Tag Archives: housing market

Miami’s luxury housing market fueled by ill-gotten gains

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The latest big Wikileaks event shows what has been fueling Miami’s luxury housing boom:

Mossack Fonseca’s leaked records offer a glimpse into the tightly guarded world of high-end South Florida real estate and the global economic forces reshaping Miami’s skyline.

And MF’s activities bolster an argument analysts and law-enforcement officials have long made: Money from people linked to wrongdoing abroad is helping to power the gleaming condo towers rising on South Florida’s waterfront and pushing home prices far beyond what most locals can afford…

A Miami Herald analysis of the never-before-seen records found 19 foreign nationals creating offshore companies and buying Miami real estate. Of them, eight have been linked to bribery, corruption, embezzlement, tax evasion or other misdeeds in their home countries.

That’s a drop in the ocean of Miami’s luxury market. But Mossack Fonseca is one of many firms that set up offshore companies. And experts say a lack of controls on cash real-estate deals has made Miami a magnet for questionable currency.

Later in the article, one analyst suggests no one really wants to know this information as luxury housing is a big deal. Who benefits? City leaders who get to trumpet the new growth. Local construction firms, people in real estate, and the finance industry who are involved with the new units. Municipalities like the new tax dollars. Possibly, nearby business owners who could see an uptick in activity with more people nearby who have money to burn. And the whole region benefits from the status of some of the world’s wealthiest people plus an attractive (and expensive) housing market.

If this is happening in Miami, it is also likely affecting other important cities. Take New York: as the leading global city, wouldn’t people who have ill-gotten gains want to be there? Or, how about other leading cities in different regions like London, Hong Kong, and Tokyo?

 

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?

What politician would kill the 30-year fixed-rate mortgage?

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The second to last chapter of Shaky Ground: The Strange Saga of the U.S. Mortgage Giants includes this summary of the American housing industry:

But there is widespread agreement among policy makers on at least this element of investors’ argument, which is that you cannot keep a cheap, long-term, fixed-rate mortgage available to the wide swath of Americans through big economic ups and downs without some sort of government backstop. There is a reason no other country has such a product. For all the supposed ideological purity in today’s Washington, no politician wants to be responsible for the loss of something Americans have come to see as a right. Indeed, despite Alan Greenspan’s admonition years ago that many Americans would do better with adjustable-rate mortgages, in November 2014 a stunning 87 percent of Americans who took out a mortgage to buy a house chose a 30-year fixed-rate mortgage, according to data from the Urban Institute.

As the rest of the book argues, the 30-year fixed-rate mortgage today the result of particular arrangements involving Fannie Mae and Freddie Mac. Americans after World War II may have thought they were after owning a single-family home but less attention was paid to what was undergirding all of this: a particular financial instrument – the 30-year fixed-rate mortgage – that made some people a lot of money and helped dictate other areas of policy and social life.

Why are Chicago families fleeing for cheaper homes in the suburbs?

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The Chicago Tribune leads with the story of a Chicago family who left the city for a townhouse in River Forest:

Megan Keskitalo and her husband, Glenn Eckstein, were enthusiastic city dwellers until the suburbs began calling. First it was Chicago’s crime, then it was worry about school districts, and in the end, it was money that pushed them past the city’s edge.

After a long search, the parents of two young daughters packed up their $1,300-a-month three-bedroom Lincoln Square apartment and in September paid $286,000 for a three-bedroom town house in River Forest.

“We were looking (in the city), but we couldn’t find anything in our price range, which was under $350,000,” Keskitalo said.

But, just how many Chicago families are doing this? The story sticks to general trends without any numbers:

They aren’t the only ones. While experts say Chicago’s housing market is sizzling — home sales were up about 8.1 percent in Chicago through November of this year, says the Illinois Association of Realtors — not everyone can afford to buy in the city. That’s because home prices are up too…

It’s not unusual for millennials and Generation Xers with children to flee to what real estate experts call “surbans” — walkable, amenity-rich suburbs — once they get married, have kids and are looking for less party and more quiet.

The implication of this article is that families like this are being priced out of Chicago: they might stay if they could find housing in their price range in attractive neighborhoods. Yet, there is a lot more going on here:

  1. The article also says real estate prices are on the rise in Chicago. This is generally seen as a good thing – unless it pushes desirable people, like young white families (or recent college graduates or older long-time city residents) out.
  2. There are real issues of affordable housing in Chicago and the whole region. However, there is often disagreement about who such housing should serve. Should it help keep wealthier residents in a community or serve those with much lower levels of income? Chicago is building plenty of high-end condos but there is not much action on the lower end of the market with affordable units in decent neighborhoods.
  3. This family had particular conditions for where they were willing to live: less crime, good schools, cheaper housing. Overall, they wanted a particular quality of life. They could have found cheaper housing in Chicago but without being willing to compromise on these particular issues, they left for the suburbs.
  4. How much of this is tied to the ongoing process of white flight? This family left a trendy Chicago neighborhood for an established wealthy and white suburb: River Forest is roughly 85% white and the median household income is over $113,000. Again, they could have found cheaper housing in the city (#3 above) if they were willing to live in more places that might not have been as white.

Shadowy McMansion owners

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A letter to the editor in the New York Times suggests McMansions owned by shell companies are a big problem:

Your article on shell companies and real estate highlights a phenomenon not unique to ultra-wealthy areas of Los Angeles. Real estate purchases using the cover of limited liability companies are a significant issue in the San Gabriel Valley in eastern Los Angeles County, where McMansions owned by L.L.C.s sit empty as middle-class home buyers are priced out, unable to compete against those flush with foreign money from unknown and undisclosed sources.

New York, San Francisco, London and Vancouver are also experiencing this influx. In the United States, real estate brokers and agents are not required to comply with customer due diligence and know your customer mandates that banks and many non-bank institutions must follow.

This kind of argument makes McMansions seem even worse then they are typically depicted: they are owned by shadowy wealthy people who don’t care about the normal resident who just needs somewhere to live. The problem with this letter is that it doesn’t provide good data on how many homes actually fall into this category. Wealthy, culturally significant cities like the ones listed above – LA, NYC, San Francisco, London, Vancouver – do attract foreign investors (particularly Chinese investors recently in Vancouver and the LA area) but major cities tend to like this: it keeps new capital flowing into local coffers and it fuels the high-end construction industry (see Miami or London or New York).

In contrast, it is pretty clear that most major American cities don’t really want to talk about affordable housing and/or aren’t willing to do much about it. Affordable housing is needed in many major cities, particularly those along the coasts. Part of the reason McMansions exist in the first place is that Americans were willing to move further out from the city to buy a bigger house (and this has to with state policies and residential preferences to avoid urban life and non-whites). The resources that it takes to construct McMansions in the suburbs could be harnessed to build smaller urban units or at least denser suburban units (see these recent ideas to use the materials from McMansions or to subdivide McMansions into multiple units) but few governments want to mess with the single-family home market and few builders or developers want to limit their profits.

Baby Boomers contributing to slow real estate market

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Experts suggest the inaction of Baby Boomers is adding to a slow real estate market:

Boomers are part of a “clogging up [of] the whole chain of home sales,” Sean Becketti, chief economist of giant mortgage investor Freddie Mac, told me last week.

“They appear to be staying in the family home longer than previous generations,” Becketti wrote in a new outlook report, “and the imbalance between housing demand and supply continues to boost prices.”

Of course, boomers’ behavior has had outsize effects on the national economy for decades. In real estate, their footprint is enormous. Becketti cites the Federal Reserve’s most recent Survey of Consumer Finances, which estimated in 2013 that households led by people age 55 and older controlled two-thirds of all home equity. One federal estimate puts the aggregate value of their houses at close to $8 trillion.

In past generations, once the kids moved out, empty nesters began to downsize, either purchasing smaller houses or renting apartments. Boomers don’t seem to be in a rush to do either.

While bigger and more expensive housing is moving more quickly, it is at the lower end of the market – smaller and cheaper homes – that needs help. Where are the starter homes for younger adults? It could be a combination of developers focusing on homes with higher profit margins, millennials waiting longer to purchase homes, and older residents staying put longer. This not only affects different age groups; it also has an overall impact on the supply of affordable housing for anyone which is lacking in many major metropolitan regions.

So what kind of incentives would convince Baby Boomers to move?

Declining American homeownership illustrated in Las Vegas

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That city that may have been the exemplar of the early 2000s housing boom may now provide good evidence of a shift from owning to renting in the United States:

The shift to rental in single-family homes is visible on streets like Recktenwall. Between 2005 and 2009, about 80% of such houses in greater Las Vegas were owner-occupied; by 2013, that had dropped to 71%, a 12,000-unit shift…

But the homeownership decline is not entirely tragic. For the footloose, the empty-nested, the risk-averse and assorted others (contract workers, military servicemembers) renting makes sense…

The housing crash’s ground zero was Las Vegas. People who thought you couldn’t lose money on a house lost everything. At one point, an astonishing three quarters of Las Vegas mortgage holders owed more on their homes than they were worth, a percentage that still hovers around 25%.

That’s one of many factors suppressing home sales. Another is the fact that millions of houses have been flipped to rentals by investors who snapped them up at rock-bottom prices years ago.

This long article that covers presidential support of homeownership in recent decades to the perks of some newer apartment complexes presents an interesting conundrum: Americans – including young adults – tend to say that they would prefer or aspire to own a home but for a variety of reasons – from bad credit to tight credit in the mortgage industry to uncertain jobs to college loans to better perks in rental complexes to more options like single family homes available for rent – see renting as desirable at the moment. Some of this might only be determined over time; will the housing market conditions continue to push people toward renting? And, if this happens, does the aspirations of owning a home also slowly decline?

What would be helpful to see with this article that uses Las Vegas: where has the population increased or declined in the metropolitan region over the last ten years or so? While the single-family home market was hit hard, does that mean the suburbs lost people and residents moved closer to the region’s center?

Buying some of the oldest homes on the Chicago area market

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It is rare to find real estate listings for Chicago area homes built in the 1840s:

A couple of weeks ago, a really lovely historic home on a large lot in Lincoln Square listed. The house not only pre-dates the Great Chicago Fire, but it turns out that the house may actually be one of the oldest in Chicago. According to Crain’s, the original tax records show that a house on the property was built in 1849. It’s not exactly certain if the same house that hit the market two weeks ago is the same house, but either way, the home that does stand today was completed in the 1850s at the latest. However, out in the suburbs, there is one house that is also 166 years old and also on the market. The house at 2330 Coach Road in Long Grove, IL is one of the oldest houses in the Chicagoland area that is on the market. It’s also available to rent as well — for $2,200 per month. While its exterior certainly looks to be of very old construction, the interior has been completely renovated over the decades. While it may be common to find mid-19th century homes in cities on the East Coast, these houses in the Chicago area are about as old as they get out here.

This is about as old as it gets in the Chicago market. The northern parts of Illinois were not really settled until the 1830s. Illinois was declared a state in 1818 but a majority of the population lived in the central and southern parts as new residents came from the east via routes like the Ohio River. It wasn’t until the United States government got involved in planning and eventually constructing a canal in the northeastern part of the state to connect the Chicago River to the Des Plaines River (making a path from the Great Lakes to the Mississippi River) that settlers started arriving in larger numbers. Of course, once people started coming, things started changing: the Illinois & Michigan Canal opened in 1848, the first railroad in and out of Chicago opened in 1848, and Chicago started growing quickly (growing over 500% from 1840 to 1850, 274% from 1850 to 1860, and 167% from 1860 to 1870).

Renting or buying housing difficult for young adults

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The housing market is such that either renting or buying a housing unit is difficult for those under 35:

If you’re an American man or woman under the age of 35, there’s a historically large chance that you’re living with your parents. And if not, you’re very likely to be renting, and paying too much for the privilege. Only 34.8 percent of young adult households actually own their home, the smallest fraction since at least 1994, and among those who are forking over cash to a landlord, nearly half are considered “rent burdened”—meaning housing eats up around a third or more of their income.

And what about those who’d at least like to buy? Well, there’s a pretty good probability they’re getting boxed out of the market. On top of the challenges posed by tough post-crash mortgage standards, Bloomberg reports Thursday that prices for typical starter homes have been on a tear due to a lack of supply, and are now actually above their past bubbly heights.

As others have pointed out, high housing costs for those trying to start their adult lives or in their careers can have some large consequences. How to pay off college debt? How to easily move to the next new job opportunity? How to build wealth? How to start family life? This has been a problem for a few years now and doesn’t look like it will get much better soon.

“Landlords have the advantage”

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A new report based on feedback from 500 property managers sums up the rental market:

Vacancy rates are at a low not seen in the last 20 years. According to the U.S. Census, national vacancy rates in the second quarter of 2015 were 6.8 percent for rental housing, down nearly a full percentage point (from 7.5 percent) from the same time in 2014. The last time vacancy rates dipped below 6.8 percent was the fourth quarter of 1985 (6.7 percent)…

As the rental market continues to become more saturated, property managers are having to do even less in order to fill apartment openings. In 2015, 55 percent of property managers said that they are less likely to offer concessions in order to fill vacancies than they have been in years past. In fact, 64 percent reported that they are not doing anything different from one year ago, in order to fill vacancies…

88 percent of property managers raised their rent in the last 12 months, which is likely to continue 68 percent of property managers predict that rental rates will continue to rise in the next year by an average of 8 percent, which is a two percent increase over the estimated 6 percent rent hike predicted by property managers back in 2014…

Millennials face limited job prospects, lower incomes and high student loan debts, making it harder to buy and easier to rent. 45 percent of property managers have noticed an increase in the number of millennials renters. (Maybe some were living at home, and have moved out into the rental market).

Renters are staying in their apartments longer. According to property managers, 34 percent found that renters are holding on tight to their apartments and renewing their leases (up from 29 percent in 2014), rather than moving somewhere new.

This fits with other evidence showing a expensive and tight rental market. So when are communities – from big cities that have tended to emphasize luxury units (like Chicago, New York, and Miami) to suburbs that have tended to approve nicer single-family units to protect property values and keep certain people out – going to have more reasonably priced rental units?