Friday, September 8, 2017

Single Family Homes in Suburbs Ever More Popular as Downtown Affordability Wanes

An article in Forbes magazine by Joel Kotkin on August 31st titled “U.S. Cities Have A Glut Of High-Rises And Still Lack Affordable Housing," Mr. Kotkin tells us how urban high rise condos in many cities are completely unaffordable to the middle class. He talks about objective metrics showing the Millennials and others prefer buying single family homes in the suburbs.

This makes perfect sense, as these are better environments for families, and the affordability can be far better. As always, we recommend buying homes in suburbs of large metropolitan areas and use them as rental properties, preferably being financed with 30-year fixed rate loans, which are not pegged to inflation.

We will discuss these issues plus much more in our ICG quarterly 1-Day Expo near SFO THIS SATURDAY 9/9. There will be market teams from all over the US, as well as expert speakers on issues critical to all investors. You can attend for free with guests – just email us at info@icgre.com and mention this blog, or call (415) 927-7504.

I am enclosing Mr. Kotkin’s article in its entirety.

U.S. Cities Have A Glut Of High-Rises And Still Lack Affordable Housing
Joel Kotkin CONTRIBUTOR
I cover demographic, social and economic trends around the world. Opinions expressed by Forbes Contributors are their own. 
A view of new residential buildings under construction in the Hudson Yards development, August 16, 2016 in New York City. (Photo by Drew Angerer/Getty Images)

Perhaps nothing thrills mayors and urban boosters like the notion of endless towers rising above their city centers. And to be sure, new high-rise residential construction has been among the hottest areas for real estate investors, particularly those from abroad, with high-end products accounting for 8o% of all new construction.

Yet this is not an entirely high-end country, and these products, particularly the luxury high-rises in cities, largely depend on a small segment of the population that can afford such digs.

No surprise, then, that we see reports of declining prices in areas as attractive as New YorkMiami and San Francisco, where a weakening tech market is beginning to erode prices, much as occurred in the 2000 tech bust, John Burns Real Estate Consulting notes. There have been big jumps in the number of expired and withdrawn condo listings, particularly at the high end; last year, San Francisco saw a 128% spike in the number of withdrawn or expired listings for condos over $1.5 million.

Several factors suggest the high-rise residential boom is over, including a growing recognition that these structures do little to relieve the housing affordability crisis facing middle-class residents, the inevitable aging of millennials and their shift to suburbs and less expensive cities, and the impending withdrawal of some major foreign investors who have come to dominate the market in many cities.

Cost And Affordability

One common refrain among housing advocates and politicians is that high-rise construction is a solution to the problem of housing affordability. The causes of the problem, however, are principally prohibitions on urban fringe development of starter homes. Critics also note that high-rises in urban neighborhoods often replace older buildings, which are generally more affordable.

One big problem: High-density housing is far more expensive to build. Gerard Mildner, the academic director of the Center for Real Estate at Portland State University, notes that development of a building of more than five stories requires rents approximately two and a half times those from the development of garden apartments. Even higher construction costs are reported in the San Francisco Bay Area, where the cost of townhouse development per square foot can double that of detached houses (excluding land costs) and units in high-rise condominium buildings can cost up to seven and a half times as much.

Almost without exception, then, the most expensive areas are precisely those that have the most high-rise buildings: New York, San Francisco, Seattle and Miami. More to the point, these buildings don’t tend to be occupied by middle-class, much less working-class, families. And in many cases, these units are not people’s actual homes; in New York, as many as 60% of new luxury units are not primary residences, leaving many unoccupied at any given time.

Even worse, a high-density strategy tends to raise the price of surrounding real estate. As Tim Redmond, a veteran San Francisco journalist, points out, luxury apartments often tend to be built in areas with older, more affordable buildings. The notion that simply building more of an expensive product helps keep prices down elsewhere misses the distinction between markets; the high-rises in Washington, DC, are not the affordable units that the vast majority of city residents need.

Other cities favored by luxury developers – like VancouverTorontoSeattle and San Francisco – have also seen deteriorating affordability and, in some cases, a mass exodus of middle- and working-class residents, particularly minorities. San Francisco’s black population, for example, is roughly half of what it was in 1970. In the nation’s whitest major city, Portland, African-Americans are being driven out of the urban core by high-density gentrification, partly supported by city funding. Similar phenomena can be seen in Seattle and Boston, where long-existing black communities are gradually disappearing.

The New Demography Works Against This Trend

It is common in retro-urbanist circles to maintain that more Americans, particularly younger ones, will opt to remain customers for ever-greater density, a preference that could sustain an ever-growing market for high-rises. Yet that notion may be past its sell-by date, with demographic evidence suggesting that most Americans, including younger ones, are looking less for an apartment in the sky than for a house with a little backyard. 

Suburbs, consigned to the dustbin of history by many urban boosters, are back. Demographer Jed Kolko, analyzing the most recent Census Bureau numbers, suggests that population growth in most big cities now lags that of their suburbs, which have accounted for more than 80% of metropolitan growth since 2011. Even where the urban core renaissance has been most prominent, there are ominous signs. The population growth rate for Brooklyn and Manhattan fell nearly 90% from 2010-11 to 2015-16.

The real trend in migration is to sprawling, heavily suburbanized areas, particularly in the Sun Belt. To be sure, there are high-rises in most of these markets – quite a gusher of them in Austin, for instance – but the growth in all these regions is overwhelmingly suburban.

The most critical factor over time may be the aging of millennials. Among those under 35 who do buy homes, four-fifths choose single-family detached houses, a form found most often in suburbs. Surveys consistently find that most millennials see suburbs as the ideal place to live in the long run. According to a recent National Homebuilders Association report, more than 66%, including those living in cities, would actually prefer a house in the suburbs.

The largely anecdotal media accounts of millennial lifestyles conflict with reality, Kolko notes. Although younger Millennials have tended toward core cities more than previous generations, the website FiveThirtyEight notes that those ages 30-44 are actually moving to suburban locales more than in the past.

The China Syndrome

Given the limits of the domestic market, the luxury high-rise sector depends heavily on foreign investors. Already, harder times for some traditional investors – Russians and Brazilians, for example – have hurt the Miami market, long attractive to overseas buyers. There is now three years’ worth of inventory of luxury high-rises there, with areas such as Edgewater, Midtown and the A&E District suffering an incredibly high inventory of seven and a half years. Miami Beach is faring a bit better but is still a buyer’s market at a little over two years of inventory.

Still, the greatest threat to the luxury high-rise market may come from the Far East, the region of the world with the most surplus capital and, given the rapidly aging society, often the fewest profitable places to put it. Korea and Japan have lots of money sitting around looking for a home. Japan and its companies, according to World Bank data, are hoarding more than $2 trillion in unused liquid assets.

But as in all things East Asian, China stands apart. Last year, the country had a record $725 billion in capital outflows, according to the Institute of International Finance. China is now the largest foreign investor in US real estate.

But now the Chinese government has placed strong controls on these investments, which could leave some places vulnerable. In Downtown Los Angeles, according to local brokers, many of the new high-rise towers are marketed primarily in China. (LA claims to have the second-highest number of cranes, behind only Seattle.)

These expensive units are far out of reach for the younger people who tend to inhabit the neighborhood, instead serving as what one executive called “vertical safe deposit boxes” for people trying to get their money out of China. If the new crackdown on such investments is strongly enforced, this could leave a lot of expensive units without buyers. Prices have already softened, and with several new luxury buildings coming up, Downtown is likely to experience a glut.

Even in Manhattan, another market long dependent on foreign investment, projects are now stalled, including some once-hot properties in Midtown that are delaying their sales launches. Overall sales of condos over $4 million dropped 18% last year from the high levels of the previous three years. The ultra-premium market for condos over $10 million saw a 5% sales decrease in 2016.

Changes Ahead

The current slowdown, and perhaps longer-term stabilization, could lead to lower rates of migration out of the expensive cores. Yet this trend is not likely to reverse the movement of younger people to less dense areas. Luxury high-rise units were not built for families, and they are often located in areas with poor schools and limited open space. They may simply become high-priced rentals, attractive no doubt to childless professionals but not to middle- and working-class families.

In the end, the real need is not for more luxury towers. What is needed, particularly in America’s cities, from the urban core to the urban fringe, is the kind of housing middle- and working-class families can afford.









Wednesday, May 17, 2017

Younger Renters Turn to Buying

In a Wall Street Journal article from May 11, 2017 by Laura Kusisto and Chris Kirkham, we read that millennials  and other younger buyers are becoming much more focused on BUYING rather than renting in the past year. This trend is likely to continue.

It is not surprising with lower unemployment, still-low interest rates and FHA loans with 3.5% down payments available to home buyers (*buy to OWN not as an investment). What effect does this have on us as investors?  Seemingly it will drain the rental pool.

In reality, however, there is a great shortage of good single family homes since housing starts have not yet made up for the gap in new construction created during the recession. Thus renters are still likely to be quite plentiful. 
Prices, however, are likely to get a boost from this increased buying activity. The home buyers using the 3.5%-down FHA loan are less price sensitive and willing to pay more for a home they like (after all the difference for them is only 3.5% of the extra amount which is negligible).

Appraisals will track higher as sales prices increase, creating a virtuous cycle of appreciation, also fueled by the inaccurate, but popular sites like Zillow, Trulia (etc.) which reflect the increasing prices in their estimates.

In some of our markets, it may not be a bad idea to sell and take profits. Some markets have already appreciated quite a bit in the past few years, markets like Phoenix, Las Vegas and Dallas. In other markets, as prices increase our equity builds up faster.

Another benefit is, since the younger generation of buyers seek less expensive homes, the builders are creating more and more of those see in the WSJ (article below). Since these homes have exactly the kind of size and price we seek as investors, it will widen the inventory pool from which to buy, as investors are sometimes faced with tight selections.

We will discuss this issue, as well as much more, including the improvement in FNMA’s loan guidelines affecting investors, during our 1-Day Expo on Saturday May 20th near the San Francisco Airport. Mention this blog and you can attend free. There will be market teams, lenders, expert speakers on issues critical to investors, and lots of networking. To see some detail, please go to www.icgre.com/events. To register or contact us, please email info@icgre.com


The Wall Street Journal article is copied in its entirety below:

The Next Hot Housing Market: Starter Homes
Millennials are buying homes, steering builders toward lower price points
Home buyer Darin Fredericks and his wife Summer Fredericks in the kitchen of their new home in Ontario, Calif., last November. PHOTO: PATRICK T. FALLON FOR THE WALL STREET JOURNAL

Chris Kirkham
Updated May 11, 2017 8:09 p.m. ET
First-time buyers are rushing to buy homes after a decade on the sidelines, promising to kick a housing market already flush with luxury sales into higher gear.
Tracking home sales to a particular age group is hard, but a series of data points form a mosaic of a generation of young people ready to buy: The number of new-owner households was double the number of new-renter households in the first quarter of this year, the share of first-time buyers is creeping back toward the historical average, and mortgages for first-timers are on the rise.
 “They’re crawling out of their parents’ basements, they’re forming households and they’re looking to buy,” said Doug Bauer, chief executive of home builder Tri Pointe Group Inc., which operates in eight states.

In a shift, new households are overwhelmingly choosing to buy rather than rent. Some 854,000 new-owner households were formed during the first three months of the year, more than double the 365,000 new-renter households formed during the period, according to Census Bureau data. It was the first time in a decade there were more new buyers than renters, according to an analysis by home-tracker Trulia.

Home builders are beginning to shift their focus away from luxury homes and toward homes at lower price points to cater to this burgeoning millennial clientele. Demographers generally define millennials as people born between roughly 1980 and 2000.
In the first quarter of this year, 31% of the speculative homes built by major builders were smaller than 2,250 square feet, indicating they were in the starter-home range, according to housing-research firm Zelman & Associates. That is up from 27% a year ago and 24% in the first quarter of 2015.
“There’s an increasing confidence level in that part of the market,” said Gregg Nelson, co-founder of California home builder Trumark Cos. “The recovery is finally starting to take hold in a broader way.”
The shift reflects a reversal of a pattern that has driven the five-year housing-market expansion.
Up until now the luxury market has soared, while the more affordable end of the market has struggled. Tough lending standards, slow wage growth, growing student-debt obligations and a newfound fear of homeownership have combined to crimp demand among millennials in particular.
Now, the return of first-time buyers is allaying fears that millennials might eschew homeownership permanently. But it also provides an infusion of new demand while housing supply is tight and home price growth is significantly outstripping wage gains.
Home prices in February increased by 5.8% over the same month a year earlier, according to the most recent S&P CoreLogic Case-Shiller U.S. National Home Price Index.
The return of first-time buyers is accelerating. In all they have accounted for 42% of buyers this year, up from 38% in 2015 and 31% at the lowest point during the recent housing cycle in 2011, according to Fannie Mae, which defines first-time buyers as anyone who hasn’t owned a home in the past three years.
While economists and builders said lending standards have started to ease, getting a mortgage remains challenging for young buyers with shorter credit histories and, in many cases, student debt. Mortgage rates are also expected to rise further this year, posing an added challenge. Rates for a 30-year fixed-rate mortgage have risen to 4.05%, up from about 3.5% in November, according to Freddie Mac.
In Orange County, Calif., Trumark’s Mr. Nelson said he has been selling entry-level homes at nearly double the rate of his higher-end ones. He is even gaining confidence to build homes in more far-flung locations. The company is about to begin construction on a 114-home project in the Inland Empire east of Los Angeles and another development in Manteca, Calif., about 80 miles east of San Francisco. Both areas were hard-hit during the housing crash and were among the slowest to recover.
Builders largely avoided the exurbs after the bubble burst in 2006. But because land there is cheaper, they can build lower-end homes more profitably.
“Most builders really preferred to stick straight down the fairway, right at the corner of Main and Main. They were afraid to go back into the rough where they built a lot of homes in the prior cycle,” said Alan Ratner, senior home-building analyst at Zelman.
Outside Las Vegas, Tri Pointe has introduced a new-home design that is specifically targeted to millennial buyers, featuring indoor-outdoor patios and deck spaces, as well as a separate downstairs bedroom-and-bathroom suite that could be rented out to a housemate. Mr. Bauer said the homes, geared toward first-time buyers, have been selling more rapidly than pricier homes.
Joey Liu, a 28-year-old technology worker, purchased his first home in San Jose, Calif., earlier this year. He said it is more expensive than renting but that he is getting to the stage in life where it was time to buy.
“A lot of friends of mine bought a home so I started thinking maybe it was time to buy a home and stop paying rent,” said Mr. Liu, who settled on a three-bedroom townhouse for $690,000. He plans to rent out a room to help with the expenses.
He had three housewarming parties to celebrate his newfound status. “This is my first house, so it definitely feels different,” he said.
Builders say their return to the starter-home market shouldn’t invite comparisons to the fevered construction of the mid-2000s.
“One of the misconceptions is that, here we go again, this is another 2005, 2006 where all these builders are going to build hundreds of thousands of homes. We’re not going crazy,” said Brent Anderson, vice president of investor relations at Scottsdale, Ariz.-based Meritage Homes Corp. Mr. Anderson said that last year the company was building four to five speculative homes per community and is now up to 6.4 on average.

Building executives said one challenge is that many people are buying first homes later in life, meaning they have higher incomes and greater expectations molded by years of living in luxury downtown rentals. Such buyers also appear wary of driving farther out to get more space.
Sheryl Palmer, president and chief executive of Scottsdale-Ariz.-based Taylor Morrison Home Corp., said to cater to this demographic the company is building more three-story townhouses or single-family homes on narrow lots. She said about one-third of the company’s buyers this year are millennials, up from 22% last year.

Even Toll Brothers Inc., which typically builds homes for the top end of the market, is venturing into lower price points. In Houston, the company is building homes starting in the mid-$300,000s range, while a typical Toll home in the area costs around $850,000.

Write to Laura Kusisto at laura.kusisto@wsj.com and Chris Kirkham at chris.kirkham@wsj.com
Appeared in the May. 12, 2017, print edition as 'Generation of Renters Now Buying.'

















Tuesday, April 18, 2017

Historic Decline in Home Ownership affects Economy, Bodes well For Investors

In a Wall Street Journal article form March 27, 2017 by Laura Kusisto, as well as in a few blog entries on WSJ, the point is made that home ownership in the US is at a historic low. At 63.7% home ownership, it is the lowest such number for the past 48 years!

Reasons given for it include more strict lending practices following the recession. Perhaps another issue is that the recession is still fresh enough to have taken the belief away that your home will “always appreciate “ in value and will serve not only as a residence, but as a major lifelong investment. Some people may no longer think so.

Add to that the natural desire of people to be free to move at will, and we have only 63.7% homeowners in the US as of the 4th quarter of 2016.

As investors, of course, we are quite familiar with the powerful financial effect owning houses can have on our future, especially if we finance them with the incomprehensible 30-year fixed loans still available, and at still super low rates.

Having 63.7% homeownership percentage means, of course, that a full 36.3% of the population are renters! That is about 117,000,000 people!

Those of us who know the value and power of investing in houses and holding them as rentals, can only look at this statistic as a positive – obviously these renters need a place to rent and we will have a larger renter pool available for our homes. Sure some single people may want to rent an apartment, but families usually prefer renting a single family home.

Coupling this data regarding the highest number of renters available to us in nearly 50 years, with the still-low interest rates available on 30-year fixed rate loans, means this is an excellent time to stock up on single family homes as investments.

Interest rates are on the way up. The fed keeps reminding us they will continue to raise rates. Having a period of such low rates (despite the small “Trump Bump” we experienced recently), makes it a special time to buy and hold.

If you are under the FNMA allotted 10 loans per person (20 per married couple if they buy separately), it is high time for you to go out there and purchase brand-new single family homes in good areas, finance them using these great 30-year fixed rate loans, which will never ever keep up with inflation (thus they will get eroded by inflation as to their real dollar value). The homes will be managed by local property managers we use ourselves in the various cities in which we invest.

We will discuss this as well as many other important topics for investors, at our quarterly ICG 1-Day Expo near the San Francisco Airport on Saturday May 20th. We will have experts lecturing on important topics, lenders, market teams from the best markets in the U.S., and lots of Q&A, networking and learning. Just send us an email at info@icgre.com. Just put in in the subject line, "Saw your blog on home ownership" and list your name and those of your guests. We will confirm!  See you on May 20th. 



Sunday, February 26, 2017

Buildable Lots for Single Family Homes Become More Scarce and Valuable

In an article in the Wall Street Journal from January 3rd 2017 by Chris Kirkman (yes it’s from over a month ago but this is an important and relevant trend which is intensifying as time passes), we learn that buildable lots for developers are becoming scarce. One tactic builders are reverting to is buying whole subdivisions that were abandoned during the crash and which were never fully completed. While there is a lot of remedial work to be done, it is still a better deal in many cases to fix up the existing unfinished subdivision, than to start the zoning and approval processes from scratch.

The relevance to us as real estate investors is that as buildable lots become more scarce, undoubtedly their cost increases. This reliably raises the price for finished new homes and creates comparable sales which usually push the median market prices higher.

Given the fact that interest rates are still low (historically they are very low, Trump-bump notwithstanding), and since 3.5%-down FHA loans are still widely available to homeowners buying at the price ranges we are interested in ($100K-$200K), the writing is on the wall: home prices in many cities (certainly the key cities we look at as investors), are likely to keep appreciating in the near future (possibly 1-2 years).

This points to a potential window in which to ‘stock up” on quality investment Single Family homes: with low interest rates (don’t forget to get a 30-year fixed rate loan if you can), an upwards price trajectory (if only due to the scarcity of buildable lots), still-available low-down FHA loans and still-affordable prices in many key metropolitan areas, investors are enjoying a ‘sweet window” in which to buy, finance their purchases well, and then rent and hold.

We will be talking about this and many other points, including entity formation and asset protection, investing in real estate form one’s self-directed IRA, the types of loans available to investors, which markets stand out and why, and a whole lot of expert information.  Q&As and networking are always in abundance, at our Quarterly 1-Day Expo near the San Francisco Airport March 4th. Anyone mentioning this blog entry can attend for free – please email us at info@icgre.com to register. Just tell us in the subject line, "Read your blog," and your information in the body of the email.

The full WSJ article is presented here: 

With Lots in Short Supply, Builders Revive Abandoned Projects

Developers and investors are starting to resurrect subdivisions that were left half-finished after the housing collapse


By 
CHRIS KIRKHAM
Updated Jan. 3, 2017 6:25 p.m. ET
When real-estate fund manager Drapac Capital Partners visited the Cameron Springs subdivision in Cobb County, Ga., in 2012, the landscaping was dead and weeds had sprouted through the cracked tennis courts. Discarded tools littered empty lots where construction workers had walked off the job in the late 2000s with only a fraction of the homes completed.
Drapac saw value in those abandoned lots. It bought the 101 remaining lots in the neighborhood for a total of $375,000 and spent about $550,000 finishing half-built lots and upgrading the pool and clubhouse, betting home builders someday would return to the area.
As the nation’s supply of buildable construction lots shriveled, interest in the property picked up. Drapac received 12 bids last summer for the neighborhood, eventually selling it to national builder D.R. Horton Inc. for $6 million.
“I think they’re all panicking,” said Sebastian Drapac, chief operating officer of Drapac Capital Partners, an Australian firm that has purchased more than 25,000 lots in abandoned developments across the U.S. since 2011. “They’re trying to get lot positions wherever they can.”
The housing market’s boom and bust last decade left the U.S. with a surplus of vacant lots and half-built subdivisions many thought would never be revived. But tighter lending standards since the housing collapse last decade have made it difficult for smaller operators to develop land into buildable lots—the crucial raw material for new home construction—leaving builders to compete over a dwindling supply.
Now, builders and investors are starting to resurrect those half-finished subdivisions that were given up for dead after the collapse.
Nearly two-thirds of home builders reported a low or very low supply of available lots in their markets, according to a survey last year by the National Association of Home Builders, the highest reading since the group started tracking the issue in 1997.
Converting land into buildable lots requires developers to clear and grade the property, get approvals from local planning officials and install needed utilities such as gas and water.
Overall, the supply of vacant developed lots has decreased by more than 20% across more than 80 major U.S. markets since 2011, according to data from housing research firm Metrostudy. In markets such as Nashville, Tenn., and Charlotte, N.C., the inventory of vacant lots has declined by more than 40% over the past five years.
The shortages have pushed median single-family-home lot prices to a record high of $45,000 last year, surpassing the previous peak of $43,000 in 2006, according to census data analyzed by NAHB.
Developers and investors have been sprucing up unfinished community centers, reviving underfunded homeowners’ associations and adding amenities such as walking trails, lakes and bocce courts in an effort to revive the image of moribund developments and attract new buyers.
In some cases, they change the name of the development to shed prior stigmas.
Drapac Capital Partners replaced a sign out front of a struggling suburban Atlanta neighborhood that read “Brightwood - Established 2007.” They tweaked the name to read “Brightwood on the Lake, Est. 2016,” after clearing trees and opening up the neighborhood’s access to an adjoining pond.
Steve Brock just sold land for about 300 homes in a master-planned development called Stonoview outside of Charleston, S.C., to Lennar Corp. for $19 million. The project had been abandoned during the downturn, and Mr. Brock acquired three tracts around the property in 2013 for $7 million, and spent around $5 million over three years developing many of the lots, installing a 10-slip boat dock and drawing plans for a lighthouse and walking trails. Mr. Brock and another builder will build homes on 71 other lots in the area now worth $9.4 million, he said.
“We could sell it to them for close to retail prices, and they have the runway of land and lots immediately,” said Mr. Brock, founder and president of Brock Built. As a smaller builder and developer with a higher cost of capital, he said he could never pay as much as Lennar did for such a project and still turn a profit.
In Maricopa, Ariz., 35 miles south of Phoenix, Fulton Homes is building swimming pools and reviving parks in a project called Glennwilde that had been largely abandoned by developers for seven years.
Dennis Webb, Fulton’s vice president of operations, said prices for such deals are generally lower because of the needed improvements. And because such neighborhoods have already been laid out and approved, “We can get going pretty quickly,” Mr. Webb said. “We don’t have to wait a year and a half to develop the plans.”