Tag Archives: housing market

Developers give reasons why they won’t construct starter homes

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Here are some of the reasons given by developers regarding their lack of interest in starter homes:

The market for new “starter homes” is drying up, mostly on the supply side. As credit markets recover, there are more and more people who could be buying their first homes … if only builders could build them. But for a host of reasons, they can’t:

  • Materials costs have risen.
  • They lost a lot of their labor force during the economic downturn.
  • Communities entitled large lots during the boom, and now they won’t zone them for smaller parcels.
  • Cash-strapped local governments have raised permitting and other fees.
  • Building codes and other requirements make it harder to build cheap.

This makes it extremely difficult to build a house for less than $200,000 in many places, which is a hefty multiple of local median incomes.

Three quick responses:

1. I know this doesn’t get much discussion in many industries but when they say it is difficult to build for less than $200k, what exactly does this mean? A home at that price won’t meet their profit goals? What kinds of profits do developers and builders make at the lower end of the housing market as opposed to the higher end? Builders can’t make any money off new started homes or they can’t make enough money for them to see it as worth their time?

2. As noted, communities have some influence on this process. How many are really willing to zone for starter homes and/or have different guidelines for starter homes?

3. Isn’t this an opportunity to construct homes more efficiently? It sounds like there is some turmoil in costs – material, more uncertain labor, higher fees and requirements – but this is where the housing industry could find some new solutions.

“New McMansions and Disappearing Jobs: A Tale of Two Rural Americas”

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Here is a brief summary of two trends in rural America: growing exurbs (which can include McMansions) yet a decline in jobs.

On the positive side of rural, Teresa Wiltz writes for Stateline, the very useful news and analysis source of the Pew Charitable Trusts, that “new census data show that for the first time since 2010, the outermost suburban counties are growing faster than urban counties and close-in suburbs.” The demographic change that Wiltz describes is the increase of 146,000 in new exurban residents attributable to domestic migration. The “vibe” of these exurbs, she writes, “is decidedly rural Americana.”

Why are the exurbs growing? Wiltz cites multiple potential reasons for this turnaround, including people moving to the exurbs for jobs (she cites Joel Kotkin, the well-known author, who believes that suburbanization is the likely route to growth around the world, to point out that “the vast majority of jobs aren’t in the cities”) and for “bigger and more affordable homes in a more wide-open space.”…

Some of the exurban growth might be attributable to the economic revival, but Bill Bishop reports in the Daily Yonder that, based on Bureau of Labor Statistics data, job growth in rural America stopped pretty abruptly in 2014. Between January 2014 and January 2015, rural counties lost 331,000 jobs while metropolitan counties gained 3.1 million jobs. Job losses almost always correlate with workforce and population losses; the rural workforce dropped 557,000 during 2014, which almost assuredly means that rural counties lost population as well.

It may be that these contrasting stories describe an in-migration by people who can choose to live wherever they want and an outmigration of people who have to go where there are jobs. Those in-migrants pose tough challenges for rural areas. Wiltz, for example, mentions in her piece seeing McMansions, farmhouses, mobile homes, and designer outlet stores together in the exurban area 40 miles north of Atlanta. That kind of mix of land uses can constitute a planner’s nightmare and a challenging issue for citizens groups trying to determine how residential development and open space and farmland preservation should be balanced.

There are a few confounding issues at play here:

1. This article mixes the ideas of exurbs and rural areas. The exurbs are between suburbs and the rural areas but what exactly does this mean? It is hard to know. Is 40 miles from Atlanta the suburbs or a rural area or exurbs? Exurbs often means the suburban fringe.

2. Having a rural “vibe” is also a vague idea. I assume this means big lots and smaller communities. But, a good number of Americans say they would prefer to live in “small towns” and these exurban areas may offer just that.

3. If the last paragraph is correct, the people building and/or buying McMansions in the exurbs are the same people driving the higher ends of the housing market in suburbs and cities. As the bottom end of the housing market continues to struggle, those with money can afford to move further out from the city and into big homes.

Trends in the slowly improving housing market in the Chicago suburbs

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The Daily Herald reports on the slow growth in real estate transactions and construction in the Chicago suburbs:

Sales of existing homes were on the upswing in February, climbing 1.2 percent from January and 4.7 percent from a year ago, according to the National Association of Realtors.

The tactics of builders and developers have changed:

The result is that buyers are seeing new houses of smaller square footage loaded with amenities such as wood floors, high-end appliances, specialty cabinets, spa-quality bathrooms, upscale windows and trims, and the latest wireless communication and entertainment technology.

Two groups of buyers are driving this trend: older millennials tired of paying rising rents and ready to raise a family, and baby boomers at or near retirement and looking to downsize…

Like other developers, Pulte is focusing on building in closer-in suburbs rather than massive subdivisions on the fringes…

Toll Brothers also has a limit on how far out it will develop, said Keith Anderson, Midwest group president.

“Elgin is as far as we will go. We’d rather pay more for the land and build closer,” Anderson said.

Or, put differently, there are not enough buyers and sellers putting pressure on builders and developers to construct homes further in the hinterlands in the Chicago region. In contrast, those buying homes have different expectations as well as the means to purchase more in-fill properties. This provides more evidence – from the higher economic end of suburban homeowners – that the bifurcated housing market continues.

Financial problems at the FHA: homeownership for many vs. the private sector

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The Federal Housing Administration may be helping the lower ends of the housing market but it is also running into some financial difficulties:

The House Financial Services Committee heard testimony from Housing and Urban Development Secretary Julian Castro on Feb. 11 and the Housing and Insurance Subcommittee heard from several witnesses on Feb. 26…

Historically, the FHA has controlled about 10 to 20 percent of the mortgage market. But after Congress increased the size of mortgages the agency could insure from $360,000 to $625,000, the FHA controlled about 60 percent of the low down-payment mortgage market from 2008 to 2010. That means the income eligible for FHA mortgage insurance went from the national average of about $64,000 to $110,000. Put another way, more than twice as many people can get FHA insurance than they could before the limit was raised.

At the same time that eligibility has exploded, FHA has faced serious solvency problems, culminating in a $1.7 billion bailout from the U.S. Treasury at the end of 2013. The Congressional Budget Office estimated that FHA insurance cost taxpayers $15 billion from 2009 to 2012. Nonetheless, the agency’s website falsely claims it “is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing.”

Even with all of the taxpayer money that has been thrown at the agency, the FHA is seriously undercapitalized. The law says FHA needs to keep 2 percent cash on hand, which would be about $18 to $20 billion, but as of the beginning of 2015, it had only less than half of 1 percent, or $4.7 billion.

This piece was written by an activist against government waste yet it highlights the contrast of priorities: homeownership for many versus letting the market sort this out. Americans, including politicians and presidents, have pushed homeownership for decades. We assume this is a positive outcome as people will take better care of their property if they own as well as enjoy the status and privacy of their own home. Yet, if homeownership were entirely left to the private sector, the lower end of the housing market may not do very well. Even with the efforts of the FHA in recent years, we can see some of this in action: luxury building is booming in places like New York and Miami as cheaper and smaller homes don’t generate as much profit. In the recent past, the private sector resorted to tricks to help lower-income borrowers but we saw how those subprime loans worked out for everyone.

In other words, if Americans want homeownership as a social good available to many, it still needs to be worked out how this can be done effectively.

The declining “McMansion to Multi-Millionaire ratio”

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One analysis looks at the popularity of McMansions (amidst articles claiming they have returned) via a ratio of McMansions to multi-millionaires in the United States:

We can get a good contemporaneous gauge of the popularity of McMansions by dividing the number of new 4,000 plus square foot homes sold by the number of households with a net worth of $5 million or more: call it the McMansion/Multi-Millionaire ratio. (There’s no universally accepted definition of McMansion, but since the Census Bureau reports the number of newly completed single-family homes of 4,000 square feet or larger, most researchers take this as a proxy for these over-sized homes.)

The McMansion to Multi-Millionaire ratio started at about 12.5 in 2001 (the oldest year in the current Census home size series)—meaning that the market built 12 new 4,000 square foot-plus homes for every 1,000 households with a net worth of $5 million or more. The ratio fluctuated over the following few years, and was at 12.0 in 2006—the height of the housing bubble. The ratio declined sharply thereafter as housing and financial markets crashed.

McMansiontoMultiMillionaireRatioEven though the number of high-net-worth households has been increasing briskly in recent years (it’s now at a new high), the rebound in McMansions has been tepid (still down 59 percent from the peak, as noted earlier). The result is that the McMansion/Multi-Millionaire ratio is still at 4.5–very near its lowest point. Relative to the number of high-net-worth households, we’re building only about a third as many McMansions as we did 5 or 10 years ago. These data suggest that even among the top one or two percent, there’s a much-reduced interest in super-large houses.

An interesting measure that tries to put together how many wealthy people there are (the ones who can build and purchase McMansions) with how many new large homes were constructed (with the rough proxy of square footage – not all homes over 4,000 square feet would be considered McMansions). The conclusion is interesting: the number of McMansions being built today is quite lower than the peak ten years ago or so. So, when journalists write that the McMansion is back (usually with a negative tone – our wild spending and consumeristic days of the early 2000s are set to return!), it is not at the same scale as we are still in the middle of a depressed housing market.

Chicago area apartment market continues price increases

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With homeownership still moving downward in the United States, the apartment market in the Chicago suburbs keeps going up in price:

The median net rent in the Chicago suburbs rose to $1.29 a square foot in the fourth quarter, another record, up 4.7 percent from a year earlier, according to a report from Appraisal Research Counselors, a Chicago-based consulting firm. The occupancy rate was 95.3 percent, versus 95.1 percent a year earlier.

Suburban rents have increased five years in a row—they rose 21 percent over that period—as more people have held off on buying a home, either because they can’t get a mortgage or are wary of owning after the housing crash. More recently, the improving job market has boosted demand for all housing, and apartment landlords are getting their share.

On the supply side, new developments are sprouting up from Naperville to Northbrook. Developers completed more than 3,300 apartments in the suburbs over the past year, the most in a decade, and another 2,700 are under construction, according to Appraisal Research…

Yet the revenue side of the equation is about as good as it gets for suburban landlords. Market revenue performance, a metric that combines the occupancy rate and median net rent, hit $1.23 in the fourth quarter, the highest it’s ever been, according to Appraisal Research.

An interesting housing market these days. Starter homes are not being built. New McMansions are back even as older McMansions sell briskly. People are considering disaster chic. The luxury market is booming in big cities like New York.

If apartments are indeed popular because they offer more short-term flexibility, how many suburbs will allow the construction of many apartments? Historically, wealthier suburbs in the Chicago area tend to avoid apartments and their more transient residents. So, I would guess most of these new suburban apartments are actually higher end, the kinds of places appealing to young professionals or the just retired and often located near cultural or transportation amenities like denser downtowns and train stations. If so, more expensive apartments don’t help many in the housing market who still need reasonably priced and conveniently located housing in the Chicago region.

“Used McMansions are selling briskly”

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More evidence of a bifurcated housing market: used McMansions and other expensive homes are selling just fine.

One way to look at the breakdown of home sales by price range: Used McMansions seem to be selling quickly.

While the rate of sales growth in January for existing-home sales was 3.2% from January 2014 levels, it was 13% in the $750,000–to–$1 million range, according to National Association of Realtors data released Monday. A “McMansion” is a pejorative term for relatively ostentatious and newer-construction homes targeting the upper middle class.

That’s the fastest growth of any price range, and comes after 10.4% growth for that segment in December.

“It’s a reflection of the U.S. economy where the upper end has done much better in this recovery in terms of income,” said Lawrence Yun, chief economist of the NAR.

Two quick thoughts:

1. Just because a home in this price range does not mean it is a McMansion. The data seems to be based only on price, not on year of construction or location of the home or size and design. Even with the definition of McMansion provided, I’m not sure why the term is applied here as it is misleading.

2. One of the critiques of McMansions is that they are poorly made and won’t last. Yet, data like this suggests such homes (even if mislabeled) can make it through at least one buying and selling cycle. Might many McMansions simply be like many other homes and last for decades?

Teardowns back on the rise in the Chicago area

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Teardowns are back in wealthier Chicagoland communities:

Wilmette, for example, saw 48 teardowns last year. That’s way up from the 15 to 20 the North Shore town experienced annually from 2009 to 2011. “We’re almost back to the old average of 50 a year,” says John Adler, Wilmette’s community development director. “And the resurgence is attributable to developers getting involved again on the speculative side—not just people of means building their dream homes.”

Hinsdale, the priciest west suburban housing market, had 60 teardowns last year, versus 47 in 2013, says its community development director, Robert McGinnis. All but six of the single-family homes that started construction there in 2014 replaced teardowns. McGinnis estimates at least half of the new projects are being built on spec, as opposed to being custom-built…

The teardown candidates aren’t just tiny bungalows this time. Developers are targeting larger houses as well, particularly if they sit on coveted property. Antiquated plumbing, the absence of upscale amenities such as media rooms, and the high cost of gut rehabbing (roughly $300 a square foot, versus $200 for new construction) are pushing homes on North Shore lots near the lake into early retirement. Two properties that sold for around $4 million each in 2014—one in Wilmette and one in Winnetka—are on their way to the scrap yard, says Berkshire Hathaway HomeServices KoenigRubloff agent Joseph Nash. Both were on three-quarter-acre lots with private beaches, and the Winnetka house had seven bedrooms—big and nice, but apparently not nice enough.

While there will always be preservationists who bemoan these changes, Boyle says he hasn’t witnessed as much handwringing this time over the evolving neighborhood character in La Grange: “Most people are happy that people are updating homes, because they’re seeing the value increase for their own property.”

I want to know more:

1. Are some people (like the neighbors who get upset about such homes next door) going to be happy that teardown McMansions are back just because they signal a more vibrant housing market? Or, are these teardowns just another sign of the bifurcated market where the wealthy still have money to burn?

2. Do these teardowns today look significantly different than those of the early 2000s? Did builders learn any lessons or has the market shifted dramatically?

3. We might know that the housing market has really returned when teardowns are happening in communities that aren’t the usual suspects like Hinsdale, Naperville, Elmhurst, and the North Shore. Any activity in other suburbs?

You don’t want to win the McMansion award from protesters

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Some antitech protestors recently handed out a McMansion award in San Francisco:

Wearing a pig mask and sequined suit jacket, Amy Gilgan stood outside of Davies Symphony Hall on Thursday night to accept the McMansion award at the second annual Crappys on behalf of Jack Halprin, a Google lawyer, landlord and frequent target of San Francisco’s antitech ire.

In sparkles and sneakers, technorati streamed past protesters and into the concert hall for the eighth annual Crunchies Awards, the supposed Oscars of Silicon Valley. Few turned their heads to witness the sidewalk satire. Investor Ron Conway, who last year stood on the Crunchies stage and offered his sympathy to the protesters, buzzed by a group of taxi drivers rallying against Uber. Evening news crews scaled back their coverage.

This year the pig masks were new, but the message was old. The verve of the antitech demonstrators felt diminished, and even they noted that the turnout was low.

McMansion sounds like an invasive species for the self-interested and wealthy. Some of the backstory:

Tirado said things started off  badly  as soon as Halprin bought and moved into the seven-unit building two years ago. First, Halprin forced one tenant out under owner move-in laws. Then another existing tenant was evicted,  again through the owner move-in process. Halprin told tenants that his domestic partner would be taking over the second unit. That partner, however, never materialized, according to Erin McElroy, an organizer with Eviction Free San Francisco. The affected tenant has since filed a wrongful eviction lawsuit against Halprin.

The remaining six tenants, which includes two teachers, a small child, an artist and a disabled senior, received Ellis Act eviction notifications in February of this year.

The protests continued through December. This is a big issue right now in San Francisco: in a very expensive housing market, Silicon Valley employees and companies have been perceived by some as throwing their weight around regarding properties and sending buses for workers. While this could be thought of as a more localized issue in some cities – perhaps gentrification occurring in particular neighborhoods – it is bigger than that since prices are high all over the Bay Area.

Two other quick thoughts:

1. It is interesting that we don’t hear as much about protests on this issue in New York City even though Manhattan is similarly expensive and luxury construction is booming. Perhaps the land there is being redeveloped from non-residential uses and/or fewer people are being displaced?

2. Generally, I don’t think winning an award with McMansion in the title is intended as a compliment.

Sales of McMansions up 21%; remaining 99% of market down 7.6%

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At least one statistic suggests the housing market is still split into two divided camps: one that is thriving and one that is not.

Consider this incredible statistic from the research analyst Redfin: through last April, sales of the McMansions of America – the top 1% of homes by price – rocketed up 21% compared to last year. But sales of the other 99% of homes were down 7.6%.

It’s not even clear that rising home prices – traditionally a way to measure a recovery – would be good for the middle class. Price increases harm the affordability of homes, particularly for first-time homebuyers, who have not returned to the market at their historical level. This is an important group: first-time homebuyers drive the entire market, allowing sellers to step up into bigger homes…

When prospective homebuyers are actually asked about their biggest obstacle to purchasing, a majority cites “rising home prices” and “quality of inventory”, meaning the lack of decent homes in the buyer’s price range. So it’s not surprising to see a drought in lending, and a reduction in homeownership rates from 69% in 2006 to 65% in 2014. It has nothing to do with bank regulation; it has to do with purchasing power.

In the words of senior loan officer Logan Mohtashami, “we simply don’t have enough qualified home buyers to have a true housing recovery in America.”

While I’m not sure that the top 1% of houses are all McMansions – the term tends to refer to certain styles of homes rather than just the price – the data seems fairly consistent in recent months: the housing market has not fully or evenly recovered. More expensive homes are hot as are particular locales, such as luxury condos in New York and Miami. The slump continues at the lower end of the market where builders aren’t that motivated (why build cheaper housing units when there are bigger margins on those luxury units?) and potential homebuyers don’t have the savings to move in or up and also may still be trapped in their current mortgages.