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There Are A Couple Of Cracks In The Dam

A report from the Denver Post in Colorado. “In the second half of this year, the housing market here and in other cities has cooled, with sales slumping and the inventory of unsold homes rising. And while annual price gains are still solid, the median price of homes sold continues to drop from the peaks reached this summer. When the housing markets last started heading south about 12 years ago, the most overheated cities like Phoenix, Las Vegas and Miami suffered the worst price declines.”

“Does a similar fate await Denver, Seattle and San Francisco and other leaders this time around? ‘The market is shifting right now more towards a buyer’s market than a seller’s market,’ said Martin Mata, a Redfin agent in Denver. He is working on 30 listings set to hit the market in the first quarter. A year ago, he had only 15 to 20 queuing up.”

“‘I saw the slowdown in the market in June of this last summer,’ Mata said. With no indication that conditions are about to reverse, he expects the inventory of homes to swell even further, putting more pressure on sellers. Homes priced correctly to reflect the changes in the market will move faster, while those that aren’t could linger and clog up the market, Mata said.”

The Seattle Times in Washington. “Seattle’s newest plan to sell a long-vacant block across from City Hall and have a private developer build a residential high-rise and a Civic Square plaza on the troubled site has slipped a year behind schedule, prolonging the life of an embarrassing downtown eyesore.”

“The deal approved by the City Council last year included a timeline that listed August 2018 as the target date for Vancouver, B.C.-based Bosa Development to obtain a land-use permit for the downtown project. But Bosa is still refining the project’s design in response to recommendations by a city review board and likely won’t secure a permit until late summer 2019, said Bryan Stevens, spokesman for the Department of Construction and Inspections.”

“That means construction may not begin until early 2020, an astonishing 15 years after the city’s old Public Safety Building was demolished and the valuable property became a hole in the ground. Meanwhile, the housing market is changing. Inventory is up, rents have leveled off in the past year and home prices have dropped.”

The San Francisco Chronicle in California. “Development of market-rate housing in San Francisco will slow to a trickle in 2019, because a combination of higher construction costs, escalating fees, a softening market and increased interest rates has persuaded many builders to wait on the sidelines, developers and industry analysts say.”

“Development ‘is not going to happen,’ said Sean Keighran, president of the Residential Builders Association, which represents developers and contractors. ‘There are four strikes, and you only get three. It’s hard to foresee a rosy path forward.'”

“The median price of a single-family home in the city has fallen 15 percent from its peak of $1.7 million in February 2017, according to real estate brokerage Compass. While the median price of $1.44 million is still out of reach for most people, it’s enough to have a chilling effect.”

“‘Nobody buys land and develops in a downward market,’ Keighran said. ‘Our guys stopped buying sites a year and a half ago.'”

“Mark Conroe, a managing partner with Presidio Development Partners, recently completed a 28-unit condominium project at 1598 Bay St. in the Marina district and is building a 160-unit rental building at 1699 Market St. But he said he has no plans to jump into any new projects.”

“‘There are a couple of cracks in the dam,’ he said. ‘Brokers will tell you, if they are being honest, that the market changed at the beginning of the summer. There is no question the condo market is going down.'”

“Plenty of developers are looking to sell sites where projects have been approved but construction has not started, he added. ‘I question why anyone would start construction now,’ Conroe said. ‘Before, you had to track down sites. Now, the seller tracks you down. My response is always the same: I am not a buyer. Revenues are going down and costs are going up.'”

“While groundbreakings will be rare in 2019, plenty of new units will hit the market next year because many of them were started about two years ago. The city expects that about 4,700 units will be completed in 2019, more than twice the 1,900 a year the city has averaged since 1990, and almost as many as the roughly 4,900 units that opened in 2016, the most productive year in recent history. About 2,300 homes in multifamily buildings were completed in 2018.”

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This Post Has 43 Comments

  1. ‘The median price of a single-family home in the city has fallen 15 percent from its peak of $1.7 million in February 2017′

    But Leslie said…

    ‘Nobody buys land and develops in a downward market,’ Keighran said. ‘Our guys stopped buying sites a year and a half ago.’

    OK, this brings up a major point. If you look at price reductions in San Francisco, they are the same percentage now as a year ago. The bubble popped over a year ago, longer than that in Manhattan and Miami Beach.

  2. The title to the last link:

    ‘SF’s boom in home building to slow in 2019’

    Wa? We’ve been told they can’t build shacks and airboxes in California cuz of Nancy Pelosi and not having opposable thumbs!

  3. ‘And while annual price gains are still solid, the median price of homes sold continues to drop from the peaks reached this summer’

    What happened to my shortage Denver?

    1. My confidence that the flea-bitten riffraff flocking into Denver for the legal pot would suddenly mature, adopt responsible lifestyles and virtues, move into the plentiful living wage jobs waiting to be filled in the greater Denver area, and buy overpriced shacks with white picket fences so they could raise the next generation of happy nuclear families turns out be sorely misplaced.

      1. funny boo boo.

        I dont have any problem with people making their own lifestyle choices. But these folks have to build a lower cost living style that they can self support.

  4. ‘Brokers will tell you, if they are being honest, that the market changed at the beginning of the summer.

    I wonder if the same FBs who overpaid for their shacks last year due to realtors playing on their FOMO are going to list with the same realtors, who will now be exploiting FOGS (Fear of Getting Schlonged) to panic FBs into pricing their shacks for quick sales and an easy commissions in a cratering market.

    1. “‘Brokers will tell you, if they are being honest, that the market changed at the beginning of the summer.'”

      Bahahahaha … fat chance! Brokers make their money by DOING DEALS! If honesty gets in the way of doing a deal then which one, the honesty or the deal, gets to be sacrificed?

    2. No, they most likely wouldn’t use the same realwhore. In a down market, the people who make hay are typically not the ones who made hay during the boom.

      People don’t forget who led them down the wrong path, financially speaking.

      1. “No, they most likely wouldn’t use the same realwhore.”

        I agree, I wouldn’t go near the whore that got a commission from my purchase back in 2005, even tho prices in portland are about 40% higher in 2018 than 2005; the 40% is due to inflation, and on an inflation adjusted basis, 2018 prices are the same as 2005. However, if I had purchased in southern Cali back in 2005, the prices are about the same in 2018 nominally, but down 40% on an inflation adjusted basis. Cali was way more overpriced in 2005 than portland, which is why I bought as a defensive move against the madness of the 2005 era.

        However, the point is moot cuz most of these fools won’t close a sale using any realwhore, they will be a mailin’ in the keys to the foolish lender when they need to move to another part of the country/world for work.

        Neil, please pass the popcorn.

        1. the 40% is due to inflation

          I submit that this is just about impossible. People do not have more to spend on houses simply because the price of everything else they need has gone up. It is the other way around. I would suggest that an increase in household debt more aligns with the increase in house prices. The only reason this distinction is important is that it speaks to what will happen.

          Pass the popcorn.

  7. “Plenty of developers are looking to sell sites where projects have been approved but construction has not started, he added. ‘I question why anyone would start construction now,’ Conroe said. ‘Before, you had to track down sites. Now, the seller tracks you down. My response is always the same: I am not a buyer. Revenues are going down and costs are going up.’”

    I have a good friend who’s company does the building for one of the major REIC’s in the Bay Area and I have been inquiring about what’s on the pipeline for his next projects or if they anticipate a slowdown. According to him, they are busy busy busy with no downturn in sight but also nothing more than “tentative” contracts under review for there next projects. He has an very optimistic view of the future, likely because of the new normal he is used to. He is in a management role so I am sure he doesn’t have the best insight other than speculative forecasting he hears from his executives. Articles like this are quite reminiscent of the last build boom bust…

  9. “When the housing markets last started heading south about 12 years ago, the most overheated cities like Phoenix, Las Vegas and Miami suffered the worst price declines.”

    “Does a similar fate await Denver, Seattle and San Francisco and other leaders this time around?”

    The bigger the bubble, the louder the pop when they collapse.

      1. The widespread anticipation of another liquidity bomb may limit the willingness of homeowners to sell at a loss, if they anticipate future bailouts to make them whole.

        1. Which is interesting. Unlike before when mostly only Wall Street relied on the Fed put, today *everyone* has the expectation of more bailouts, QE to the moon, ZIRP forever.

          And just when normal people think they have a handle on something is usually when the rug gets pulled out from under them. I have no idea, but maybe we’re in for a big surprise. No one was expecting Volker and 20% interest rates in 1981, but it happened.

          1. I need to read up on what caused that inflation and the subsequent high rates back then. I was just a child.

          2. Interesting. Sounds kind of like what we have going on right now!

            “Still, President Nixon’s primary concern was not dollar holders or deficits or even inflation. He feared another recession. He and others that were running for re-election wanted the economy to boom. The way to do that, Nixon reasoned, was to pressure the Fed for low-interest rates.

            Nixon fired Fed Chairman William McChesney Martin and installed presidential counselor Arthur Burns as Martin’s successor in early 1971. Although the Fed is supposed to be solely dedicated to money creation policies that promote growth without excessive inflation, Burns was quickly taught the political facts of life. Nixon wanted cheap money: low-interest rates that would promote growth in the short-term and make the economy seem strong as voters were casting ballots.

            In public and private Nixon turned the pressure on Burns. William Greider, in his book “Secrets of the Temple: How the Federal Reserve Runs The Country” reports Nixon as saying: “We’ll take inflation if necessary, but we can’t take unemployment.” The nation eventually had an abundance of both. Burns, and the Fed’s Open Market Committee which decided on money creation policies, soon provided cheap money.”

          4. A few key factors to check out:

            1) Accumulated debts from WWII, Korean War, Vietnam War, Great Society and other unfunded government programs had to be paid off.
            2) Bretton Woods agreement was scrapped in the early 1970s, decoupling the dollar from gold.
            3) Nixon dissuaded Arthur Burns from taking away the punchbowl when necessary to contain future inflation.
            4) OPEC organized, driving oil prices through the roof.
            5) Union contracts had automatic cost of living adjustments, and union labor was pervasive in 1970s America. This helped establish a wage-price spiral that drove inflation to double-digit rates.

          5. I’d like to see a reference (aside from Wikipedia) to support the claim that, “Nixon fired Fed Chairman William McChesney Martin and installed presidential counselor Arthur Burns as Martin’s successor in early 1971.” As the current CIC is discovering, firing an uncooperative Fed chair is easier said than done. Apparently Lyndon Johnson, Nixon’s immediate predecessor, looked into firing McChesney Martin for overseeing unapproved rate hikes, but later reappointed him, according to an article I’ll post momentarily.

            By 1970, McChesney Martin was already the longest-serving Fed chair, having served since 1951 under five presidents, sixty-four years old, and a prostate cancer survivor.

            Unless someone has convincing evidence to the contrary, I’m going with the hypothesis that the Wikipedia article has it wrong and McChesney Martin retired from his post or failed to be reappointed, rather having been fired by Nixon.

          6. A President at War With His Fed Chief, 5 Decades Before Trump
            By Kevin Granville
            This was originally published in June 2017, but was updated on Thursday.

            A new president takes office with big plans, and needs a booming economy to help underwrite his promises. A Federal Reserve chief sees an economy starting to overheat, and begins warning of the need for higher interest rates.

            They were bound to clash: Lyndon B. Johnson, the new president, and William McChesney Martin, the longtime, fiscally conservative Fed chairman.
            …
            Martin flew down to the Johnson Ranch on Monday, Dec. 6, along with Fowler and other advisers. The president met them at an airstrip behind the wheel of his Lincoln convertible. They piled in and he drove them to the house.

            There, Johnson got Martin alone and did not mince words. According to different accounts, the 6-foot-4 Johnson pushed the shorter Martin up against a wall.

            “You went ahead and did something that you knew I disapproved of, that can affect my entire term here,” Johnson said, as Martin recalled later in an oral history. “You took advantage of me and I’m not going to forget it, because here I am, a sick man. You’ve got me into a position where you can run a rapier into me and you’ve run it.”

            “Martin, my boys are dying in Vietnam, and you won’t print the money I need,” he said.

            Martin stood his ground. He pointed out that he had given the president fair warning that a raise was coming. More broadly, he insisted that he and the president had different jobs to do, that the Federal Reserve Act gave the Fed responsibility over interest rates.

            “I knew you disapproved of it, but I had to call the shot as I saw it,” he said.

            The two eventually stepped outside and tried to assure reporters that any differences had been patched up. Their sour expressions, captured in newspapers the next day, suggested otherwise.

            Despite their differences, Johnson renominated Martin to the Fed chairman’s job one year later. Martin would step down in 1970 during the administration of Richard M. Nixon, the fifth president he served under, after having had the longest term of any Fed chief.

            The economic expansion that started in 1961 would continue until nearly 1970 — the second longest ever, a credit to Martin’s stewardship. But many argue that he was too slow to raise the discount rate.

            In fact, the increase in rates approved in December 1965 did little to control inflation, which would creep higher after the mid-1960s and become a defining issue in the next two decades. A successor, Paul A. Volcker, was forced to push interest rates to nearly 20 percent to bring prices down.

            In the end, it appears Martin left the punch bowl out too long.

        2. Final point: Sans government manipulation of interest rates, the market prices in an inflation risk premium to interest rates. Bond investors get a real return equal to the nominal return (the “interest rate”) minus inflation. So, for example, if inflation is running at 10%, investors need a yield of 13% to deliver a real return of 3%.

          1. Great historical lesson from NYT, thanks for sharing professor. It makes me view DJT’s recent tweet about Powell in a different light:

            Per DJT, “The Fed is like a powerful golfer who can’t score because he has no touch.”

            “History may not repeat itself, but it does rhyme.” – Attributed to Mark Twain

        3. This is part of the reason why I think the market won’t normalize until baby boomers start leaving this earth in greater numbers.

          1. After Baby Boomer die off. inflation will be less politically hazardous to incument office holders. Inflation is detrimental to retirees on fixed incomes, a large voter block with very high turnout at elections.

  11. I think it’s over. I no longer live in the SF Bay Area (having sold my house last summer). But I had a few friends from there asking me about “investing” in residential real estate in the Sacramento area. One of these guys is a perfect contrarian indicator (got bullish on dotcom stocks in late 1999 and early 2000; bullish on houses in 2005-06; bullish on tech stocks again last year…).

  12. Speaking of cracks…at least one Aussie high-rise is literally cracking:

    “Opal Tower Sydney crack sparks calls for broad apartment development inquiry”

    “The crack in Sydney’s Opal Tower — and subsequent evacuation — has sparked calls for an independent inquiry into the approval process across the NSW industry, with experts saying “corners are being cut”. ”

    https://www.abc.net.au/news/2018-12-29/opal-tower-crack-sparks-calls-for-broad-inquiry/10673134

      1. Someone must have stopped letting someone get a piece of the action
        When I was Senior Appraiser in State services, my construction inspectors took a lot of time inspecting construction and final.
        Contractor got mad at me for complaining about boat patches in mahogany panels on the entrance walls, when I made him redo the wall. I turned down one subdivision in San Jose when I walked into a completed new house and could put my hand under the interior walls, and this was after inspection by the city. Turned out he had used post and beam on expansive soil. Did another home in San Jose , after FHA and City inspection, because framing lumber was not inspected, or , I should say, did not have rating marking on the lumber. This was after I inspected the attic space.

    2. Yea, this is like all the landslides that have happened and the pipeline of events that will happen as the Idiot Developers continue to clear cut the cliffs and or too much of the underbrush that holds it all together with all the rain. The last couple of big slides, I think they found that the Geo Certs were faked way back in the 70’s with the inspectors paid off by the RE Cartels, etc.

      I hold my breath and every time I see a house for sale on a cliff in the PNW, I look at the topography over head, and sure enough, they only left a couple of trees in the backdrop to make it look like it was surrounded by forest and clear cut everywhere else. Or, it’s forest land that is in process of being restored but is “young” with all the beautiful old growth ravaged up by the land cannibals.

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