04.10.2007 - Tuesday Open Thread
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80 comments:
Well, it looks like the MSM is starting to state that the sub-prime meltdown is flowing into Alt-A's now. Y'all can find the links, NY Times et al....The Dollar is giving back it's gains yesterday as well. MSNBC is trying convince it's guests that we are at the bottom, but they aren't bighting.
Of course we are at the bottom! Please for the sake of their jobs, buy stupidly, without caution.
Check this out, yo.
http://money.cnn.com/2007/04/10/news/economy/drhorton_warning/index.htm?postversion=2007041009
Oh
Hell
Yeah
Nuther one.
http://www.cnbc.com/id/18036583
i think when people say "seattle is special", I believe they are using the term "special" meaning dim-witted or retarded.
Oh
Hell
Yeah
i think when people say "Seattle is special", I believe they are using the term "special" meaning dim-witted or retarded.
Actually, what they mean is that they just have higher incomes then most others.
The article says:
The metro areas with the highest mortgage delinquency rates are:
Detroit, 6.19%
Brownsville, Texas, 6.01%
Corpus Christi, Texas, 5.63%
Modesto, Calif., 5.62%
Beaumont, Texas, 5.57%
Zandi said people living in these metro areas tend to have low, volatile incomes, making it difficult to manage debt.
These are some of the most depressed economic areas in the country. Record foreclosures in these places don't really tell us much. Seattle is in the top 15 highest income areas for the whole country.
Repeating something over and over and over again doesn't somehow mystically make it true. High incomes do not protect an area from home price declines.
You're going to have to come up with a better argument than that, because it just doesn't hold true, period.
At least you're not this guy
iamfacingforclosure.com
The strong sales we're seeing this Spring have been fueled by a strong and growing local economy. Seattle's high income job sector seems set for unabated growth. It is now one of the Big Boys of American high income cities.
TheLadders.com’s Quarterly Executive Job Market Trends Report measured hiring activity across a variety of metrics and found the hottest $100,000 plus job markets to be New York, San Francisco, Boston, San Diego, Washington D.C., Chicago, and Seattle.
The strong sales we're seeing this Spring have been fueled by a strong and growing local economy.
Speculation. Please prove the causative link between the two.
Alternatively, you can stop repeating the same old tired, disproven points.
And there's no slowdown in RE in San Diego, Boston, Chicago and DC. Nope. Things are just peachy.
Hi Tim,
High incomes do not protect an area from home price declines.
Actually, most economists agree that they do. A strong local economy, job growth, and high incomes protect prices.
Here's an excerpt from The Economist that will explain it for you:
Such a dramatic drop in national house prices this year is possible, but not yet probable. Unlike share prices, house prices rarely plunge in nominal terms. Unless repossession forces a sale, homeowners prefer to sit tight when markets are weak. If house prices stagnate, consumption may suffer a little, but not too much, so long as jobs stay plentiful and wages grow. If so, the mortgage crunch will be a grinding drag on America's economy; one that unfolds over several years, hitting some people and some regions hard, but not, in itself, a macro-economic disaster.
Oh, and San Francsico, my brother's had his Belmont house on the market for three weeks, not a single bite. Had a couple who said they'd send in an offer and then mysteriously disappeared. Hmmm, wonder if they couldn't get financing. Now, in order to buy this house a few years ago, the market was so hot that because of multiple bidders my brother had to write a letter telling the seller what a good guy he was (he is a good guy), and he had to agree to NO home inspection. But Belmont's not special like Seattle.
Alternatively, you can stop repeating the same old tired, disproven points.
If you've disproven the income to housing demand relationship, then where are our price declines? in March we had double digit appreciaiton in March. But you're saying our market should be toast.
Over the last year you've gotten everything you've asked for:
-Cessation of loose lending practices
-Higher Interest Rates
Now that "easy money" is gone, what is driving the "bubble?" Sorry, there's nothing left now but good ole' fundamentals: jobs, populations growth, and high incomes.
The strong sales we're seeing this Spring
Um, sales figures are down, chief. Sure that's only relative to last year, which was strong, but you also need to pair that with inventory data, which has taken the first few steps of a parabolic liftoff.
You can't say spring is strong until you see figures for April, and I've got another prediction for you: even bigger sales declines, and even bigger inventory.
According to estimates by The Economist, the total value of
residential property in developed economies rose by more than $30
trillion over the past five years, to over $70 trillion, an increase
equivalent to 100% of those countries' combined GDPs. Not only does
this dwarf any previous house-price boom, it is larger than the
global stockmarket bubble in the late 1990s (an increase over five years
of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of
GDP). In other words, it looks like the biggest bubble in
history.
he most compelling evidence that home prices are over-valued in many
countries is the diverging relationship between house prices and rents.
The ratio of prices to rents is a sort of price/earnings ratio for the
housing market. Just as the price of a share should equal the discounted
present value of future dividends, so the price of a house should
reflect the future benefits of ownership, either as rental income for an
investor or the rent saved by an owner-occupier.
Calculations by The Economist show that house prices have hit record
levels in relation to rents in America, Britain, Australia, New Zealand,
France, Spain, the Netherlands, Ireland and Belgium. This suggests that
homes are even more over-valued than at previous peaks, from which
prices typically fell in real terms. House prices are also at record
levels in relation to incomes in these nine countries.
America's ratio of prices to rents is 35% above its average level during
1975-2000 (see chart 1). By the same gauge, property is "overvalued" by
50% or more in Britain, Australia and Spain. Rental yields have fallen
to well below current mortgage rates, making it impossible for many
landlords to make money.
To bring the ratio of prices to rents back to some sort of fair
value, either rents must rise sharply or prices must fall. After many
previous house-price booms most of the adjustment came through inflation
pushing up rents and incomes, while home prices stayed broadly flat.
But today, with inflation much lower, a similar process would take
years. For example, if rents rise by an annual 2.5%, house prices would
need to remain flat for 12 years to bring America's ratio of house prices
to rents back to its long-term norm. Elsewhere it would take even longer.
It seems more likely, then, that prices will fall.
A common objection to this analysis is that low interest rates make
buying a home cheaper and so justify higher prices in relation to rents.
But this argument is incorrectly based on nominal, not real, interest
rates and so ignores the impact of inflation in eroding the real burden
of mortgage debt. If real interest rates are permanently lower, this
could
indeed justify higher prices in relation to rents or income. For
example, real rates in Ireland and Spain were reduced significantly by
these countries' membership of Europe's single currency—though not by
enough to explain all of the surge in house prices. But in America and
Britain, real after-tax interest rates are not especially low by
historical standards.
Michael, you really need to learn some reading comprehension skills. The part of the article you cited does not link house prices and a strong job market, it links consumption with a strong job market.
If house prices stagnate, consumption may suffer a little, but not too much, so long as jobs stay plentiful and wages grow.
Read it again. If house prices stagnate, CONSUMPTION MAY SUFFER A LITTLE, but not too much, so long as jobs stay plentiful and wages grow. The writer is discussing the link between real estate and consumption, and the effect of real estate on retail consumption.
Sheesh.
A strong local economy, job growth, and high incomes protect prices.
So in this version of reality, I suppose we just completely ignore all the places with strong local economies, job growth, and higher incomes than Seattle that are in fact experiencing home price declines?
Just because The Economist chooses to deny reality does not mean that I will ignore the evidence that disproves their theory.
Now that "easy money" is gone, what is driving the "bubble?"
As has been pointed out to you repeatedly in the last few weeks (and you consistently ignore), lending standards are only just now beginning to tighten. No one—not me, not anyone else on here—predicted that the instant there was any sign of tighter lending, prices would plummet, or that a one-point increase in interest rates would have any significant effect.
You're attempting (and failing) to set up a straw man.
shugy-
I hate being repetitive but where are from originally? Have you eer ventured north or south of Seattle? There will be an explosion of BK's and foreclosures in Pierce, Thurston, Kitsap and Skagit counties. The military has been getting into buying houses and I can't imagine what that will do ontop of everything else.
If you think that the world can crumble around Seattle without affecting it, well, i give up.
Seriously, you need to drive down to these areas and take a look. It will happen here. I have enver been to Modesto but if it is anything like Spanaway no wonder they are doomed.
BTW,
D.R. Horton 2Q orders fall 37 percent
The company saw declines in every region, but experienced the largest quarterly drop in California, where orders fell 59 percent to 1,107 homes from 2,697 in the prior year. Orders in the Southwest fell 39 percent.
Home orders in the Northeast declined the least, falling 21 percent to 1,564 homes from 1,990 a year earlier.
We can infer from this that orders in the Nortwest fell more than 21 percent.
Actually, they list it as "West" and California separately.
the "West" Fell 37% in Number of homes and 26% in Value in the last 3 months and 26% in number nad 24% in value in the last 6 months.
Confused:
Go to www.foreclosurepoint.com and search for foreclosures in Pierce county... That'll give you an idea of what an inherently transient population buying homes does...
It's not a scientific measurement (I'm not completely sure how they get their data.), but it's a good ballpark estimate of what's available "now." King is also available to look at as well. It's also search able at different scales as well (county, city, zip).
I occasionally compare the raw number of foreclosures against the available properties on the MLS by combining those numbers and getting a total available home estimate... Can be very interesting when those two are combined and looked at in percentages.
Thanks Sven. Good article Lionel.
If job growth is so strong in SF, DC, NY, SD, then they must be seeing massive housing price increases and little inventory....What? They're not? They're actually dropping? and inventory is increasing? Whooooaa, WAIT ONE MINUTE!!!! How can that be? Strong jobs = Strong housing, Right? Right?
Today, MSNBC posted a story about mortgage fraud and the person they chose to interview on appraisal fraud is from Seattle.
Every day in my office I received threats, attempts at bribes and was told, 'You make this value,' 'We need it pushed,' 'I’ll give you all my business for the rest of the year,'" said Richard Hagar, a Seattle-area real estate appraiser. "(Mortgage brokers) do not want ‘no’ from the appraiser. They start yelling and screaming."
“The fraud problem, it crushed my firm," he said. "I went from 10 appraisers to two. It happened so much, I lost 80 percent of my business.”
Yup, Seattle is Different.
Mortgage woes could be 'tip of the iceberg'
I talked with my sister in the Bay Area over the weekend. It was fun to have a conversation with someone that is just as giddy as I am at the prospect of being able to afford a home at a decent price.
There were 3 interesting things she told me. First, She can't talk about the housing bubble with her friends because a lot of them bought homes and are banking on them appreciating. One couple that is in trouble refuses to sell their house because they need it to appreciate so they can buy a boat. These are young couples (mid-30s at most), not retirees. People are just so greedy.
Second, my sister is constantly being pressured by a friend that is a realtor to become a realtor because it's easy and good money (my sister is a stay at home mom, but runs a pretty lucrative family photography business out of her home). When my sister points out that market is terrible right now, she says (this is unbelievable), "It's bound to start rebounding soon. I've been in this business for 3 years and it's never been this bad!" Wow, just wow.
Lastly, and probably the most interesting for Seattlites, people in her city believe that their city specifically will not experience the same downturn as the rest of the bay area. They really believe that the entire bay area could burst around them and their city alone would be spared. So, basically this feeling of, "Oh no, that won't happen here. We're special." isn't limited to the Seattle area. Everyone everywhere experiences this, it's called denial.
Joel, absolutely amazing, your story so closely mirrors the conversation I had with my brother about trying to sell his house in Belmont. He said he wasn't too worried because there were multiple offers on a 2.2 mill house down the road. He did concede that the East Bay was getting hit really hard, but he didn't think this would have any effect on his trying to sell. He's a scientist and should know better. I'm worried he's going to take it off the market and wait till summer, rather than merely lowering the price.
"Everyone everywhere experiences this, it's called denial."
"Wall Street never changes. The pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes." - Jesse Livermore
"Seattle is in the top 15 highest income areas for the whole country."
So is Boston and the market certainly isn't appreciating any more.
"Boston: This one is in Winzer's backyard, his firm is based in Wellesley, Mass., so he sees what is happening there every day.
"Until about a year ago, homes would go on sale and be gone in a week," he says. "Now they're sitting on the market for a year." He doesn't see the prices dropping rapidly here -- or in any market, for that matter -- because while real estate prices escalate rapidly, they drop slowly.
"In markets that are well-overpriced, prices don't really fall because people just won't sell," he says. "The adjustment mechanism is skewed by people's emotions getting involved. People will grit their teeth and hang on as long as they can to get the price they want."
They might not be able to hang on for long. Burns ranks Boston fourth on his list of markets likely looking at a bubble; Winzer's analysis indicates the market is 33% overvalued. "
http://realestate.msn.com/buying/Articlebankrate.aspx?cp-documentid=421723
Seattle is especially mediocre.
Job growth = #86.
Population growth = #97
Income = #15, but bottom 10 in growth
Mediocrity is special
From the "Mortgage Woes..." article Mike posted...
"Every day in my office I received threats, attempts at bribes and was told, 'You make this value,' 'We need it pushed,' 'I’ll give you all my business for the rest of the year,'" said Richard Hagar, a Seattle-area real estate appraiser. "(Mortgage brokers) do not want ‘no’ from the appraiser. They start yelling and screaming."
Oh no... this must be a type-O, Seattle's too special and we're all rolling in non-taxable cash (the only way to really explain the median-income/median-price differential) because we're sooo smart...
All our home-prices are accurate to the gnats-arse, we invented Zillow for Christo's sake!!! All our appraisers are ordained by the local Catholic Bishop (or something)
Lionel - Appartment rental rates increased by 8.5% from 1Q06 to 1Q07 in Seattle.
Since January there has been record rates of landlords selling appt buildings in the city (especially near Capital Hill/Eastlake/Downtown & Queen Anne). Not sure what this means, yet investors probably want to lock in profits. Overall it has been reported that with large complexes being sold they are dramatically increasing rents to justify the purchases...thus the 8.5% increase in rent over the past year.
Historical King County Inventory to Closed Sales Gaps (Approximate)
March 00 - 3500
March 01 - 4750
March 02 - 5000
March 03 - 6000
March 04 - 3250
March 05 - 2000
March 06 - 2250
March 07 - 4000
From the same Mortgage Woes article
Like many borrowers who were sold mortgages they couldn’t afford, Russo says that when she called the broker to complain, she was told that because she failed to read the fine print, the responsibility for getting in too deep was hers.
After coming up with about $14,000 to get out of the downward spiral into yet another loan, Russo says she’s learned an important lesson.
“I have learned a new term called 'predatory lending,'” she said. “And that is what I am a victim of.”
... um, no.... you are victim of your own stupidity and greed. They work together, you know
Historical King County Inventory to Closed Sales Gaps & smoothed YOY% Price Change (Approximate)
March 00 - 3500 - 8.5%
March 01 - 4750 - 6.5%
March 02 - 5000 - 4.5%
March 03 - 6000 - 5%
March 04 - 3250 - 8%
March 05 - 2000 - 13.5%
March 06 - 2250 - 16%
March 07 - 4000 - 8.5%
they are dramatically increasing rents to justify the purchases...thus the 8.5% increase in rent over the past year.
Rent prices are not determined by what the landlord paid. They are determined by what the renters will pay. Maybe the market will support 8.5% increases, but it has nothing to do with landlords buying the property for high prices.
You just lost a tremendous amount of credibility as a finance guru in my eyes.
"Just lost a tremendous amount of credibility in my eyes."
When the heck did he ever have an ounce of credibility???? He knows nothing about finance and certainly is no guru.
FG said:
Appartment rental rates increased by 8.5% from 1Q06 to 1Q07 in Seattle.
Reality (see the last story here):
The average one-bedroom apartment rental rate across "80 percent of properties with 20 or more units" increased 8.5% from 1Q06 to 1Q07 in King County.
In other words, a sample that does not include rented condos, rental houses, smaller apartment complexes, studio apartments, or 2+ bedroom apartments.
Please forgive me if I find myself less than convinced.
First-time homebuyers learn the fine art of compromise
Cooley let go of any notion of buying a house or living in downtown Seattle to find the modern, two-bedroom condo she wanted.
Hilarious.... okay, buying maybe, bascially because there are no houses in downtown Seattle, but living?, finding a modern 2 bedroom condo?
Here you go sweatheart... seems pretty modern and If you can throw down for 250K Skyway-esque "condo" I'm sure you can swing the $1425 a month...
Owe but wait, sold down the river by GW's "Loanership" society? Yeah, you do have a point... enjoy Tukwila!
Nor I. I can't wait for my landlord to tell me he wants to increase my rent (which I doubt he will) but there are tons of really nice houses out there for less than what I am paying now. I just don't feel like moving.
Hi, first time post to this blog, and I have a question that I haven't seen any straight answers for yet. I frequently hear the argument that "we aren't building any more land" as a justification for housing price appreciation. While that argument might justify appreciation of land, it does not explain why housing appreciates.
Apartments depreciate completely (according to the IRS) in about 27 years. Since condo are just apartments you can sell, it seems like a typical condo should depreciate in value at about 3% a year. Inflation is also around 3% a year, so I would expect a condo's value to remain virtually steady until it is torn down.
These are all just back of the envelope calculations, but I would be interested if anyone has well formulated opinions of this.
I know the new owners of the monstrosity on the Eastern slope of Magnolia is looking for significant rent increases. A friend of mine was just informed that when her lease is up in June, they want to bump her 1 bedroom by $200/month. I know what I'd do in that situation...
I can't wait for my landlord to tell me he wants to increase my rent
I'm in the same boat. The selection is a bit cheaper and more bountiful than when I moved here. If my out-of-state landlord thinks he can squeeze more out of me when my lease runs out next month, I'm ready to scoot.
Anyone have stats on what % of loans in Seattle are Alt-A?
Since Option-ARMS are mostly Alt-A (all are non-prime) and the map of misery showed Seattle at 15.5%, I'd estimate it's above that.
Alan – “Rent prices are not determined by what the landlord paid. They are determined by what the renters will pay.”
In the article that Tim referenced indicates that often times new landlords improve the property (usually just marginally) and will want to raise rents since it is under new management. The commercial real estate environment TENDS to be more rational than residential RE. There is a degree of how much the landlord paid for the building (thus wanting to recoup costs) and what the market will support.
If many landlords gradually increase rent, then the avg will start to creep up. Such as with T,V & Mr.B, the cost of moving exceeds the benefit of slightly lower rent. Thus there is a positive relationship to what you pay for something to what you rent it for…however the correlation is not extremely strong, but there is an element of truth to it.
Oh, also, I tried to recommend the Seattle Bubble site to another friend of mine who bought about 2 years ago in Maple Leaf.
All he's done since he bought his place is talk about the "appreciation" that he's getting and how the development at Northgate is going to make his property value sky-rocket.
He regurgitates the same MSM garbage about the job market, increasing population, etc...and says that at most the market will "slow down" but never sink.
He says I'm a bitter renter that should have bought and that I've missed the boat.
I responded that there was another boat that was once considered "unsinkable".
"look out, iceberg dead ahead!"
Of course current RENT does not determine the price the previous investor bought the building for, but DOES impact what the investor sells the building for…the higher the rental rates (REVENUE) the more they can sell it for. Its like owning a business, the higher your Revenue (or profits) the more you could sell the business for!
When buying an apartment building they calculate the CAP Rate (or the amount of Operating Income it will bring in). Thus we can determine that if the landlord is able to increase rent in their apartment complex, then they can justify their HURDLE RATE (minimum accepted profit margin).
If you buy a 10 unit appt building for $2MM and brings in $100,000/yr then your CAP Rate would be: 100,000/2,000,000 = 5%. Lets say that you need a CAP Rate of 5.5% for your investors and bank to go forward with funding the investment and the current owner wont lower their price…you raise rents (to some degree) once you purchase it (if the market allows). So your new Operating Income would then be: 110,000/2,000,000 = 5.5%. Or a 10% increase in rent for the residences.
http://realestate.about.com/od/knowthemath/ht/cap_rate_calc.htm
“By using other properties' operating income and recent sold prices, the capitalization rate is determined and then applied to the property in question to determine current value based on income.”
1. Get the recent sold price of an income property, such as an apartment complex.
Example: Six unit apartment project sold for $300,000
2. For that same apartment project, determine the net operating income, or the net rentals realized by the owners.
Example: The rental income after expenses (net) is $24,000
3. Divide the net operating income by the sale price to get cap rate.
Example: $24,000 / $300,000 = .08 or 8% (The Capitalization Rate)
What you leave out of your explanation FG, is that CAP rates will vary - and right now, in Seattle - they are incredibly low - somewhere around 5% according to my investor buddies. Because of that , most people in the business are not buying here.
Unless you have evidence of high velocity in sales of apartment buildings, I would say that that is not going to be a driver of rent increases. My assessment is admittedly based on a few interactions with knowlegdable people - but based on that, I don't see it. I don't believe there is much new institutional money coming into seattle for rental properties. For condos and townhomes, it is an entirely different story.
Deejayoh - Here is an article in the Seattle Times (4/5/07) that shows the rapid rise in apartment sales. From ~$1 Billion in 2003 to ~$2.8 Billion in 2006 (from the chart in the article below), which means that there is higher turnover than usual.
I have heard that 5% is about the CAP Rate for Seattle as well (and why I used it in my example). It also shows that a large increase/decrease in rental rates has a small impact on CAP Rates.
http://seattletimes.nwsource.com/html/realestate/2003652023_apartments05.html
"i think when people say "Seattle is special", I believe they are using the term "special" meaning dim-witted or retarded.
Actually, what they mean is that they just have higher incomes then most others."
If that's the case, then why do I have to leave Seattle to get a higher income?
There's ton of institutional capital coming into Seattle for apartments! TC reseidential just solf the Amli 535 in SLU for $299k per unit. Harbor just sold two projects in the U-District for $264k-$272K per unit - and there were not even at stabilized lease up! Institutional capital is also wanting in on JV equity and mezzanine debtquity like I'll never seen. Large gaps in affordability coupled with healthy job growth create the opportunity.
as far as the competition from small apartments/rented condos/homes for rent goes, I think they could keep the rent increases in check to some extent. However, only the rented condos are directly competitive with new apartment product, which need to be fairly high-end to pencil. That means "A" locations in at least "A-" building. The tentants in these buildings are predominantly female and single. They want a close-in location, secured parking, nice finishes and usually desire to live alone. This is the same demographic that dominates first-time condo-buyer set; but many have now been priced out, at least temporarily.
Young, single males are different story- more likey to share rented SF homes and more lilkely to seek out low-end, cheap apartments - which less than 20-unit apartments tend to be.
Another interpretation is the current owners of rental units are gettin' while the gettin' is good.
I have a new theory that supports high housing prices: Dark income.
Dark income does not show up in census statistics, but it is obviously present since it can be observed indirectly through housing prices.
What is this dark income? How can we observe it directly? Is it possible to harness its power to travel through time or warp reality to our will?
Interestingly, I zillowed my home that I sold in San Diego. It is now valued at 100K less than what I sold it for but Zillow states the value has gone up 56K since it's last sale.?????
"Harbor just sold two projects in the U-District for $264k-$272K per unit - and there were not even at stabilized lease up!"
I think I know the buildings you're referring to -- they've had consistently high vacancy rates for the U District, because their rents are too high for the neighborhood. There are people who are willing to pay a premium for nice aparments, and there are people who are willing to live in the U District, but there are precious few who are willing to do both.
Which brings me to my greater point: people like guru, who try to imply that rents will rise to correct the current imbalance between cost of ownership and cost of renting, completely ignore reality: rents will not rise if incomes cannot support the increase.
Whenever I hear landlords making crystal-ball predictions about dramatic increases, I am reminded of what my grandmama used to say: wish in one hand, shit in the other, and see which one fills up first.
flotown said...
There's ton of institutional capital coming into Seattle for apartments! TC reseidential just solf the Amli 535 in SLU for $299k per unit. Harbor just sold two projects in the U-District for $264k-$272K per unit - and there were not even at stabilized lease up!
As I said, my observations are based on a few discussions - but at least I caveated. This is just anecdotes submitted as data.
Do you know the velocity of apartment sales vs. previous years? That would be a telling piece of data
And please don't point me to this article, which just says that investors are paying more and getting less. it says nothing about unit volume, only dollar volume - which should be going up if prices are.
often times new landlords improve the property (usually just marginally) and will want to raise rents since it is under new management
Improvements to a rental can allow for rent increases because the deirability is increases, that increases demand, and higher demand supports higher prices. Improvements have nothing to do with a recent sale. The old owner could have done the same thing. "Wanting" to raise rents has nothing to do with what the market will bear. "New management" has nothing to do with what the market will bear.
The commercial real estate environment TENDS to be more rational than residential RE.
That sounds reasonable. Businesses who can afford to buy apartment complexes have demonstrated the ability to make financially sound decisions decisions instead of emotionally based irrational decisions.
There is a degree of how much the landlord paid for the building (thus wanting to recoup costs) and what the market will support.
Your causality is backwards. The price the market will bear for a rental determines the price for which that rental will sell. This is true for all businesses.
If many landlords gradually increase rent, then the avg will start to creep up.
When multiple entities conspire to raise prices or lower supply it is called a cartel. The diamond and oil trades are examples of cartels. In the USA, businesses are prohibited from forming cartels by US anti-trust laws. In some cases there are implicit cartels where businesses raise prices together knowing the other party will cooperate. Coke/Pepsi is an example of an implicit cartel. In most cartels there is an incentive for one member of the cartel to defect. The defector lower his price slightly and increases sales greatly. A necessary condition of a stable cartel is for the cartel to be able to punish a defecting member.
The real estate rental industry has too many members to form a cartel. Even if they did it would be illegal. Even if it wasn't, there is no barrier to entry in the market and no way to punish defectors.
All rental units raising their rents together is a stupid argument if you understand anything about economics.
the cost of moving exceeds the benefit of slightly lower rent.
You almost hit on an important concept. A landlord can raise rent by the difference between what a renter can save by moving and how much it costs that person to move.
Unfortunately, knowing this, a landlords may offer a lower initial price to entice a renter to move from another landlord knowing that once the person has moved in their high switching costs will allow the landlord to charge higher future rents.
Thus there is a positive relationship to what you pay for something to what you rent it for…however the correlation is not extremely strong, but there is an element of truth to it.
This is the dumbest thing I have ever read. The price you pay for a business is directly related to current and future income. This is the entire truth and not just an element. The correlation is absolutely positive. If you do not believe this, then I have a money losing business I would like to sell you.
Alan -
Good breakdown. Thx.
I think an implicit argument that FG and others are making is that so many people are paying so much for buildings, they will all raise rents to get back their invesment. While I think it is generally true that if one over pays (e.g. 5% CAP rate) one will try to rais earnings - I seen no evidence provided that there are a large number of units changing hands in the current environment. My sources tell me that deals are rare as hen's teeth and dear as diamonds.
Deejayoh - Did you read the Seattle Times article showing in hard numbers the increased volume of apartment complex deals over the past few years? Apparently not.
Confused. I guess the "Seattle is special" stops at 145th. Centex dropped prices on their Woodridge development in Bothell as reported by another blogger and which I've confirmed. Some homes dropped by around 10-30K. Ok, that's Bothell, not Seattle. Everything is fine. As I head into downtown Seattle from I-5, once I hit 145th at the city limits I will go through a semi-permeable membrane where Rainbows appear, glorious light shines and the roadway into town will look like the yellow-brick road. (Sorry couldn't resist)
Up in my neck of the woods in Everett, there is a New Construction Condo/Cottage development that has recently dropped prices by about $100K per unit.
Builders do this when the market shows steady job growth, growing income levels and a robust r.e. market. Except in Seattle, particularly neighborhoods within a 6 min drive of Dicks in Crown Hill. (sarcasm now turned off).
I think an implicit argument that FG and others are making is that so many people are paying so much for
You may be right, Deejayoh.
I think people are paying so much for properties because of expected *future* earning on the property appreciating not because they think the market will bear a higher rental price.
This is the definition of a bubble.
It doesn't rain pink ponies in Bothell....
Just got out of a meeting about h1b visas, the process has been changed to a lottery wich will impact several hundred to possibly over 1000 Microsoft moves to the area. I am sure this is relevant to the housing discussion on some level...
Did you read the Seattle Times article showing in hard numbers the increased volume of apartment complex deals over the past few years?
I read the article. The only number I saw relating to volume was the statement that "in the past three months, 4,300 apartments have sold". The rest of the article was about sales prices.
Another problem -- the article does not distinguish between apartments sold for conversion to condos, and apartments sold for rental. We've already established that the former is more common than the latter, and the article quotes developers as wanting to "renovate" their newly-purchased units. My guess is that "renovate" is scumbag-investor code for "convert to condominiums".
wish in one hand, shit in the other, and see which one fills up first.
LMAO!
FinanceGuru said...
Deejayoh - Did you read the Seattle Times article showing in hard numbers the increased volume of apartment complex deals over the past few years? Apparently not.
FG - no, I did not see your post. Sorry. I am not trying to be a flamer here. I am actually quite interested in what percent of units are trading hands - because if it is significant, it indeed could encourage "cartel" like behavior I referenced in my earlier post.
The chart in the article you referenced shows only $ volume - which could be driven by units, could be driven by prices.
Very simplistically, I know CAP rates are down (from ~8% to 5%) over basically flat rents - which implies property values are up by 8/5 - or about 60%. That would explain much of the increase in that chart - no? Doesn't have to be a much larger number of units.
Re: renting in Seattle, 1) it was incredibly easy; there are loads and loads of houses for rent in the 15-1700 range.
Something to consider about the value of the house you own: there does appear to be a cap of some sort as the rent pushes above a certain price point. I checked out a house in Ravenna that was up for 1350. Within 12 hours, the owner had 15 or so calls. I found a much nicer house renting for 1695. Was on Crasigslist for about a month. No calls. None. Just me. Cats? No problem. Have a friend with a huge dog who will be living there until you arrive? No problem. It's a great house, and it fit a large number of needs and wants my wife had outlined before we started looking.
If you're willing to go above 2000 (which in LA will mostly get you a POS), you can rent beautiful houses, 4 bedrooms, big backyards.
People who spout stats about how tight the rental market is clearly aren't out there looking.
IMF warns subprime woes may spread, dollar falls
Very interesting article.
http://au.us.biz.yahoo.com/rb/070410/usa_subprime.html?.v=1
Alan said:
I have a new theory that supports high housing prices: Dark income.
Dark income does not show up in census statistics, but it is obviously present since it can be observed indirectly through housing prices.
What is this dark income? How can we observe it directly? Is it possible to harness its power to travel through time or warp reality to our will?
Alan,
That’s it! You’re a genius! If dark income is taken into account, the theory of ever-appreciating real estate makes perfect sense!
Even though dark income’s actual existence remains speculative, I would think sub-prime mortgage brokers would vigorously support all scientific research dedicated to finding ways to altruistically exploit dark income for the masses.
Oh faithful readers of Seattle Bubble Blog, this is the discovery we have been waiting for! Our problems are over! Hooray for us!
Sounds like a job for the Discovery Institute!
Maybe it will keep their noses out of our schools mucking with our kid's reasoning abilities.
. Some homes dropped by around 10-30K. Ok, that's Bothell,
No kidding. Go on Redfin and zoom in on the area south of 212th st sw, between 39th and 45th ave sw (zip 98021)
When I set the map to show all sales in the past year, it shows 108 sales and 220 properties available. That particular neighborhood has a 2 year supply of homes for sale.
Apparently people are not yet desperate enough to shell out $600K for a postage stamp lot in the unincorporated county.
I found one builder dropping $40k on these homes;
http://www.ziprealty.com/buy_a_home/logged_in/search/home_detail.jsp?listing_num=27038107&page=3&property_type=SFR&mls=mls_seattle&cKey=k9x27f2k&source=NWMLS
there is bunch more with the same price drops almost %10 on some.
even better, click on a few of the listings and check the "Zillow" charts. On at least half of them, you'll see the familiar pattern of the price dropping off after a long period of appreciation.
I am seeing this in every neighborhood I check - Bothell, Bellevue, Ballard (SHOCK)
random example...
Prices arent going down..its "Buy a house in 2007 at 2006 (or 2005) prices Today"!
"If [RE] prices were driven simply by their potential for income, everyone would sell right now."
Roger Lowenstein, a contributing writer to The New York Times Magazine
D+S only had data back to 2002 on apartment sales in King County. I'll have to check other sources for earlier years:
Apartment unit sales by year
2002-10,745
2003-10,765
2004-14,556
2005-25,531
2006-18,464 (year to date as of publication in Dec.)
Dupre and Scott apartment investment report Vol 27, No.3 December 2006
Edited to say per last that was region (King, sno, Pierce) not just King
Real estate markets are local. Just because the housing prices are dropping nationally does not mean that they will drop here. Different circumstances here. Remember, San Francisco has never dropped in prices.
"Remember, San Francisco has never dropped in prices."
No, I don't remember that. Tell me more. Cite your sources.
Remember, San Francisco has never dropped in prices.
Really? Are you sure?
Apartment unit sales by year
2002-10,745
2003-10,765
2004-14,556
2005-25,531
2006-18,464 (year to date as of publication in Dec.)
Looking for census data for the base on the same set of counties, but couldn't find. Closest I could come was ~330k units in king/snoho/island counties - against which I would say this is surprisingly high turnover - lending credibility to the pressure on rents.
one interesting and related item from the news yesterday - apparently investments in RE related funds have dropped from $400mm to $2mm/week. I'll bet this is the source of financing these guys are using to pursue these properties (and thus drive CAP rates down). Looks like it is going to get tight.
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