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If Costs Are Going Up And Rents Aren’t Going Up, The Land Has To Go Down

A report from the Wall Street Journal. “Companies such as Opendoor aim to bring Wall Street-style efficiencies and Silicon Valley software to the housing business. Zillow came to Phoenix last spring to test its own computer-driven flipping strategy. In May 2018, Zillow bought its first house for $410,000. After a renovation, Zillow listed it 11 days later for $425,000—and ended up selling it for $403,000, around 2% less than it paid.”

From Real Estate Weekly on New York. “The most sweeping changes ever made to New York City’s rent regulations have been roundly criticized by a real estate industry that is warning of crumbling housing stock and a worsening affordability crisis. ‘There are many losers including small property owners, contractors as well as tenants,’ said John Banks, president of the Real Estate Board of New York.”

From Bisnow on Washington DC. “The continued rise in construction costs has made D.C.’s ongoing projects more expensive, and developers say the next wave of new projects will be hit the hardest. CBRE Vice Chairman David Webb, a leading finance broker, said the combination of rising costs and stagnant rents have impacted land values across the region. ‘It makes it harder to get top dollar for land not just because of the cost increases, but because of the fear of more increases with tariffs and the labor shortage,’ Webb said. ‘If costs are going up and rents aren’t going up, the land has to go down.'”

From Bisnow on Texas. “Shifting interest rates and product oversupply pose the greatest threats to expansion in the Dallas-Fort Worth commercial real estate market, a new survey by Henry S. Miller says. Real estate faces several major headwinds — from the impact of trade tariffs to interest rates and a glut of CRE production.”

From KCRW in California. “Thousands live on the streets of Los Angeles and many others struggle to pay high rents. Yet, more than 100,000 units reportedly sit empty across our city. So four councilmembers have proposed a vacancy tax on property owners who keep rentals vacant.”

“And it may provide an answer to the question many of us have pondered as we watch all the new residential towers going up in LA: Does anyone actually live there? For the past two years, Walter Dominguez and Brad Kane have been driving around their West LA neighborhoods, apartment hunting. But they’re not in the market for themselves. Instead, they just like to count the windows.”

“‘You can look up and see the building, more than half the lights are not on,’ Kane said, pointing up at the Vision, an 18-story high-rise on the corner Wilshire and Crescent Heights Blvd. ‘It gives you a good idea, that our estimate of about 40-50% vacancy is about right.'”

From Honolulu Civil Beat in Hawaii. “There is probably no truer symbol of the state of Honolulu’s housing market than the vast darkness of unoccupied condos in the new high rises of Kakaako.
Many of them belonging, no doubt, to out-of-state investors who collect residences in exotic places for occasional visits. People who not only can pay the units’ towering purchase prices, but can afford to let them sit empty most of the time instead of renting them out.”

“And frankly, all the talk about designating certain proportions of the units in condo towers for affordable housing has been something of a smokescreen. The implication is that the city and state are really focusing on the problem when they’re actually still playing into the hands of developers looking to serve those lucrative upscale buyers who don’t even live here.”

From Forbes on Florida. “The founder of a Miami-based private equity firm is doubling his initial target goal of $100 million for a fund dedicated to acquiring distressed commercial real estate loans. Ralph Serrano, principal of Safe Harbor Equity said a recently completed fundraising tour through Europe and Asia convinced him there’s strong appetite among high net worth individuals and institutional investors abroad to put their capital in a distressed commercial real estate debt fund.”

“‘There has been a slight uptick in foreclosures statistically,’ he said. ‘They are bit higher than they were 12 months ago.'”

“Foreclosure starts in Florida were up 23% last month, the fourth highest among all 50 states, according to Attom Data Solutions’ May 2019. In Miami-Dade County, foreclosure starts inched up 9.1% year-to-year, rose 18.7% in Broward County and jumped 33.9% in Palm Beach County.”

“Among recent foreclosure actions involving South Florida commercial properties is the Design Center of the Americas in Dania Beach. Wells Fargo, acting as a trustee of GE Commercial Mortgage Corp., sued owner Cohen Brothers Realty Corp. on June 4. The lawsuit alleges the owners are delinquent on two loans worth $172.9 million.”

“Last month, Madison Realty Capital filed a foreclosure lawsuit against the developer of the Costa Hollywood Beach Resort. The 326-unit condo-hotel at 777 North Ocean Drive in Hollywood opened last October. Madison is claiming $40.6 million of delinquent debt on a $70 million construction loan issued in 2016. And in March, the lender for the Midtown Doral condominium and retail complex filed a $11 million foreclosure lawsuit.”

“Other private equity firms looking to capitalize on a potential rise on distressed loans include New York City-based Churchill Real Estate Holdings and London-based Cheyne Capital. In April, Churchill launched a $200 million distressed debt fund targeting failed condo projects and struggling retail properties valued under $100 million. Cheyne recently raised $1.1 billion for a fund that will buy the debt of stressed middle-market companies from European banks seeking to sell down loan portfolios in order to meet new accounting and regulatory standards.”

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This Post Has 62 Comments

  1. ‘In May 2018, Zillow bought its first house for $410,000. After a renovation, Zillow listed it 11 days later for $425,000—and ended up selling it for $403,000, around 2% less than it paid’

    What’s funny about this article is all the people sitting around tables looking at their laptops. The net loss doesn’t include the overhead from that. These idiots are losing money hand over fist.

    1. These money losing companies will have billion dollars valuation soon! And they got billions to waste, I mean spend!

    2. “…Zillow came to Phoenix last spring to test its own computer-driven flipping strategy….”

      High frequency [stock like] trading has come to the REIC. The house next door to you may have 5 different owners in a single day.

      Eat your heart out Alexa, Zillow’s computer program is probably named “Suzanne_has_researched_this V1.0”

      “…and ended up selling it for $403,000, around 2% less than it paid…”

      No worries about losses. Zillow will make up for it with volume.

    3. Flipping homes for Zillow is just to increase their revenue and manipulate their stock price. A -$7k loss is nothing for this company which loses hundreds of million each year.

      Zillow get a tech company like valuation for a low or negative margin business of flipping homes. Since so many people passively invest, a company like Zillow has plenty of investors buying their stock, especially if they can show impressive revenue growth (forget profit).

      1. Flipping homes for Zillow is just to increase their revenue and manipulate their stock price. A -$7k loss is nothing for this company which loses hundreds of million each year.

        Gee, I hope they’re still around to do that when prices are cheap. I’ll buy from them.

        1. There has to be some clever people who are figuring out how to flip overpriced shacks to Zilllow, Redfin, and Opendoor.

          Their algorithm = we need x revenue growth this quarter so flip x homes to hit that number Wall Street wants us to hit.

          It allows these companies control to exceed Wall Street expectations, spike the stock, and insiders can dump shares as it rises.

          2. And there are still more clever people who know how to buy stocks of money-losing tech companies, only to get out in time before the next big tech stock meltdown. I believe the technique is called Picking Up Nickels Ahead of Steamrollers.

          3. I’ve always associated the phrase “picking up nickles ahead of steamrollers” with relatively benign risks that have large, blackswan like events (e.g. investing in government bonds). It seems relatively risk free, until it’s not.

          4. I never see it as low risk. I just see it as low odds of happening on any one roll of the dice but a really horrible consequence when you finally do roll snake eyes. And I’m always amazed at the people willing to do it…

  2. ‘The most sweeping changes ever made to New York City’s rent regulations have been roundly criticized by a real estate industry that is warning of crumbling housing stock and a worsening affordability crisis. ‘There are many losers including small property owners, contractors as well as tenants’

    Sounds like everybody in New York is a loser John. Good thing real estate is so liquid…

    1. about 20 years too late, every renovation was luxury, plus a 20% vacancy increase, there was no incentive to just repaint and raise the rent $50, but enormous incentives to spend $20,000 with luxury flooring appliances fixtures video security systems, all to raise the rent $500 a month

  3. ‘There has been a slight uptick in foreclosures statistically’

    ‘Foreclosure starts in Florida were up 23% last month, the fourth highest among all 50 states, according to Attom Data Solutions’ May 2019. In Miami-Dade County, foreclosure starts inched up 9.1% year-to-year, rose 18.7% in Broward County and jumped 33.9% in Palm Beach County’

    This isn’t a slight uptick. And it comes on top of the “spike” in 2017.

  5. Investors Are Buying More of the U.S. Housing Market Than Ever Before
    Their interest poses a challenge for millennials and other first-time buyers

    excerpt:
    Investor purchases of U.S. homes have climbed to an all-time high, a sign that rising home prices have done little to dampen demand for flipping homes or turning them into single-family rentals.

    Big private-equity firms, real-estate speculators and others that buy properties comprised more than 11% of U.S. home purchasers in 2018, according to data released on Thursday by CoreLogic Inc.

    1. Why should someone starting out be able to afford a home when they could be a profit stream for shareholders? /s If private-equity firms could corner the supply of food and resell it to people at a hefty profit, they would do it in a heartbeat.

          1. To get a better understanding of the Wall Street mindset, read Fiasco, a book about Morgan Stanley traders who enjoy “ripping someones face off” in a trade.

    1. Deflation? Who said anything about Deflation?

      dtRump, Kudlow, Mnuchin, Ha$$ett, Ro$$ & Moore: The eCONomy is $uper.$trong! Lower the damn Fed Fund$ intere$t rate$ now!

      “Stephen Moore, who pulled out of consideration as Trump’s pick for a Fed board seat in May, criticized the central bank’$ deci$ion Wednesday to leave rate$ unchanged.

      “The Fed board’s decision to keep the federal funds rate unchanged shows that the board still doesn’t get the extent of the continuing threat of deflation,” Moore said in a statement.”

      Powell Says He’ll Serve Full Fed Term Despite Trump Pressure

      Alister Bull| Bloomberg | June 20 2019

      1. Hurry, hurry, hurry! … Buy, Buy, Buy! … Go dog, GO!

        Opinion: The U.$. $tock market is like a drunken party — stay for a while but know when to leave

        Nigam Arora | MarketWatch |Published: June 20, 2019

        “There is a type of in$anity among central bank$ and politician$. It starts with the bond market$ and follows through to the $tock market$. Let’s bring some common sense to the forefront. Is there a free lunch here? The answer from politicians, central bankers, stock market permabulls and mom-and-pop investors is a re$ounding “yes.”

        What to do now depends on your thoughts about this free lunch. I, for one, do not believe in free lunche$. The debt bubble is getting bigger and will eventually bur$t. Many investor$ will get badly hurt. Think of it, instead of a lunch, as a party where almost everybody is drunk and all the drunken people claim that nobody is drunk. I would suggest to investors that they enjoy the party but be aware of the risk$ ahead.”

      2. When are the Mega.Wanker.Banker$ gonna start paying wee poor depositor$ to borrow their monie$, when?

        Bloomberg |Market$

        In Land of $ub-Zero Debt, a Whole Yield Curve May Turn Negative
        By Anchalee Worrachate |June 19, 2019,

        “The amount of bonds globally with negative yields surged to a record $12.5 trillion this week. Danish two-, five- and 10-year securities are already trading with below-zero yields, while 30-year Swiss obligations fell into negative territory Tuesday.

        Drivers for the global fixed-income rally include trade tensions, tumbling inflation expectations and anxiety over economic growth, prompting central banks to talk up the prospect of looser policy — juicing bonds anew.

        While the Federal Re$erve is expected to keep its intere$t rate unchanged on Wednesday, the market has already priced in more than one rate cut for this year.”

        What at the implication $ of negative bond yield$?

        Expectations of low growth / deflation. Usually negative bond yields are an indication that investors expect some form of economic downturn. It is this negative expectation which encourage investors to choose the $afety of government bonds rather than commoditie$ or $tock share price$. In addition, negative bond yields are a sign investors expect deflation. Deflation usually accompanies prospects of lower economic growth.

        Deflation. If a country experiences deflation (e.g. inflation rate of -1%), then a negative nominal bond yield of -0.04% still can give a real positive return for the investor, because the bond is falling in value at a slower rate than cash reserves because of deflation.

        1. “Deflation. If a country experiences deflation (e.g. inflation rate of -1%), then a negative nominal bond yield of -0.04% still can give a real positive return for the investor, because the bond is falling in value at a slower rate than cash reserves because of deflation.”

          Wrong. Cash reserves will outpace a negative bond return.

        2. No one who has to pay health insurance, buy groceries, buy a transit pass, pay state and municipal license fees, auto insurance, college tuition, or rent on an apartment is feeling much risk of deflation. The only deflation the central planners care about is deflation in asset prices that prop of the banking system. If it costs you a week’s pay to buy groceries for the month, Too bad. It cost me 360$ In CA to register my 2005 pick up with 150 k miles on it. Can’t see deflation affecting that anytime soon

          1. “The only deflation the central planner$ care about is deflation$ in a$$et price$ that prop of the banking $ystem.”

            Bugs: “eh, preci$ely Doc!”

          2. It cost me 360$ In CA to register my 2005 pick up with 150 k miles on it

            You must live in King County, WA 😉

        1. This woman will gladly a$$ist in that ta$k:

          FEDERAL RE$ERVE
          Trump’$ potential Fed nominee reportedly wants rate$ at zero

          Michael Sheetz | CNBC |Published Wed, Jun 19 2019

          Judy Shelton said she “would lower rate$ as fa$t, as efficiently, as expeditiou$ly as po$$ible,”

          Shelton is one of President Donald Trump’s possible picks for the open seats on the Federal Re$
          erve board.

          She served as an economic adviser for Trump during his 2016 campaign and told the Post that she had spoken with the White House about a role on the Fed’s board.

          1. Judy Shelton said she “would lower rate$ as fa$t, as efficiently, as expeditiou$ly as po$$ible,”

            Have to read-up on her economic philosophy. Thanks!

  8. “These last 25 years, with the weakening of the rent laws, it allows speculative landlords to move in,” said McKee. “That’s over now. There’s no vacancy decontrol. No longevity bonus. MCIs will be based on need, not speculation, not a business model that relies on displacing people. They don’t have the mechanisms.”

    He said owners will still see profits on MCIs. “Under the old MCI law, they saw returns of 20 percent. With the new law, they’ll still see a return, but it will be six percent. So they’ll just have to live with it.”

    But but but what if they brought during the last 6 years expecting a 20% ROI! Like Ben said, it is good thing real estate is so liquid LOL

  9. Record profits are a thing of the past, warns Berkeley

    ‘One of Britain’s leading housebuilders called time yesterday on an era of making record profits. Rob Perrins, chief executive, said that Berkeley’s prices had come down since 2013 and 2014, when the market was “booming”, but that pricing in the capital “remains firm” and that it was securing prices above expectations.’

    https://www.thetimes.co.uk/article/booming-profits-are-a-thing-of-past-warns-berkeley-xf9g9qxw8

  10. “…. more than 100,000 units reportedly sit empty across our city. So four council members have proposed a vacancy tax on property owners who keep rentals vacant….”

    Oh, gosh what a swell idea. Betcha these four council members sat up all night thinking up that one.

    Don’t even think of the legal issues.

    Shouldn’t take more than 100,000 new bureaucrat hires to administer.

    No problem, LA city will just keep bumping up the “vacancy tax”.

    Last one to leave the city of LA would you kindly turn off the street lights.

  11. “Shifting interest rates and product oversupply pose the greatest threats to expansion in the Dallas-Fort Worth commercial real estate market, a new survey by Henry S. Miller says. Real estate faces several major headwinds — from the impact of trade tariffs to interest rates and a glut of CRE production.”

    Also shills been saying or praying or hoping that the low interest rates will bailout the market. It’s the low interest rate that is creating the glut! More Yellan bux looking places to invest in this low returns environment and they are building like crazy!

  12. While I believe the homeless is more of a drug problem, these people aren’t employable or good renters either in their current state.

    So, does society just pay for their expensive housing when it’s a drug problem and they are not able to be a productive member of society.

    Don’t know what the rehab success rates are but addics in general don’t want to go to rehab. I use to volunteer at homeless shelters and got a good idea of what the gig was.

    The homeless get free food and clothing and they pander for money to support their drug habits.

    The problem is now becoming a public health crisis . Interested in how they propose to solve it.

    1. “The problem is now becoming a public health crisis . Interested in how they propose to solve it.”

      Solve it? How about move it. Ship the druggies up North to the Bay Area.

      1. They already flock on their own to wherever the free handouts and lax enforcement is greatest. From there a ‘homeless-industrial complex’ arises to siphon off the ever greater amounts of money diverted to growin.. er.. combating the problem.

        Liberal progressives in Seattle won’t be satisfied until their socialist cesspool dream is complete.

        1. And Denver is just getting started. When I got rear-ended in a hit and run in Denver a year ago, I didn’t even bother calling Denver Police. I did call Denver City Council and leave them a voice mail thanking them for their sanctuary city policies.

          I live in Arapahoe County, not in the City / County of Denver. I’m boycotting Denver, I’m not gonna buy anything in Denver, I’m just gonna make alot of money in Denver. And not spend a goddamn dime in Denver…

          1. In the words of Howie Carr, “if I ever get arrested for anything, I just want to be treated like an illegal alien.”

      2. Huh? ( “move ’em”) … Can’t they $ign on a dotted _._._._._._ line? You should welcome them! In fact, you should take out a life in$urance policy on ’em whilst ya pitch the “long.term” benefit$ of becoming a “wanker.banker.borrower”!

      3. In response to shipping them up North.

        They have residence requirements for the homeless. That way Counties control taking on the homeless from other areas.

  15. If you consider drug addiction a medical problem, which becomes a crime problem as well, and now a public health hazard, than the problem has to be addressed.

    I think currently the government can’t force people into rehab, and there isn’t enough jail cells for the increase in encroachment violations.

    So, the numbers are increasing and it’s out of control at this point.

    I don’t really have the answers, but no doubt the solutions are expensive.

    I don’t think in general the tax payers just want to give free housing and everything else to the drug addict. People in general don’t even want to live near drug addicts. They are fire hazards for one thing.

    I’m just saying that the problem is getting worse without easy solutions.

    2. I think currently the government can’t force people into rehab

      I think rehab tends to be useless for people who are forced into it anyway.

        1. Any solution would need to start with some forfeiture of ones civil liberties. If our purpose is to help someone recover, then that forfeiture seems reasonable to me. Drug addiction is the devils workshop.

          Outsourcing may be worth discussing if the ultimate goal is to save someone’s life and help make them a reasonably productive citizen again.

      2. “I think rehab tends to be useless for people who are forced into it anyway.”

        I would agree.

        Twenty or so years ago I heard a gentleman at an AA meeting with 30 or so people in attendance say that the meeting was for people who wanted to be there, if it was for the people who needed to be there you would’t be able to get within 2 miles of the door.

    3. Lots of good solutions revolving around medication assisted treatment. We are going to have to provide free, bare-bones housing to these people in undesirable areas to prevent theft, property crime, and causing a decline in tourism in our most important cities. I am not saying this housing is warranted, but it will be cheaper than trying to put these people in prison or have them use the revolving door of the ER.

      As for employment/rehabilitation, I think expectations have to be fairly low. Some will get better, but most won’t. They will be black tags and the collateral damage of the pain killer epidemic that was foisted upon us by the drug companies. The best thing we can do is inoculate the rising generation from this scourge of addiction and limit the negative impact on society by those who are probably too far gone.

      1. “…in undesirable areas…”

        Within each state, or in another state, e.g., N. Dakota suggesting a federal solution?

    4. Not just free housing. The libs want to build them all cute tiny houses, with tiny yards and tiny picket fences. Meanwhile, I lived in a one-bedroom apt for 15 years, and I had to pay.

        1. The able-bodied will pay one way or another. Drugs fuel property crime, theft, and vagrancy. Free housing in remote areas doesn’t have to be nice. Make it more like refugee tents. Enough to meet basic needs but nothing that would create the type of resentment that Oxide his airing.

  17. Bugs: “eh, what’$ up Doc? … Fa$cinatin’ figure$!”

    Dow Jones Industrial Average
    CLOSED
    Last Updated: Jun 20, 2019 at 4:05 p.m. EDT

    26,753.17

    Sept 16th 2018 (9 month$ + 4 day$ ago)

    26,743.50

    1234567 … mi$$ed it bye .03

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