (1) like many other older American homes – altered, remodeled, passed from groups to groups; or (2) they are so undesirable or shoddy that they are replaced by other housing options. The second option is hard to imagine; plenty of postwar houses are still in existence and it would be costly to destroy a lot of housing units.

Even if fewer McMansions are constructed in the future, they aren’t simply going away. Some McMansions will be around for 50+ years.

2016 State of Housing report: not so good

The State of the Nation’s Housing 2016 was released last week and there are a number of unfortunate historic points highlighted in the executive summary:

But at 1.1. million units, new home construction was still running near historic lows last year. A key factor holding back housing starts is the sustained falloff in household growth…

The US homeownership rate has tumbled to its lowest level in nearly a half-century. The decade-long declines are especially large among the age groups in the prime first-time homebuying years…

Just as exits from homeownership have been high, transitions to owning have been low. Tight mortgage credit is one explanation…And given that the homeownership rate tends to move in tandem with incomes, the 18 percent drop in real incomes among 25-34 year olds and the 9 percent decline among 35-44 year olds between 2000 and 2014 no doubt played a part as well…

On the renter side, the number of cost-burdened households rose by 3.6 million from 2008 to 2014, to 21.3 million. Even more troubling, the number with severe burdens (paying more than 50 percent of income for housing) jumped by 2.1 million to a record 11.4 million…While nearly universal among lowest-income households, cost burdens are rapidly spreading among moderate-income households as well, especially in higher cost coastal markets.

The conclusion suggests stability – homeownership should stabilize with increased household formation – as the effects of the housing bubble continue to fade. However, the glory years of housing seem to be far off as housing costs plague many Americans and the housing industry concentrates on higher end units.

As the economic crisis slowly fades into history, the question remains: is American housing transformed for decades (lower rates of homeownership, more high-cost renting, fewer housing starts)?

Homes over 4,000 sq feet see sales increase

The hottest part of the 2015 housing market may have just been large homes:

Homes 4,000 square feet or larger saw a sharp jump in sales last year, rising 30 percent from a year earlier, according to data from the U.S. Census Bureau. Meanwhile, sales of homes of fewer than 1,800 square feet barely budged from their year-earlier figures.

That’s shifting the new home market in favor of bigger, more expensive homes, catering to the tastes of Americans with higher incomes. The median size of new single-families homes reached almost 2,500 square feet last year, an all-time record, Census found. Much of that growth is coming from sales of ultra-big homes, the type of showpiece properties that sell for well above the median sale price of $232,500 for existing U.S. homes.

See the full 2015 Census housing report (764 pages!) here.

Three quick concerns with the CBS story on this data:

  1. Large houses are not necessarily McMansions. Here, the term is used as shorthand for a large house but the term typically implies garish architecture, mass produced, and in a suburban setting.
  2. Although the story may be correct that “ultra-big homes” are driving these numbers, the Census categories top out at 4,000 or more square feet. This story doesn’t offer data about extra-large homes – it just cites the average price of Toll Brothers homes.
  3. The first line of the story is this: “If there’s a sweet spot in the real estate market, it may be catering to the desires of the 1 percent.” Again, the “1 percent” is probably shorthand for wealthier Americans but you don’t have to reach those levels of wealth to buy a home of 4,000 squar efeet.

Do these three points invalidate the headline: “McMansion redux: Big homes are back”? Perhaps they are evidence of reporting that could be more exact. The story does hint at the growing size of new homes – which is a trend several years in the making:see previous posts here from March 2015 and here from November 2013 as well as this CBS August 2015 headline “McMansions are back – and they’re bigger than ever.